Swiss double tax treaties – a one-sided affair?

A car plant in India, one of four countries to sign a double tax agreement along OECD lines with Switzerland AFP

Switzerland’s double taxation treaty policy puts developing countries at a serious disadvantage, suggests a new study by the University of Bern. But government experts, who commissioned the report, question some of its conclusions.

Following mounting foreign pressure, the Swiss government relaxed its banking secrecy laws in March 2009, agreeing to adopt Organisation for Co-operation and Development (OECD) standards on administrative assistance in tax matters.

Since then, Switzerland has renegotiated double taxation agreements (DTAs) with 42 countries containing the new international standard on exchange of tax information.

But very few of these new treaties are with developing countries, which continue to lose billions of dollars every year in the flight of assets and valuable tax money needed to reduce poverty.

In 2011 the OECD estimated illicit financial flows from developing countries reach $850 billion (CHF763 billion)-$1 trillion per year. This money can be attributed partly to tax evasion but also to perfectly legal, yet morally questionable, tax avoidance practices.

A critical new report published this month by researchers at the university’s World Trade Institute, which looks specially at Swiss DTAs concluded with developing countries, describes the overall picture as “mixed”.

Developing nation?

There is no universal, agreed-upon criterion for what makes a country ‘developing’ versus ‘developed’ and which countries fit these two categories.

According to the Swiss government, in 2012 there were 37 developing countries. This definition originates from the list of countries featuring on the March 2007 Decree of Preferential Customs Rights for Developing Countries.

The University of Bern study uses the United Nations Conference on Trade and Development (UNCTAD) classification, which is also followed by the World Trade Organization.

This states that there is no established convention for the designation of ‘developed’ and ‘developing’ countries or areas in the UN system but in common practice: Israel and Japan in Asia, Bermuda, Canada, Greenland, Saint Pierre et Miquelon, and the United States in northern America, Australia and New Zealand in Oceania and Europe are considered ‘developed’ regions or areas.

Transition countries are countries in transition from centrally planned to market economies. Developing economies include all the countries that do not belong to the two above categories.

Elsewhere, the World Bank classifies countries into four income groups: low income countries (gross national income (GNI) per capita of US$1,026 or less); lower middle income countries (GNI per capita of between US$1,026 and US$4,036); upper middle income countries (GNI per capita of between US$4,036 and US$12,476 and high income countries had GNI above US$12,476.

The World Bank considers all low- and middle-income countries as developing.

Switzerland has DTAs with only one-quarter of the world’s developing nations (see infobox for definition), but only four countries, India, Mexico, Uruguay and South Korea, have concluded the new OECD model. As a result, the vast majority of developing countries obtain very limited information about data on assets managed in Switzerland, even when they specifically request it, the study notes.

The authors say the new DTAs are the clear result of bargaining between ‘stronger and weaker partners and tend to contain provisions that are more favourable to Switzerland’.

“It’s important to have tax agreements and it’s important they are balanced. The current ones are not as balanced as they could be,” said Elizabeth Bürgi, a law and trade expert at the Bern institute, and co-author of the study.

Confirmation

Non-governmental groups say the study backs their claims that Switzerland has bullied economically weaker states into lowering taxes for Swiss companies in exchange for greater help in tracking down tax evaders.

“Developing countries are effectively excluded from Switzerland’s recent steps towards increased tax transparency. If they seek a new or revised tax treaty with Switzerland, they must be ready to engage in long and tedious negotiations and make substantial concessions with regard to the taxation of Swiss investors,” said Mark Herkenrath, a tax specialist who works for the NGO Alliance Sud, adding that the report confirmed a similar analysis his NGO had carried out in 2010.

“What Switzerland demands from its treaty partners is that they lower, or eliminate, withholding taxes on license and interest payments used by Swiss multinationals to shift their profits back to their Swiss headquarters.”

The report says Switzerland is pursuing, together with other OECD countries, a unilateral strategy of committing developing countries to low withholding tax rates in order to create more favourable conditions for foreign investment.

Some commodities traders, in particular, have long been accused by pressure groups of using accountancy tricks to syphon off taxable income from the poorer countries where the raw materials are extracted.

This is achieved by basing administrative functions, such as licensing, in low-tax Switzerland and charging subsidiaries in other countries for their services.

This legally reduces the profits being declared by the subsidiary and thus the amount of tax being paid to the country it is based in.

States impose withholding taxes on royalty payments to prevent the loss of such income, so if Switzerland reduces the withholding tax rate it will have an impact, say campaigners.

Bürgi points to the examples of Mexico which accepted a lower withholding tax rate of 7.5%, compared to 12.5% for Peru. More extreme was Georgia, which under their DTA are not allowed to levy any withholding taxes on Swiss firms. “They had to accept zero in order to get the new provision on information exchange,” she said.

Recent tax talks

At the World Economic Forum (WEF) annual meeting in Davos in January, Swiss Finance Minister Eveline Widmer-Schlumpf held talks with Angel Gurría, Secretary-General of the OECD, to confirm Switzerland’s willingness to play a constructive and active role in the development of a global standard for the automatic exchange of information which is moving ahead fast.

Both sides acknowledged Switzerland’s signing of the OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters, as well as the progress made within the framework of the Global Forum’s peer review.

The automatic exchange of information was also discussed during talks with the European Commissioner for Taxation, Algirdas Šemeta. Other topics addressed on this occasion included the current status of the discussions on business taxation, as well as the ongoing negotiations on the taxation of savings agreement.

(Source: Swiss finance ministry)

Not surprising or conclusive

The Swiss foreign ministry, which commissioned the study from the Bern institute, said it was not surprised by the results which it said were in line with those of similar studies carried out elsewhere, such as in the Netherlands.

Last August the Dutch government said it would offer nearly two dozen developing countries the chance to renegotiate double taxation treaties to close loopholes that allow multinationals to avoid taxation. The decision to examine the treaties came after several studies found that emerging economies are losing revenue due to low tax rates set in the deals.

Swiss foreign ministry spokesman Stefan von Below said the Bern study did not provide conclusive evidence but said it was an important contribution to current national and international discussions about illicit financial flows from developing countries.

He argued Swiss DTAs were fair as Switzerland pushed for low tax rates with all countries during negotiations. He added that the small number of treaties concluded with developing countries may be explained by the fact that the level of economic activities with many of them was too low.

However, the signing of the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters in October 2013 was likely to add over 20 more developing countries to Switzerland’s list, said the spokesman.

Pascal Duss, deputy head of bilateral tax issues, from the State Secretariat for International Financial Matters, was much more critical of the study’s findings, however, which he said contained several errors.

“They say these DTAs are the ‘result of bargaining between stronger and weaker partners and tend to contain provisions that are more favourable to Switzerland’. This is simply not the case,” he told swissinfo.ch.

He said Switzerland only signed DTAs with developing countries where economic activities were at a certain level and a priority. He added it was unrealistic to consider totally equal treatment across all DTAs as the treaties formed a ‘bridge’ between the internal tax regimes of two countries which were ‘never the same’.

“The study authors might be good lawyers but they are definitely not tax lawyers. Many of the ideas are very utopian,” he noted.