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Swiss banks, value-adding, and tax suitable services

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Most banks make it a policy not to provide tax advisory services, even though there are no regulatory prohibitions to do so in Switzerland, the UK or US. But as tax considerations become increasingly important in any investment strategy, Deloitte Switzerland’s Brandi Caruso and Karim Schubiger discuss the viability of banks providing such an explicit value-add.

Tax is no longer hidden, sitting quietly in the background, surrounded by books and a calculator. Tax is now centre-stage, in the spotlight. Issues including Swiss banking secrecy, FATCA, CRS, BEPS, and now DAC6, have all increased in intensity as issues including tax transparency and accountability are becoming more prominent.

For instance, banks globally already report on their clients to the tax authorities where those clients are tax resident. Conversely, with clients demanding more value, banks are responding by not only providing customised tax reports based on a client's tax residency (to facilitate efficiency in the clients' own reporting obligations), but offering withholding tax reclaim services to recover sums and increase a client's return after tax. In addition to those services, banks are now also dabbling in tax advice.

But is it possible that the real value to clients would be realised if banks increased their sophistication and provided services in a more systematic way? Banks already face an unprecedented number of regulatory restrictions, so what kind of value do clients currently receive, and where is the possibility for banks to add more value?

The regulatory viability of value-adding

From a regulatory perspective, MiFID II and FIDLEG already include investor protection rules which broadly ensure investors receive appropriate information, ultimately ensuring that products match the client's needs and investment objectives, both at the time of the potential investment and throughout the life of an investment. As a result, banks need to comply with conduct rules (consideration of client risk profiles, portfolio diversification, best execution, risk disclosure, among others), regardless of whether it provides individual portfolio management, investment advisory services, or the execution of transactions. But is a product suitable if the client suffers a detrimental tax impact?

Often, tax comes at the end of the transaction lifecycle, but we ought to stress that tax needs to be considered up front so that the impact does not come as a surprise. Having said that, tax should not drive the investment decision, but rather an informed decision should include a consideration of taxes. A client's investment profile typically considers their domicile, investment size, risk appetite, investment time horizon, and cash flow needs. This profile leads to the selection of asset classes (e.g. shares, bonds) and investment types (e.g. direct exposure, structured products). During the lifecycle of an investment, different events (e.g. acquisition, distribution, and disposition) can have various tax consequences for the investor. Ignoring them can lead to significant discrepancies with the expected cash flows.

A new transparent world

With the onset of the Organisation for Economic Co-operation and Development's (OECD) Common Reporting Standard, banks are facilitating client reporting to the jurisdiction of the clients' tax residencies. Bank clients must declare their assets to tax authorities, and as a result, clients are seeking greater advisory services for the same cost, if not less. Banks are subsequently responding by providing income tax reports corresponding to the clients' domicile, as well as providing withholding tax reclaim services.

The demands of clients are constantly changing, and clients are already starting to consider these services as a commodity. As a consequence of higher compliance costs and the additional services provided, banks are seeing decreased margins, increased regulatory pressure, while at the same time needing to differentiate themselves in the market and add value.

The Cambridge Dictionary defines value as "the amount of money that can be received for something". Tax is a relevant consideration in the overall value of an investment. Let's take two similar equities: Equity A, where a withholding tax reclaim is possible, and Equity B, where it is not. Before tax, Equity B has a higher expected return, while the pre-tax return on Equity A is lower. Which is the better investment? Should the client be told about this difference? If the bank tells the client about the difference, is it providing tax advice? Or tax information?

The Cambridge Dictionary defines advice as "an opinion that someone offers you about what you should do or how you should act in a particular situation". In contrast, it defines information as "facts about a situation, person, event, etc." In a banking context, whether the service offered is considered advice or information may depend on the mandate the bank has with a specific client. Under a discretionary portfolio mandate, the bank works within the investment profile agreed with the client and then takes the decision on behalf of the client within those parameters. If the bank provides investment advisory services, the bank provides advice to the client who then makes the investment decision. For execution only mandates, the bank executes on the client's investment instructions.

Are banks allowed to provide tax advice?

In certain jurisdictions like Germany and Australia, there are legal or regulatory restrictions that prohibit banks from providing tax advice. In Germany, only certain persons are authorised to provide business-related assistance in tax matters (for instance, certified tax advisors, lawyers, auditors and certified accountants). In Australia, only registered tax agents (for instance, accounting and legal firms) can provide tax advice. However, there is a caveat for financial advisors that provides for incidental tax advice on their investments. In other jurisdictions like Switzerland, the UK and US, there are no legal or regulatory prohibitions. This is just a selection of countries, but it is clear that there is no overarching global or regional regulation regarding tax advice.

Legal and regulatory restrictions aside, approximately a dozen Swiss banks informally surveyed noted they have a policy to not provide tax advice. Those are the rules and policies, but what about practice?

Let's take a look at the wealth planning function of a typical private Swiss bank. Generally, it provides large jurisdictional coverage with market focused wealth planners, which includes product lists and country guides that provide options on structures with pros and cons from an overall governance, administration, and tax perspective.

Everything is caveated in these documents with a wide range of disclaimers ranging from stating it "does not constitute tax or legal advice", to noting it is "not tailored to a specific set of circumstances", to almost always stating that "you should always seek your own tax and professional advice". However, if we look closer, the wealth planning function may in effect provide up to 90% of the relocation tax advice, provision of domestic tax advice, and certain tax compliance services. Banks label it as "wealth and succession planning", but there is certainly tax and legal embedded. In all honesty, clients really do rely on it.

