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Multinational companies restructure Swiss operations over BEPS

Switzerland has adopted international reporting standards, subjecting taxpayers to more scrutiny, leaving businesses facing difficult choices over their future operations.

The Swiss Federal Tax Administration (FTA) has been sharing account data with most EU countries, plus nine other non-EU territories, since the common reporting standard (CRS) came into force in September 2018. Nevertheless, Switzerland still ranks highly in financial secrecy rankings.

The country claimed the number one spot in the 2018 Financial Secrecy Index. However, the data swap is set to expand to include 89 jurisdictions. This will further water down what were once unquestionable secrecy laws in the Alpine nation. Businesses are considering their options.

“There is significant restructuring going on in Switzerland,” said Arthur Pleijsier, managing partner at Eurofiscus in Zürich. “The BEPS project and changes in attitudes when it comes to the taxation of multinationals has driven a lot of companies to restructure.”

Country-by-country reporting (CbCR) and the common reporting standard (CRS) have raised the threat level for taxpayers around the world. However, structural decisions cannot be made in haste as business models have to be durable to succeed.

“You have to look at the mid-term impact,” Pleijsier explained. “It’s certainly wrong if you’re panicking about CbCR and the CRS to suddenly restructure everything. It’s very costly to restructure.”

There are no quick fixes in tax strategy. Fortunately, there are still plenty of options for multinational companies to ensure their tax burden is manageable. It is perfectly possible to salvage a business model even in times of great uncertainty.

What are the options?

There are still many perks for companies locating in Switzerland regardless of the tax benefits and the domestic secrecy laws. Yet the cost of living and doing business in the country sets a deterrent for basing certain operations there.

This means that the restructuring of operations to ensure there is more substance in Switzerland runs into a problem: it might not be cost-effective. There are plenty of countries where labour and infrastructure costs are far lower.

“If the costs are low then the taxable base, even in a high-tax country like Germany, will not be so huge it’s unmanageable,” Pleijsier said. “If you’re a tech company hiring R&D engineers in Switzerland, you could get two German R&D engineers for the price of every engineer you hire in Switzerland.”

“The problem is Germany is not the best location for an IP-generating R&D centre, but Switzerland is still a great location for the value-creating aspects of your business,” he continued. “So maybe you keep your support functions in Switzerland for the centre in Germany.”

It’s possible to stretch and nuance the R&D operations across jurisdictions, so the bulk of the work could be carried out in Germany while the support functions remain in Switzerland. This might be the best way to balance off the need for substance and the costs of doing so.

“I wouldn’t put a thousand people in Switzerland, but it’s still a very good location,” Pleijsier said. “For example, if you look at the healthcare manufacturing industry, companies won’t move because of the technical advantages, the high level of manufacturing and engineering capability.”

These factors play different roles depending on companies’ business model and the industry. Swiss principal structures might not be viable for certain businesses because the tax advantage is most beneficial to highly profitable enterprises.

This is not the case for low-profit or even lossmaking companies. These businesses are increasingly common in the era of apps, tech platforms and big data. As a result, it’s likely such companies will relocate from Switzerland.

It would be possible to save just as much money in a country like Ireland, where the cost of labour and the infrastructure is far lower than in Switzerland, and the tax advantage is comparable for most companies.

“You can still optimise your business model, but what’s changed is that in the past a lot of companies restructured and moved functions to jurisdictions just by paper transactions,” Pleijsier said. “That’s not possible anymore.”

“There’s nothing wrong with choosing a certain country based on multiple considerations, including tax, but you shouldn’t be making decisions about functions, assets and risks on tax alone.”

The full impact

Businesses have to consider their options right now because the consequences of greater transparency are still unfolding. The full impact of the CRS and CbCR has yet to register in the form of audits and disputes, but this threat is on the horizon.

“Everyone in the field expected that the first CbC reports would lead to more audits,” Pleijsier said. “In fact, a lot of people expected an avalanche of audits. But it hasn’t happened yet.”

“Some of the countries who have received the CbC reports don’t have a clue what to do with the information. That’s just one reason,” he told TP Week. “The other reason is that many tax authorities are understaffed and don’t have the resources to pursue every company.”

It’s inevitable that the CRS and CbCR will eventually lead to more audits and disputes. Swiss companies are already facing multiple challenges across Europe. UBS has faced court cases in France and Italy.

“A lot of countries have fairly awful finances at the moment and they want more money from somewhere,” said the head of tax at a Swiss asset management company told TP Week.

“You could have a significant taxable presence in a country outside the treaty and some stroppy tax authority could come after you,” they added.

At the same time, there are calls to go much further. The information exchange covers the owner’s name, address, country of residence and tax identification number, as well as the account balance and capital income.

Feeling the heat from the EU, the Swiss government decided it was better to meet the standard than risk falling foul of the European Commission. The information exchange does not apply to past holdings, but it is still a dramatic change for a country synonymous with banking secrecy.

“The CRS is everywhere now and the automatic information exchange is a level playing field. If you compare it to the previous years, you are worse-off today,” said the tax director of a manufacturing company in Switzerland.

“The Swiss authorities have to provide the details of your tax arrangements with other countries,” the director said. “That’s very different compared to the past.”

It was once illegal for the Swiss tax authority to share such information. There is still not total transparency in the country or with all its trading partners and many intermediaries are excluded from the reporting standard. But complete secrecy is a thing of the past.

“Whatever structure you have is out in the open now. That’s the international standard and everyone has to be transparent,” Pleijsier said. “But there are still planning opportunities out there.”

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