Reform of Swiss Withholding Tax - Paying Agent Tax?
Report of the expert group set up by the FTA released
The seemingly never-ending work on a reform of the Swiss withholding tax has reached another intermediate stage. Following the withdrawal of the federal popular initiative "Yes to the protection of privacy" in January 2018, the expert group appointed by the Federal Department of Finance intensified its work and completed it in December 2018. Following the Federal Council's information session, the expert group's report* was released on 8 March.
The high-calibre expert group chaired by the Federal Tax Administration (FTA) was composed of the Swiss Bankers Association (SBA), economiesuisse, SwissHoldings, the Swiss Insurance Association (SIA), the Conference of Cantonal Financial Directors (FDK), the State Secretariat for Economic Affairs (seco) and the State Secretariat for International Financial Matters (SIF). Like the Federal Council, the expert group also considers the need for action to strengthen the Swiss capital market and, at the same time, the safeguarding purpose of the Swiss withholding tax to be urgent.
What are the objectives of the reform? What are the proposals? What are the positions of the stakeholders?
1. Swiss Withholding Tax Purposes
The Swiss withholding tax is levied on both dividends and interest and is payable by the debtor of the payment. The tax serves two purposes:
For domestic taxpayers, the Swiss withholding tax is intended to ensure the complete declaration of income and therefore has a safeguarding purpose. The tax is fully refundable and therefore has no fiscal purpose here.
For foreign taxpayers, Swiss withholding tax has both a safeguarding and a fiscal purpose. Since Swiss withholding tax, especially on dividends, is usually only partially refundable to foreign taxpayers based on double tax treaties, the non-refundable part of the tax remains with the Swiss tax authorities.
2. Today's situation
With the introduction of the automatic exchange of financial account information (AEOI), the safeguarding purpose of the Swiss withholding tax has become outdated for most countries, which automatically receive information from Switzerland enabling them to verify the correct declaration of the assets and income of their citizens.
The safeguarding purpose of Swiss withholding tax for Swiss taxpayers has always been incomplete, as only income from Swiss sources is subject to tax. Foreign income is not subject to Swiss withholding tax.
The tax revenues from Swiss withholding tax cannot be attributed clearly to dividends or interest and receivers. In principle, all investors in Switzerland are entitled to a full refund of Swiss withholding tax. Therefore, assuming a correct declaration, no tax revenue should remain after the refund.
However, foreign investors most likely make a significant contribution to the CHF 4 to 8 billion of Swiss withholding tax per year that were not reimbursed in the past. Foreign investors usually receive full reimbursement for interest based on double tax treaties*. However, in the case of dividends, most treaties only grant a refund up to a non-refundable tax rate of 15% for portfolio investors. This final tax burden means substantial tax revenues for Switzerland, which should remain unchanged under the reform.
Problems in the area of debt financing Foreign investors appear to find Swiss equities attractive, but are very reluctant to purchase bonds from Swiss issuers. A major reason for this reluctance is likely to be the Swiss withholding tax on interest and the costly recovery process.
Investors can easily replace Swiss debt securities with comparable securities of foreign issuers without withholding tax. For this reason, Swiss groups issue their bonds abroad and place their internal financing activities there as well, resulting in the associated value creation and jobs being lost to Switzerland. The detailed report by the advisory board for the future of the Swiss financial center* ("Beirat Zukunft Finanzplatz") on the development of the capital market of April 2018 provides an excellent overview.
3. Elements of a reform
Previous course The reform has already gone through a number of stages. In 2012 Parliament rejected the Federal Council's proposal to restructure the Swiss withholding tax* for all bonds in connection with the too-big-to-fail legislation. A temporary exemption for TBTF instruments is now in place and will expire at the end of 2021. In 2014, the next proposal took the form of a consultation draft. Banks judged it to be too complex, costly and with too many settlement risks. Other participants in the consultation process were not enthusiastic either. The SBA then proposed a partial reporting system by the banks to the tax authorities. The Federal Council suspended the project in the summer of 2015 given this consultation result* and the "Yes to the protection of privacy" initiative* (the so-called Matter-Initiative). In November 2015, the Federal Council initiated the establishment of the expert group by the FDF.
Following the withdrawal of the Matter-Initiative in January 2018, the expert group intensified their work and concluded with the present report*.
Current elements of a possible reform With this starting position, a reporting system is off the table and the reform proposals include the following elements:
Elimination of Swiss withholding tax on interest in order to make bonds issued by Swiss companies and cantons or Swiss municipalities attractive to foreign investors, especially institutional investors.
Introduction of a comprehensive paying agent tax, which is levied on all income of domestic private individuals at Swiss banks. As before, this tax is purely for safeguarding purposes and will be fully refundable.
Limitation of Swiss withholding tax for foreign investors to dividends and reduction to the usually non-refundable tax rate of 15 %.
4. Assessment of proposals and impact on taxable persons
The change to a paying agent tax strongly will expand the tax base for the Swiss withholding tax. Since the Swiss withholding tax will continue to be fully refundable within the scope of the tax declaration, the paying agent tax will result neither in definitive tax burdens for investors nor in direct additional tax revenues.
It remains unknown whether – due to the improved safeguarding effect - previously untaxed assets can be taxed, resulting in additional ordinary tax revenues. In any case, the loss of liquidity and interest between the deduction and refund of the tax remains a major disadvantage for the honest taxpayer.
The paying agent tax will also be a considerable administrative expenditure for both banks and customers. A reporting procedure by domestic banks to the tax authorities would in principle be simpler; however, politically it does not seem capable of achieving the majority vote.
The Swiss Federal Tax Administration estimates a substantial loss of revenue if the Swiss withholding tax on dividends is reduced from 35% to a standard rate of 15%. For the SBA, however, this measure is a mandatory element of the reform. The representative of the FDK sees fiscal policy reasons against this linkage and fears that the administration will involve increased implementation work, costs and risks for the entire system. SwissHoldings and the Swiss Insurance Association welcome the reduction in Swiss withholding tax on dividends as an important move in keeping Switzerland an attractive holding location. However, improving debt financing is a clear priority for them.
A lot more water will have flowed down the Rhine and the Limmat before the reform is in place. In November 2018, the Economic Affairs and Taxation Committees (WAK-N) of the Parliament decided to set up a sub-commission to draw up a preliminary draft. As soon as a basic agreement is reached, detailed work can begin (e.g. settlement frequency, exemption limit, default interest etc.). The report* already contains a concise overview of these details.
The tax team will be happy to answer any questions and provide further information.