Are Switzerland’s new tax breaks for companies a licence to misbehave?

Zurich's Paradeplatz is the headquarters of Switzerland's two largest banks. © Gaetan Bally/Keystone

Switzerland has announced that companies will be able to deduct multi-million dollar fines incurred abroad from their tax bill. Critics argue it rewards bad behaviour.

The Federal Act on the Tax Treatment of Financial Sanctions, which takes effect on January 1, 2022, intends to prevent companies from being used as scapegoats for political retaliation between governments. The issue is stirring controversy because it could let companies off easy for fines received in poorer countries and does little to incentivise responsible business.

Switzerland is one of the few countries that allows such fines to be tax-deductible.

No blanket exoneration

The law, passed last year, states that companies will only be able deduct fines imposed abroad if two conditions are met: the penalties contravene Swiss public order and the company demonstrates that it took all reasonable steps to comply with the law of the other country, explained Fabien Liégeois, a member of the Centre for Banking and Financial Law at the University of Geneva and a tax law expert at the law firm CMS.

The Swiss government insists that meeting these conditions won’t be easy. “The company must present credible evidence that it did everything necessary to comply with the law and that its conduct was penalised anyway. This is based on the principle of good faith laid down in Article 3 of the Swiss Civil Code,” explained Joel Weibel, spokesman for the Swiss Federal Tax Administration.

Moreover, companies need documented evidence, Weibel said, such as audit compliance reports from relevant authorities. The Swiss courts can also intervene to review cases where tax deductions were approved or rejected.

As an example, a company would be able to deduct a fine incurred because it didn’t have the correct licence to operate in a country if it can show that it did everything it could to comply with the law. However, financial penalties for paying bribes wouldn’t be tax-deductible.

“Parliament’s intention is not to reward law-breakers but to prevent companies from suffering the tax consequences of arbitrary or politically motivated monetary fines,” Weibel said.

Rewarding bad behaviour

The Social Democratic Party argue that there is no justification for giving tax breaks to companies for misbehaving, “especially if it is the taxpayers who have to pay for it,” said the party’s spokesman Nicolas Haesler.

“Companies must comply with the laws of other countries and assume their responsibility for the risks. If the profits remain in the companies, why should the losses be transferred to taxpayers?”, he asked.

Moreover, he added, Switzerland applies a double standard: companies that operate inside the country are not entitled to deduct fines, while those operating abroad are.

“European legislation is moving towards greater corporate responsibility, and Switzerland should do the same,” said Haesler.

Dominik Gross, an expert in international finance and fiscal policy with the NGO coalition Alliance Sud, agrees. “With the decision to allow the deduction of fines, we are rewarding companies, such as banks, for their illegal behaviour. This goes against what we, as Swiss civil society, want and what we have been fighting for over many years, as was made clear at the ballot box [in reference to the Responsible Business Initiative vote last year].”

Gross further points out that the new law introduces a marked injustice in the treatment of citizens and companies, since the former don’t enjoy this right.

Against the popular will

Last November, a majority of Swiss citizens voted yes to the “responsible business initiative”, but it was ultimately rejected after two thirds of the cantons voted against it. However, popular opinion is clear: People are no longer willing to reward dishonest companies,” said Haesler.

In the view of Alex Cobham, chief executive of the independent Tax Justice Network, “the new law is surprising because it goes against national public sentiment. It also jeopardizes Switzerland’s international reputation, as it accepts misconduct that other countries are trying to penalise”.

Cobham said that under the law, a company that engages in practices that cause lead poisoning in communities in low-income countries, could deduct any fines from its tax bill if it proves that it “took all reasonable steps [to comply with the law of the other country].”

“When a company can deduct a fine incurred abroad, it is the Swiss public that pays the price,” stressed Fabien Liégeois of the University of Geneva. “There is no reason why moral considerations should end where borders do,” he added.

A global exception

Switzerland is an outlier for allowing such deductions, making it difficult to judge the impact such a policy would have.

In 2017, a study of G7 countries, the BRICS [Brazil, Russia, India, China, South Africa] and Austria, found that none of them allow fines to be deducted. “In other countries, the situation is vague. But the principle of the non-deductibility of fines exists in most legal systems,” explained Joel Weibel of the Federal Tax Administration.

Almost no OECD country allows fines and penalties received abroad to be deducted, although it did in the past.

“The laws have changed significantly, in particular since the OECD adopted recommendations concerning the tax-deductibility of bribes paid to foreign public officials (1996), urging its members to avoid this practice,” said Pascal Saint-Amans, director of the center for Tax Policy and Administration within the OECD.

According to Saint-Amans, the new Swiss law brings greater clarity to the Swiss tax system. By clearly prohibiting the deduction of bribes, Switzerland removes ambiguity concerning this.

The OECD is actively combatting all forms of financial crime and recognizes that Switzerland made a step forward in 2018 in accepting the automatic exchange of tax information between governments. Between 2018 and 2020, Switzerland shared information with 73 countries and jurisdictions.

With regards to the new law, it will just be vital “to significantly limit the deductions allowed and to establish clear guidelines in order to avoid misinterpretations,” said Saint-Amans.

Up to the courts

Sceptics fear that the new law will benefit major banks in particular. Serge Steiner, spokesman for the Swiss Bankers Association (SBA), is cautious in his response: the new rules are for all kinds of companies, not just financial institutions. “Deducting fines is clearly limited to special cases, which will have to be evaluated individually when they occur,” he said.

Would a company be able to deduct a fine like the one Swiss bank UBS received in France (€4.5 billion) in 2019 for participating in a large-scale tax evasion scheme?

Theoretically, no. This fine punished the crime of money-laundering aggravated by tax fraud committed by the bank between 2004 and 2012, an offence that is also illegal in Switzerland. Moreover, since 2016, Swiss banks are obliged to detect any tax crimes that their clients may be committing inside or outside Switzerland, in order to inform the authorities.

Nonetheless, the courts will play a key role in ensuring the new law is applied correctly, Fabien Liégeois stressed.

Adapted from Spanish by Julia Bassam.