Enter DAC6, stage left

We live in an era where tax topics make front-page news. Most recently, everyone is talking about DAC6, which is the European Union's (EU) implementation of BEPS Action 12 and the OECD's Mandatory Disclosure rules. DAC6 imposes new requirements on EU intermediaries to provide the tax authorities of EU member states with information on in-scope cross-border arrangements (Reportable Cross Border Arrangement, or RCBA). EU member states expect to use this information to promptly react against harmful tax practices and to close loopholes.

The DAC6 intermediary definition includes both service promoters and providers. A promoter designs, markets, organises, makes available, or manages the implementation of a RCBA. A service provider knows, or could be reasonably expected to know, that it provided aid, assistance or advice with respect to designing, marketing, organising, making available for implementation, or managing the implementation of a RCBA. Wealth planners, financial advisors, asset managers, and similar such institutions are likely caught, simply based on the reality of the activities they currently perform.

DAC6 includes a main benefit test, which focuses on arrangements through which a taxpayer obtains a tax advantage, and provides three categories of arrangements. First, the taxpayer engages in an activity which sees them pay less tax than they would have otherwise. Most DAC6 hallmarks target such situations, and banks are hesitant to be involved in such activities. Second, the taxpayer gets to the same point as they would have before, for example, by structuring an investment into a fund so that the indirect investment is not worse off than the direct one. It is unclear if DAC6 is targeting such activities. Third, the taxpayer engages in an activity that sees them not reported under a regime such as CRS. DAC6 targets such activities, and banks that are trying to be compliant are not involved with these.

In its current form, DAC6 leaves many questions unanswered. The directive implementing DAC6 was effective in 2018, but individual EU member states have until the end of 2019 for implementation, with limited local guidance available to date. Questions also revolve around whether individual product investment decisions (Equity A vs Equity B) are already in scope? However, the big DAC6 question revolves around whether avoiding a negative tax consequence is already in scope of the main benefit test. For example, is the act of not paying double tax a tax benefit? This is an unresolved question that needs to be resolved in 2019.

Divisional responsibility and value-adding

The divisional responsibility for the concept of tax suitability varies from one bank to another. Among the banks informally surveyed, it sits in the risk function (back office) of one, but in the products and services function (front office) of another. Risk mitigation is certainly relevant, with clients more likely to take legal action in this new tax transparent world.

For example, take the situation where a settlor establishes a trust, and specifies the investment profile as low risk, long-term, with regular income desired. The trustee establishes the trust, and then contracts the affiliated bank for the investment management services. In the process, the trustee did not provide an investment policy statement to the bank, the investment managers did not check investment objectives, and in the end, the bank misinterpreted the mandate and the client took legal action.

In many banks, wealth planners are a cost centre, and their services are offered to client profiles where the assets under management (AUM) can support the fees associated. If value is added, clients would certainly be willing to pay for the service. For instance, say a family office has significant investments across a range of banks. In the course of speaking with the client, they may not have thought about post-tax returns. A portfolio review uncovered significant withholding tax leakage across the structure. This is considered a value-add.

Knowing the tax considerations before a purchase is key to enable a client to make an informed investment decision. However, if tax information is buried in a 50-page document, it is difficult for any non-tax expert to find it, let alone read it. Some banks informally surveyed are trying to make this information more accessible. One has developed a traffic light system where acceptable products are marked green, products requiring the client to obtain external advice before purchase are marked yellow, and off-limit products are marked red.

It is not without challenges to consider tax in the investment product lifecycle. Data quality is an issue, but the topic of data quality requires an article of its own. We saw with Rubik, the agreement on tax cooperation between Austria, Switzerland and the UK, that data shared was incomplete or incorrect, and as a result, products and corporate actions were classified incorrectly. Banks need a solution to the data challenge, among others.

As demand increases on banks to provide a greater value-add with the services they provide, tax services will become more relevant. After-all, tax can amount to a significant value, and the higher the tax, the lower the value of the overall investment. It may not be necessary for banks to provide more holistic tax advice, but rather provide more holistic information about tax.

Deloitte Switzerland can support you in developing and implementing a value-adding client facing tax strategy, including through managed services offerings and off-the-shelf innovative solutions. Do not hesitate to contact us learn more about our services.

Brandi Caruso


Partner | Tax & Legal

Deloitte AG

Tel: +41 58 279 6397

Brandi Caruso is a tax partner at Deloitte in Switzerland. She has extensive experience in advising Swiss based global and regional financial institutions on tax transparency matters including QI, FATCA, CRS, 871(m), and DAC6. Brandi is responsible for innovative tax solutions, including in the area of tax suitability, and is the founder of the Deloitte Trust Forum.

Brandi is a lecturer at the University of Zurich and Lucerne University of Applied Sciences, and is a frequent speaker at tax conferences. She holds a degree from the University of California Los Angeles and is a US certified public accountant.

Karim Schubiger


Director | Financial Services Tax & Legal

Deloitte AG

Tel: +41 58 279 9202

Karim is a director in the Financial Services Tax team in Lausanne, overseeing all tax transparency projects in Suisse Romande and Ticino. He holds a master’s degree in engineering from the Swiss Institute of Technology (ETH-Lausanne) and a masters in advanced studies in international taxation (University of Lausanne).

Before joining Deloitte in 2014, Karim worked in the private banking industry, where he occupied a series of roles ranging from managing operational teams, change management specialist, to tax related project leader (Rubik, FATCA, EUSD) in mid/large-sized Swiss and foreign banks.

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