Switzerland moves towards the spontaneous exchange of information on tax rulings to play its part in the OECD BEPS project.
Switzerland moves towards the spontaneous exchange of information on tax rulings to play its part in the OECD BEPS project. Tax rulings issued after 31 December 2009 may fall within the scope if suspicion of undue tax savings are found.
Following the 2013 Federal Council signing of the 1988 Convention on Mutual Administrative Assistance in Tax Matters (MAC), the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Account Information (MCAA) was signed in November 2014. The Federal Assembly approved said Convention in December 2015.
Article 7 of the MAC provides the legal basis for the Swiss tax authorities to spontaneously exchange information under a number of circumstances; mainly covering cases where there is a significant risk of underreporting of tax in another jurisdiction. In April of this year the TAAO was published, which is now subject to a public consultation process.
Purpose of the draft ordinance
By implementing the MAC in national law, Switzerland aims to play its part in the project of the OECD regarding Base Erosion and Profit Shifting (BEPS). In the final BEPS report on action 5 published on 5 October 2015 regarding the countering of harmful tax practices, the OECD proposes a compulsory spontaneous exchange of information on tax rulings relating to preferential tax regimes.
The recently published draft of the Tax Administrative Assistance Ordinance (TAAO) governs situations related to the exchange of the content of Swiss tax rulings, however it remains silent about other potential situations. To what extent other information may be included in the spontaneous information exchange remains open to discussion.
What is a tax ruling?
Under the draft TAAO, the definition of a “tax ruling” is larger than the common usage definition. It covers any confirmation by a competent tax authority – at the request of a tax payer – of a given fact pattern that influences the tax situation of the taxpayer, that can be considered binding on said tax authority, insofar as the taxpayer is entitled to rely on it for the purpose of assessment of taxes. The confirmation can take the form of a letter, an email or even a verbal confirmation.
Inspired by BEPS action 5 providing for automatic information exchange rather than Art. 7 of MAC, which would be its actual legal basis (this is of importance because the MAC imposes tougher requirements to trigger information exchange), the draft ordinance covers the following types of tax rulings:
- rulings confirming the application of a preferential tax regime
- unilateral advance pricing agreements or other TP rulings
- downward adjustment of taxable profit rulings
- permanent establishment rulings
- conduit rulings.
Only tax rulings issued on or after 1 January 2010 that are still valid on 1 January 2018 (possibly 1 January 2017 in relation to some countries) will be subject to the ordinance. The information exchange applies even to tax rulings never implemented in practice by taxpayers. Agreements reached as a result of a tax audit are however excluded by TAAO as long as they relate to past tax periods subject to audit.
How will information be exchanged?
Art. 7 MAC provides that the exchange of information will be spontaneous if a tax ruling as defined above exists; a request from a foreign tax authority will not be required. Exchanging may take place when the submitting tax authority assumes an interest in the information of the receiving tax authority. This can be the case when there is for example, a tax loss outside of Switzerland or transfer of profits within groups of companies.
The information will be provided to the countries in which the shareholder (head office in case of branch, which qualifies as a permanent establishment for tax purposes) and the ultimate parent company are resident. Exchange may also take place with countries where transactions with related parties, for which the tax ruling was issued, are affected. All countries involved must be party to the Convention, as well as meet a certain number of other criteria, including a confidentiality threshold equivalent to that of Switzerland.
Only a summary of the tax ruling will be exchanged via the format of the OECD-Template (Annex C of BEPS Action 5); not the entire document. The tax ruling may be exchanged upon a separate request for assistance from the country concerned. The cantonal tax authorities will provide a summary of the tax ruling with a copy of the tax ruling to a special division of the federal tax authority (State Secretariat for International Financial Matters “SIF”) who will be arranging for exchange of information with the foreign tax authority.
Prior to the actual exchange of information, the taxpayer will be informed who will then have the opportunity to appeal to the decision to exchange, contrary to the automatic information exchange under MCAA.
The ordinance is expected to be in force as of 1 January 2017. Exchange of information will start taking place most likely as of 1 January 2018 (an earlier commencement date cannot be excluded in relation to some countries).
To prepare for the entering into force of the ordinance clients should already start assessing:
- which tax rulings were issued
- which tax rulings were issued after 31 December 2009
- which of the tax rulings under bullet point 2 above would still be valid on 1 January 2017 or 1 January 2018.
- which of the tax rulings under bullet point 3 above would still be required
- which of the tax rulings no longer serves a purpose and can be terminated (eg. transactional rulings or tax rulings that are longer valid).
Tax rulings that are not terminated will be subject to spontaneous exchange of information. Also, tax rulings that are no longer valid may have to be formally terminated by giving a written notice to the tax authority, to prevent the spontaneous exchange of information.
It may be determined that application of tax law and practice may award equal treatment even though the tax ruling is no longer in place.
Corporate Tax Reform III
The implementation of MAC by Switzerland will provide a positive basis for international acceptance of the current Corporate Tax Reform III proposals.
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It’s prudent to review your current tax ruling status in Switzerland. Our Swiss team can assist in this process and make referrals to local tax counsel where required.
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