International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Switzerland: Embracing the worldwide trend of increasing substance requirements

savoia.jpg

hurdowar.jpg

Reto Savoia


Yan Hurdowar

In a fast-evolving tax world characterised by increased scrutiny from tax authorities, politicians and the general public, addressing substance requirements has become a key concern for multinationals. While substance is a wide-ranging term from a tax standpoint, it is the issue of economic substance which is increasingly under focus. Economic substance (or tax substance as it is sometimes called) stands for the actual business activities of a company and its effective role within a wider group. The economic substance of a company is typically assessed based on its personnel (headcount, level of skills and remuneration), the significant people functions it undertakes, the risks it assumes as well as the key assets (for example valuable trade and marketing intangibles) it owns. Recent tax surveys provide clear evidence that tax audits increasingly target the correlation between the taxable income of multinationals' operating entities and the level of economic substance of such entities. In such audits, taxpayers, who are unable to demonstrate adequate economic substance, frequently find themselves having to defend where their effective place of management is or why no deemed permanent establishment arises from the way they conduct their business. Recent trends also demonstrate a growing tendency by tax authorities to re-assess the remuneration of intra-group transactions based on their actual economic substance, for example arguing for profit split methodologies for IP generating activities and in more extreme cases, even seeking a recharacterisation of such transactions.

Substance has been put at the forefront of the tax agenda with the July 2013 OECD Action Plan on BEPS stating its firm objective of preventing "practices that artificially segregate taxable income from the activities that generate it." There is a clear intention to tackle substance issues through the following actions: counteracting harmful tax practices (Action 5), the prevention of treaty abuse (Action 6), the prevention of artificial avoidance of PE status (Action 7), aligning transfer pricing outcomes with value creation (Actions 8, 9 and 10). Further, multinationals can anticipate unprecedented visibility on the location of their value generating activities and where their profits are taxed on the back of transparency measures enforced through information exchange provisions and Action 13 of the BEPS Action Plan on transfer pricing documentation.

Switzerland is ideally positioned to take advantage of the aforementioned developments since Swiss based global/regional hubs already have significant substance by virtue of their highly skilled personnel, the valuable intangibles they own and exploit as well as their strategic importance in global value chains. Already, Swiss taxpayers have to abide by several economic substance thresholds when applying for existing Swiss tax regimes. The upcoming Swiss Corporate Tax Reform III should also prove favourable as preferential tax regimes such as the licence box, with incentives such as R&D&I deductions and tax credits, are anticipated to enhance the degree to which Swiss taxpayers can benefit from their existing economic substance. These incentives coupled with other tax opportunities such as notional interest deductions and an overall decrease in the headline cantonal tax rate are expected to enable Switzerland to remain a location of choice for its attractive tax system.

Reto Savoia (rsavoia@deloitte.ch)

Tel: +41 58 279 6357
Yan Hurdowar (yhurdowar@deloitte.ch)

Tel: +41 58 279 8152

Deloitte

more across site & bottom lb ros

More from across our site

The Indian company, which is contesting the bill, has a family connection to UK Prime Minister Rishi Sunak – whose government has just been hit by a tax scandal.
Developments included calls for tax reform in Malaysia and the US, concerns about the level of the VAT threshold in the UK, Ukraine’s preparations for EU accession, and more.
A steady stream of countries has announced steps towards implementing pillar two, but Korea has got there first. Ralph Cunningham finds out what tax executives should do next.
The BEPS Monitoring Group has found a rare point of agreement with business bodies advocating an EU-wide one-stop-shop for compliance under BEFIT.
Former PwC partner Peter-John Collins has been banned from serving as a tax agent in Australia, while Brazil reports its best-ever year of tax collection on record.
Industry groups are concerned about the shift away from the ALP towards formulary apportionment as part of a common consolidated corporate tax base across the EU.
The former tax official in Italy will take up her post in April.
With marked economic disruption matched by a frenetic rate of regulatory upheaval, ITR partnered with Asia’s leading legal minds to navigate the continent’s growing complexity.
Lawmakers seem more reticent than ever to make ambitious tax proposals since the disastrous ‘mini-budget’ last September, but the country needs serious change.
The panel, the only one dedicated to tax at the World Economic Forum, comprised government ministers and other officials.