Switzerland is embracing tax reform. Independently of the OECD BEPS project, the Swiss government has undertaken substantial tax reforms. On 5 June 2015, the Federal Council issued a dispatch and a draft bill that will be discussed in parliament's next sessions. However, in view of an upcoming referendum, enforcement of any new rules is not expected to begin earlier than 2018.
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 fall in line with the BEPS project proposals, and the Swiss tax authority has been actively monitoring discussions with the OECD to ensure that new legislation conforms to the new standard. The most important elements of the legislation are those that will abolish the special holding company regime, the mixed and domiciliary regime, the finance branch regime and 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.
We expect several changes, including the introduction of an intellectual property (IP) box regime and a deemed interest reduction regime. We also expect reforms such as the elimination of stamp duty on the issuance of bonds and shares, the withholding tax regime and possibly the introduction of a tonnage tax. The overall corporate tax rate may also be lowered, while traditional measures such as taking a step-up in basis for tax purposes are likely.
Perhaps in anticipation of the coming reforms, Swiss tax authorities have been 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 its support of the BEPS project should not be seen as a directive 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.
Tax directors are re-examining their hybrid instruments, wary of anyindication of profit shifting. They are performing gap analyses to determine the degree of change necessary to become compliant 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 to unilaterally inhibit the misuse of treaty benefits.
As the government seems determined to develop BEPS-compliant tax rules, tax directors of companies with operations in more than one jurisdiction are also preparing for a future in which CbyC is the norm.
Tax authorities have recently announced that they will examine the margins of limited risk distributors and commissionaires. The Swiss Federal Tax Administration is currently of the view 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 the Big Four in Switzerland, many individual companies are in discussion with the Tax Administration regarding its peculiar approach to limited risk deductions.