Switzerland - Response to BEPS

Switzerland - Response to BEPS

Switzerland is embracing tax reform. Independently of the OECD BEPS project, the Swiss government has undertaken substantial tax reforms. On 14 June 2016, the National Council adopted a bill that is now subject to a likely referendum. The deadline for seeking a referendum is October 2016, and the actual vote should take place February 2017. The Federal Council announced that the bill should enter into force in January 2019.

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The Swiss Parliament has been driven to act in part by the same public outcry that is being heard in other jurisdictions. EU opposition to certain Swiss tax structures is also playing a role in the proposed reforms. In January 2014, the EU and government of Switzerland initialed a mutual understanding on business taxation, ending a nearly decade-long dispute.

The new measures will align with the BEPS project proposals, and the Swiss tax authority has been actively monitoring the OECD discussions to ensure that new legislation conforms to the new standard. The most important elements of the legislation would abolish:

  • the special holding company regime
  • the mixed and domiciliary regime
  • the finance branch regime
  • the Swiss principal regime

Regimes established to replace the previous ones will comply not only with EU law but also with the requirements set out by the OECD. As substitutes for the abolished tax regimes, the following main measures would be introduced:

  • patent box regime
  • notional interest deduction
  • R&D super deduction
  • a substantial reduction of cantonal income tax ratesthat would result in an overall effective income tax rateranging from 12.3 percent to 18 percent (depending on the canton).

Stricter audits

Perhaps in anticipation of the coming reforms, Swiss tax authorities have become stricter with audits. When their rulings are challenged or there is room for interpretation, the authorities have been leaning toward the recommendations of the BEPS project. Switzerland enjoys a solid financial position compared to other European countries, so itssupport of the BEPS project should not be seen as adirective from a cash-strapped government. Rather, its actions reflect the Swiss government’s desire to be seen as a leader in implementing the internationally recognized OECD principles.

Hybrid structures

Tax directors are re-examining their hybrid instruments, wary of any indication of profit shifting. They are performing gap analyses to determine the degree of change needed to comply with the expected new regulations. Current tax rules, introduced approximately two decades ago, do not allow Swiss parent companies to use hybrid structures with their immediate subsidiaries. Further, for over 50 years, Switzerland has had legislation in place that unilaterally inhibits the misuseof treaty benefits.

Country-by-country reporting

As the government seems determined to developBEPS-compliant tax rules, tax directors of companies with operations in more than one jurisdiction are also preparingfor a future in which CbyC reporting is the norm. As of 2017, CbyC reporting will be mandatory for Swiss companies meeting the respective criteria.

Exchange of rulings

Generally, as of January 2018, valid rulings may be exchanged spontaneously, depending whether they meet the respective criteria (in particular, where they have cross-border effect).

Limited risk deductions

The Swiss tax authorities recently announced that they will examine the margins of limited risk distributors and commissionaires. The Swiss Federal Tax Administration’s current view is that the gross margins of such distributing units cannot exceed 3 percent, based on the usual function and risk profile of such set-ups. Together with a national interest group led by KPMG in Switzerland and other firms, many individual companies are in discussions with the tax administration regarding its peculiar approach to limited risk deductions.

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