By Francesca Amaddeo, Lecturer-Researcher, Tax Law Competence Centre (SUPSI), Manno, Switzerland
On 10 November, the Federal Council introduced within the Swiss legal framework a new law, the federal act on the implementation of international tax agreements (ITAIA), as well as a related ordinance. These new rules will apply from 1 January 2022.
As the title emphasizes, this legislation aims to update the basis for the execution of international treaties and, moreover, double taxation conventions.
Currently, a federal law dated 22 June 1951 applies to such conventions: the federal act on the implementation of international federal conventions on the avoidance of double taxation. This law is made up of just four articles, which only grant the Federal Council the power to enact all the ordinances required to implement international agreements.
It is worth noticing that the 1951 Federal Act was born in a different reality, where international tax concepts and relations were totally different. Fiscal sovereignty was strongly felt, and only a few double taxation conventions were signed.
Needless to say that, in the meanwhile, the international scenario has deeply changed. Rights to tax and exchange of information are two of the main points actually encompassed by tax treaties, pursuing the international road to transparency.
In the Swiss legal framework, the exchange of information has been implemented through a specific law, the so-called Tax Administrative Assistance Act (TAAA), and the legal base for the application of different taxing rights between states has seemed to be missing.
ITAIA: new rules
The new rules reprise some policies already in practice and further define policy in other areas.
In particular, the legislation aims to provide clear rules to follow in mutual agreement procedures, particularly where the applicable convention keeps silent. Secondly, it clarifies withholding tax relief based on international agreements. Thirdly, it sets out criminal provisions related to relief from withholding taxes on investment income.
Mutual agreement procedures to prevent double taxation issues
The ITAIA aims to provide a clear structure for mutual agreement procedures, i.e., procedures which can be exploited regardless of internal remedies.
Usually, competent authorities involved in a cross-border dispute can work together to resolve a specific controversy, which could arise from the application of treaty provisions (i.e., interpretation of specific terms or double taxation).
These new provisions make clearer the possibility for taxpayers involved to require competent tax authorities (at the national level) to start the procedure.
Before the ITAIA, the only legal basis was article 25 of the OECD model convention against double taxation. As a consequence, tax authorities tried to fill the gap with a structured administrative practice. Notwithstanding this, mutual agreement procedures required an ad hoc system of rules. Double taxation conventions already provide some guidance to execute the procedure, but some issues such as taxpayers’ rights and dues, deadlines, and other conditions are not addressed at the international level.
The 2021 federal act on the implementation of international tax treaties clarifies important aspects. First of all, regarding the taxpayer’s role, the legislation specifies that taxpayers may ask national authorities to start the mutual agreement procedure, but they are not part of the procedure. Only tax administrations are allowed to participate. Nonetheless, taxpayers can exercise their rights and should cooperate with authorities, giving approval upon the execution of the agreement reached.
The Swiss competent authority is the State Secretariat for International Finance. The ITAIA defines a series of specific practical rules to grant legal certainty in the domestic procedure.
Withholding tax relief based on international agreements and criminal provisions
The ITAIA sets out the legal basis to recognize relief and refund of the Swiss withholding tax. Indeed, there is actually no provision specifically addressing the topic from an international perspective.
Usually, the mechanism relies on the Swiss federal law on withholding tax and on several ordinances. Thanks to these new rules, the procedure will be ruled uniformly, by the federal tax administration.
Such provisions are complemented by specific criminal consequences aiming to tackle abusive behaviors.
Brief remarks
ITAIA is a step forward in adapting Swiss federal legislation to the current international scenario. Tools established through this law will grant tax authorities better instruments to operate and cooperate to prevent double taxation issues. Moreover, the law will allow greater tax certainty to both taxpayers and the administrations involved.
Francesca Amaddeo
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Hi.
A UK company residing in Switzerland has a deposit account in a UK bank. Which tax rate is applied in Switzerland to the interest income received from the UK bank?
Thank you 🙂