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#Investments — 12.09.2016

The Time Has Come: Switzerland and the Automatic Exchange of Information

Samuel Favre

Not so long ago, Switzerland was still seen as an impregnable fortress where bank secrecy meant that all requests for mutual assistance filed by foreign tax authorities regarding problematic taxpayers could be rejected. Only certain cases of tax fraud involving the falsification of documents (e.g. falsifying a balance sheet or issuing falsified invoices) would enable access to substantiated banking information from the Swiss authorities.

But all of that ended with the first decade of the new millennium. The subprime mortgage crisis, the collapse of Lehman Brothers and especially the measures adopted by various states in an attempt to save the international banking system gradually eroded Swiss bank secrecy. Championing international tax transparency, the OECD decided to force banking and financial centres to align their tax treaties with the international standard on administrative assistance.

Now, states no longer shackled to bank secrecy would have access to information upon request. Even tax havens with no network of tax treaties whatsoever started to enter into agreements with other countries to enable this exchange of information upon request. Not complying with the OECD’s recommendations meant appearing on a black or grey list and suffering potentially damaging economic, tax and reputational consequences.
 

On 13 March 2009, Switzerland fully withdrew its reservation to Article 26 of the OECD Model
 

Since 2009, Switzerland entered into renegotiations with its partners in order to adapt the provisions governing the exchange of information on request for tax purposes, and to remove its major reservation to Article 26 point 5 of the OECD Model (this reservation essentially stated that bank secrecy superseded the principle of exchanging information in accordance with a treaty). Since then, it has been possible for foreign states to file a request for administrative assistance with the Swiss authorities (specifically the Administration Fédérale des Contributions (Federal Tax Administration, hereinafter “AFC”)) for cases involving simple tax evasion (rather than fraud).

To be admissible, the request must include information such as the identity of the person in question, an indication of the information being sought and even the tax-related purpose for which the information is requested. Requests must, therefore, be specific and the information must be “foreseeably relevant” for the application of the provisions of the Convention on Mutual Administrative Assistance in Tax Matters, or of national tax legislation of any kind. All vague and imprecise “fishing expeditions” are still formally prohibited.

To date, Switzerland has entered into 53 treaties precluding double taxation in accordance with the new international standard (of which 46 are in force) and 10 tax information exchange agreements (of which 7 are in force). It should also be noted that a peer review by the Global Forum resulted in Switzerland being awarded the overall rating of “largely compliant” with the international standard for the exchange of information on 26 July last year.
 

The emergence of group requests
 

Since 2013, it has also been possible to file a group request pertaining, as the name suggests, to a group of taxpayers residing in a third country with “identical behaviour patterns” who are “identifiable by means of precise details”. The first group request for mutual assistance addressed to Switzerland under the auspices of the Tax Administrative Assistance Act (TAAA) was made by the Netherlands in July 2015.

Under this request, information was sought on all persons residing in the Netherlands holding an account with a particular Swiss bank between 1 February 2013 and 31 December 2014 who had not provided this bank with the proof of tax compliance that had been requested from them. Despite initial approval by the AFC, the exchange of information is currently suspended following a ruling by the Federal Administrative Court on an appeal filed by a person living in the Netherlands who was affected by this request for mutual assistance. This ruling may nevertheless be challenged before the Federal Court and the latter will have the onerous task of establishing a legal precedent with major repercussions.
 

On the cusp of automatic exchange
 

Initially resistant to the idea of an automatic exchange of information, Switzerland has had to adapt to the changing international context. It was only a small jump from the exchange of information on request based on bilateral tax treaties to the automatic exchange of banking information.

It was not until April 2013 that G20 finance ministers and central bank governors approved the automatic exchange of information as a new international standard for the purposes of combatting tax evasion on a global scale. A few months later, in October 2014, around 100 states (including Switzerland) expressed a desire to implement this new standard.

As a result, Switzerland committed to engaging in the first round of reporting in 2018 on information collected in 2017, subject to definitive approval of these standards in accordance with national laws.
 

Implementation

The automatic exchange of information (hereinafter “AEOI”) may be implemented by means of a bilateral treaty or based on the Multilateral Competent Authority Agreement (hereinafter “MCAA”) signed by Switzerland on 19 November 2014. In the latter case, the automatic exchange must be implemented bilaterally between the signatory states through a notification sent to the Co-ordinating Body Secretariat of the MCAA. Simply signing the MCAA is not sufficient.
 

Which countries are involved?
 

To date, Switzerland has signed an agreement seeking to introduce the international standard governing AEOI with the European Union (which is intended to replace the existing agreement on the taxation of savings). Joint political declarations based on the MCAA and intended to introduce the automatic exchange of information for tax purposes on a reciprocal basis have also been signed with Australia, Canada, South Korea, Guernsey, the Isle of Man, Ireland, Japan, Jersey and Norway. These various dossiers still have to be submitted to the Swiss parliament for approval.
 

What information will be exchanged?
 

The standard applies to both natural persons and legal entities. The information to be communicated includes the following:

  • Account number(s)
  • Name, address, date of birth
  • Tax identification number
  • Interest, dividends
  • Income from particular insurance contracts
  • Account balance
  • Income derived from the sale of financial assets
     

In practice
 

Swiss banks will begin to collect the aforementioned information from 2017 and will submit it to the AFC in 2018. The latter will exchange the information by 30 September 2018 with the tax authorities of countries with whom a bilateral treaty is in force, or on the basis of the MCAA and ad-hoc notifications sent to the Co-ordinating Body Secretariat of the MCAA.

The last ten years have been a turning point for Switzerland as a banking centre. It has successfully adapted to ever-changing international standards and is actively preparing for AEOI starting in 2018. Swiss banking institutions have their nose to the grindstone in order to ensure that they apply these standards rigorously while continuing to offer their international clients high-quality value-added services in terms of asset management, investment advice and wealth structuring. The bank for a changing world certainly has challenges to overcome.