18 October 2016
Switzerland facilitates tax avoidance on funds originating from third countries in two ways. On the one hand, it makes a distinction between tax evasion and tax fraud: for a long time now, this has allowed the Swiss authorities to withhold assistance from their foreign counterparts. On the other hand, it offers tax privileges to multinational corporations, enabling them to repatriate profits earned in other countries to Switzerland so that they can largely evade tax on such sums.
Tax avoidance originating from developing countries is by no means a negligible factor for the Swiss financial centre. According to estimates by Public Eye in 2008, developing countries lose between CHF 5.4 and 22 billion per year due to tax avoidance involving funds sent to Switzerland, many times more than the CHF 1.26 billion that Switzerland allocates to development aid.
Tax avoidance as opposed to tax fraud
According to Swiss law, tax evasion (or the simple act of "forgetting" to declare assets or income) is not penalised, unlike tax fraud (which entails the falsification of documents). In principle, a request for legal or administrative assistance from a third country can only relate to those offences that are penalised by law. Consequently, Swiss law protects the individuals and entities aiming to avoid the taxman in their own countries by omitting to declare their assets deposited in Switzerland.
The Swiss financial centre has benefited from this policy for many years. It has become specialised in asset management, due in particular to the advantage bestowed upon it by this subtle distinction between tax avoidance and tax fraud. But against the backdrop of the rapidly escalating global financial and economic crisis in 2008 – the worst crisis since the 1930s – the Swiss authorities were forced to reconsider their position. On 13 March 2009, the Federal Council stated that it was prepared to renegotiate Switzerland's international double taxation agreements so as to incorporate provisions that would also allow for the prosecution of tax avoidance.
Since then, several other measures have been introduced – always in response to international pressure – in order to implement this decision and to broaden its scope. In 2013, the Swiss authorities declared that they were ready to introduce the automatic information exchange standard, thereby meeting one of Public Eye's long-standing demands.
This decision might not benefit developing countries in real terms because the OECD (Organisation for Economic Co-operation and Development) standard attaches several conditions to the exchange of information. The main problem with the OECD's current proposal is that it stipulates a reciprocity clause. What this actually means is that a country can only obtain automatically exchanged information if it is able to transmit similar data itself. However, the collection and transmission of bank data in this way requires technical and administrative infrastructure, which is only available to a few Southern countries at present. Moreover, a provision of this sort does not in fact make much sense: there are few taxpayers in developed countries who use underprivileged countries to shelter assets that they have shielded from the tax authorities.
Special tax regimes and tax optimisation for multinationals
The Swiss cantons offer multinationals a range of advantageous fiscal statuses (holding companies, mixed companies or domiciliary companies), which are specifically designed to optimise their international cashflows. Moreover, the deduction for participating interests in foreign subsidiaries – a provision that allows holdings in foreign subsidiaries to be exempt from tax – also allows holding companies to reduce their direct Federal tax, i.e. to reduce their tax burden significantly. Conditions of this sort are highly attractive.
Between 2003 and 2012, over 300 multinational corporations relocated their headquarters to Switzerland (Arthur D. Little, Headquarters on the Move, 2009). In view of the very low effective tax rates applied here (1.5% - 10% compared to 35% in the US, according to figures published by KPMG in 2012), it is in the interest of foreign companies to transfer as much as possible of their profits to Swiss companies.
In these ways, therefore, Switzerland helps to worsen the haemorrhaging of public revenue in Southern countries due to aggressive tax avoidance by multinational corporations. According to calculations by international organisations, such as Christian Aid, these losses may amount to as much as USD 160 billion per year for developing countries. By way of comparison, the worldwide total of development aid granted in 2012 was USD 125 billion.
Public Eye submits the following demands to the Swiss authorities:
- To eliminate the distinction between tax avoidance and tax fraud,
- To engage in the automatic exchange of information with the tax authorities of all countries where democracy and the rule of law prevail,
- To eliminate the special Swiss tax regimes that allow multinational corporations to repatriate profits made elsewhere to Switzerland for the sole purpose of tax optimisation,
- To lend Switzerland's active support to international initiatives that aim to combat tax avoidance by corporations and private individuals.