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Exchange of information: Where do we stand?

Pietro Sansonetti of Schellenberg Wittmer explores the evolution of information exchange practices in Switzerland, against a global backdrop of increasing transparency and exchange of information in tax matters.

As has been well recognised in the context of international taxation, Switzerland had a very restrictive policy in terms of exchange of information in tax matters until March 13 2009. In short, the administrative exchange of information (that is, an exchange which goes from the tax authority of the requesting state to the tax authority of the requested state) was limited to the information necessary to grant a proper application of a given bilateral tax treaty (such as evidencing the real place of residence or ensuring whether the conditions to obtain a treaty reduced rate were met). In other words, no information could be exchanged at the administrative level to enforce the domestic tax provisions of the requesting state. This was a consequence of a strict application of the Swiss bank secrecy rules, which could be lifted only by means of the International Mutual Assistance in Criminal Matters (IMAC). This way of obtaining information for the requesting state implied that the request had to be channeled through the respective departments of justice of both the requesting and the requested states. Switzerland agreed to cooperate at this level only in the event of severe tax fraud by means of which it was understood as the use of shrewd conduct to commit tax evasion (as opposed to the mere non-disclosure of taxable items which was – and still is in the Swiss domestic tax legislation – considered as an infringement, still criminal but at a lower degree). Besides, even this form of exchange of information, which is significantly more burdensome than the administrative exchange of information, did not enable Switzerland to grant any extradition for cases of severe tax fraud by means of the IMAC.

Two notable exceptions to this clear practice appeared, however, during the decade or so preceding the crucial day of March 13 2009. The first one was introduced in the Swiss-US tax treaty on income which was entered into in 1996. This amended treaty contains a clause specifying that administrative assistance can be granted in the event of tax fraud "or the like". This was aimed at enabling the requesting state to obtain administrative assistance in the event of tax evasion of significant amounts made through complex or systematic mechanisms which had to be considered severe but which might, technically speaking, not fulfill the conditions of a qualified fraud by means of the Swiss IMAC regulations. A second exception to the clear segregation mentioned took place when Switzerland entered into the Agreement on Fraud with the European Union, which applies to indirect taxes (such as VAT and Customs Duties and Excise Taxes), where a very large collaboration at administrative level between tax authorities of different states party to the agreement was made possible even in the event of mere tax avoidance.

The volte-face which took place in the first quarter of 2009

In the aftermath of the 2008 financial crisis, the OECD and the G20 states, which were about to meet in London, decided to stigmatise the so-called non-cooperative countries, by which were intended the countries whose policy or rules did not allow the administrative assistance for the purpose of combating tax evasion. More specifically, it was foreseen to set up a black and a grey list. To escape the inconvenience in terms of likely financial sanctions and restrictions on the access to the financial markets of being put on the black list, it was necessary for a given targeted country to formally commit to accept the unrestricted exchange of information on demand (as defined at Article 26 of the Model Tax Convention on Income and of Capital of the OECD – MOECD). The country concerned further had to enter into at least 12 new tax treaties (or to renegotiate existing ones) where Article 26 MOECD would be taken over without any reservation or restriction. It is clear that Switzerland was particularly targeted by this joint initiative of the OECD and the G20.

Practically speaking, the Swiss Finance Minister declared on this now famous day that Switzerland was withdrawing with immediate effect its reservation on the scope of the clause on exchange of information contained in the MOECD and that it was going to renegotiate at least 12 tax treaties. As a matter of fact, the number of Article 26 MOECD compliant renegotiated (or newly-concluded) bilateral tax treaties by Switzerland is now more than 40, not to mention four new tax information exchange agreements (TIEAs).

Implementation of information exchange on demand

In the months following its commitment to change its policy in terms of exchange of information on demand, Switzerland enacted a domestic legislation due to organise the practical way of granting the collection and the communication of the information to be requested by the foreign states with whom the treaties would have been adapted in the meantime to the unrestricted OECD standard. A first ordinance issued by the federal government was replaced by a new Federal Law on Administrative Assistance in Tax Matters.

In parallel, the OECD – more precisely the Global Forum on Tax Transparency and Exchange of Information for Tax Purposes (the Global Forum) – started its peer review of Switzerland. Such a procedure, which is conducted by the representatives of two countries belonging to the Peer Review Group of the Global Forum, consists in two phases, the second one being only possible once the first one has been completed successfully. Phase One is aimed at checking the legal framework of the country under review so as to ensure that it complies with the wording and the spirit of the exchange of information as understood by the OECD. It appeared quite early on that some points contained in the Swiss legislation were not in line with these requirements. Criticisms were expressed by the reviewers about the extended rights of the persons targeted by the requests of information in terms of being kept informed by the Swiss tax authorities (these ones when acting on behalf of those of the requesting state). The reviewers further considered that the criteria set forth in the first version of the domestic provisions due to implement the exchange of information on demand regarding the identification, by the requesting state, of the targeted taxpayer as well as of the institution which is holding the information sought (in other words the bank where the deemed hidden account lies), were too restrictive, thus threatening to render the exchange of information inefficient. Eventually, criticisms were formulated on the fact that Switzerland still offers the possibility for companies to have their capital divided into bearer shares. The Swiss Government drafted measures to fix these hindrances so as to obtain the Global Forum's approval for the Phase One test and to be allowed to undergo the next step – Phase Two – which consists in ensuring the actual implementation of the exchange of information.

Because of the complexity of the process which leads, in Switzerland, to the enactment and eventually to the entering into force of new legislation, none of these amendments could enter into force as of today, even though, one can reasonably expect that this will happen during the current year. In short the government – the Federal Council – issues a "pre-draft" legislation which is submitted for review and comments to the political parties and to the relevant lobbies. The amended draft is then submitted to the Parliament (that is, successively to its two chambers: the National Council – the lower chamber – and the States Council – the Senate) which is ordinarily a process which lasts several months. Once adopted by the Parliament, the new law can be challenged by means of a popular referendum if requested by at least 50,000 citizens, which means that the national population will have the last word on the acceptance or the rejection of the law. This effect of the so-called semi-direct democratic system explains the unusual length of the legislative process in Switzerland compared with many other countries, in particular within the EU, which can give the impression abroad of a reduced ability of Switzerland to react and to adapt in a fast-changing international tax environment.

This being mentioned, it appears that, in practice, Switzerland is adapting its procedures so as to be compliant with the adapted standards. Because it appears that in Switzerland the legislative process is more time-consuming than its actual implementation, which in the present case seems already underway, one can imagine or at least hope that this country may pass the Phase Two test in due time without greater difficulties once Phase One is over.

Last, it is worth mentioning that on February 19 2014, the Swiss Government issued a statement in terms of which it will systematically introduce the unrestricted Article 26 MOECD clause in all the existing treaties which have not yet been adapted.

Other and extended forms of exchange of information

Besides this whole debate on exchange of information on demand, other initiatives aimed at introducing other forms of collaboration in tax matters are currently either under development or in the course of being implemented. The common feature of these programmes is that they aim at enlarging and introducing automatisms in the passing of information relevant for tax purposes from one country to another.

First of all, one has to refer to the new US legislation called Foreign Account Tax Compliance Act (FATCA), which is a unilateral measure by the US but which is definitely going to inspire the discussions held at the OECD aimed at developing a standard for the automatic exchange of information.

FATCA requires that, from July 1 2014, all non-US financial institutions worldwide pass to the US tax authority (IRS) information about accounts held by "US Persons" (by means of the US tax legislation which is extensive) or to levy a high tax at source in the event of refusal by the account-holder to let the information be passed. Because of the importance of the US in the world economy, financial institutions not willing to adhere to this programme will de facto be excluded from the international financial system. In fact, many of the principles and mechanisms contained in FATCA will be applicable in the automatic exchange of information. Logically, Switzerland adhered to this programme.

On its side, the OECD, entrusted by the G20 countries, is developing a standard on automatic exchange of information, where Switzerland plays an active role. In short, this form of collaboration consists in each country passing to the other ones on a periodical (usually annual) basis standard information in its possession (such as the balance of the bank account and the related income belonging to a given taxpayer resident in the receiving country). This standard has been presented to the G20 countries during the February 2014 meeting and one can expect that it will be finalised by mid-2014. It is generally ackowledged that Switzerland will adopt this standard without delay.

Eventually, the Swiss Government signed on October 15 2013 the Multilateral Agreement of the OECD and the European Council on Mutual Assistance in Tax Matters. This agreement, which entered into force in 1995, contains what can be called modules such as exchange of information on demand, spontaneous (that is, unilateral and at the initiative of the offering state) exchange (more precisely passing) of information, automatic exchange of information, international collaboration in conducting tax audits. Practically, the actual implementation of these principles requires the entering of a specific agreement between two or more states. From this point of view, one can define the Multilateral Agreement as an outline (or programmatic) agreement. One has to keep in mind, however, that this agreement contains a compulsory retroactivity clause of at least three years regarding tax offences committed before the entering into force of the agreement. In what concerns Switzerland, the entering into force of said agreement still requires its ratification by the Parliament (and, if the latter so decides, a possible popular referendum). At this stage, no timetable has been made public for this step and one could imagine that the government will put this on hold until the automatic exchange of information standard is finalised.

Biography


Pietro Sansonetti

Schellenberg Wittmer Ltd
15bis, rue des Alpes
PO Box 2088
1211 Geneva
Switzerland
Tel:
+41 22 707 8000
Fax:
+41 22 707 8001
Email:
pietro.sansonetti@swlegal.ch

Pietro Sansonetti is a partner and head of Schellenberg Wittmer's taxation group in Geneva. He specialises in domestic and international corporate tax matters, with a focus on complex situations requiring discussions with tax authorities. He also advises individuals – especially in partnerships – and private clients on tax issues and assists clients in enforcement matters, including international exchange of information.

Pietro Sansonetti was admitted to the Bar in Switzerland in 1985, after graduating from the University of Geneva where he obtained a law degree in 1982. He became a Swiss certified tax expert in 1990 while working as a tax manager with Arthur Andersen. Pietro Sansonetti was the director of tax affairs (chief tax officer) at the Geneva Tax Authority before joining Schellenberg Wittmer as a partner in 1999. In addition, he was the chairman of the Swiss Examination Commission for Tax Experts until 2006. He regularly publishes on a range of tax and legal issues and is active in various think-tanks in the field of tax policy, legislation and practice.

Pietro Sansonetti belongs to the faculty of the Executive master in advanced studies in international taxation at the University of Lausanne (formerly Neuchâtel) and also lectured on criminal tax law at the Swiss Tax Academy. He was the chairman of the Swiss examination commission for tax experts between 1999 and 2004. He is a fluent speaker of French, English, German and Italian.

Schellenberg Wittmer is one of the leading business law firms in Switzerland. More than 140 specialised lawyers in Zurich and Geneva advise domestic and international clients on all aspects of business law.


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