Are Switzerland’s new company tax breaks a license for unhealthy conduct?

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Are Switzerland's new corporate tax breaks a license for bad behavior?

The Zurich Paradeplatz is the seat of the two largest banks in Switzerland. © Gaetan Bally / Keystone

Switzerland has announced that companies will be able to deduct billions of dollars in fines incurred abroad from their tax burden. Critics argue that it rewards bad behavior.

This content was posted on February 2, 2021 – 11:00 am

Andrea Ornelas

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Federal Law on the Tax Treatment of Financial Sanctions, which comes into force January 1, 2022, aims to prevent corporations from being used as scapegoats for political retaliation between governments. The issue is controversial as it could give companies the ability to impose fines in poorer countries and does little to promote responsible business practices.

Switzerland is one of the few countries where such fines are tax deductible.

No general discharge

The law passed last year says that companies can only deduct fines if two conditions are met abroad: the penalties are against public order in Switzerland, and the company shows that it has taken all reasonable steps to ensure that Respect the law of the other country. said Fabien Liégeois, member of the Center for Banking and Finance Law of the University of Geneva and tax law expert at the law firm CMS.

The Swiss government insists that meeting these conditions will not be easy. “The company needs to provide credible evidence that it did everything it could to comply with the law and that its behavior was punished anyway. This is based on the principle of good faith laid down in Article 3 of the Swiss Civil Code, ”explained Joel Weibel, spokesman for the Swiss Federal Tax Administration.

According to Weibel, companies also need documented evidence, such as audit compliance reports from the responsible authorities. The Swiss courts can also step in to review cases where tax deductions have been approved or denied.

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For example, a company could deduct a fine incurred for not being properly licensed to operate in a country if it can demonstrate that it did everything possible to comply with the law. However, financial penalties for paying bribes would not be tax deductible.

“Parliament does not intend to reward lawbreakers, but rather to prevent companies from suffering the tax consequences of arbitrary or politically motivated fines,” said Weibel.

Reward bad behavior

The Socialist Party argues that there is no justification for giving companies tax breaks for bad behavior, “especially when it is taxpayers who have to pay for it,” said party spokesman Nicolas Haesler.

“Companies have to comply with the laws of other countries and take responsibility for the risks. If the profits stay with the company, why should the losses be passed on to taxpayers? “, Asked he.

In addition, Switzerland applies a double standard: companies that are active in Switzerland are not entitled to the deduction of fines while companies are active abroad.

“European legislation is moving towards greater corporate responsibility and Switzerland should do the same,” Haesler said.

Dominik Gross, an expert on international finance and fiscal policy at the NGO coalition Alliance Sud, agrees. “By deciding to allow fines to be deducted, we are rewarding companies such as banks for their illegal behavior. This contradicts what we want as Swiss civil society and what we have been fighting against for many years, as the ballot box made clear [in reference to the Responsible Business Initiative vote last year]. ”

Gross also points out that the new law brings with it a clear injustice in the treatment of citizens and companies, as the former do not enjoy this right.

Against the will of the people

Last November, a majority of Swiss citizens approved the “Initiative for Responsible Business”, which was ultimately rejected after two thirds of the cantons voted against it. The opinion of the population is clear, however: people are no longer willing to reward dishonest companies, ”said Haesler.

According to Alex Cobham, executive director of the independent Tax Justice Network, “The new law comes as a surprise because it goes against national public opinion. It also endangers Switzerland’s international reputation as it accepts misconduct that other countries try to punish. “

Cobham said that under the law, a company that has practices that lead to lead poisoning in communities in low-income countries could deduct fines from its tax bill if it can demonstrate that it has “taken all reasonable steps [to comply with the law of the other country]. ”

“If a company can deduct a fine incurred abroad, the Swiss public pays the price,” emphasized Fabien Liégeois from the University of Geneva. “There is no reason why moral considerations should end where boundaries do,” he added.

A global exception

Switzerland is an outlier allowing such deductions, making it difficult to assess the impact of such a policy.

In 2017 a study by the G7 countries, the BRICS [Brazil, Russia, India, China, South Africa] and Austria found that none of them allow the deduction of fines. “In other countries the situation is vague. However, the principle of non-deductibility of fines exists in most legal systems, ”explained Joel Weibel from the Federal Tax Administration.

In almost no OECD country, fines and penalties received abroad can be deducted, although this has been the case in the past.

“The laws have changed significantly, particularly since the OECD passed recommendations on the tax deductibility of bribes to foreign officials (1996) and urged its members to avoid this practice,” said Pascal Saint-Amans, director of the Center for Tax Policy and administration within the OECD.

According to Saint-Amans, the new Swiss law brings more clarity to the Swiss tax system. By clearly prohibiting the deduction of bribes, Switzerland has eliminated any uncertainties in this regard.

The OECD actively combats all forms of financial crime and recognizes that Switzerland took a step forward in 2018 by accepting the automatic exchange of tax information between governments. Between 2018 and 2020, Switzerland shared information with 73 countries and jurisdictions.

Regarding the new law, it will only be important to “significantly limit the allowable deductions and set clear guidelines to avoid misinterpretation,” said Saint-Amans.

Up to the courts

Skeptics fear that the new law will particularly benefit the big banks. Serge Steiner, spokesman for the Swiss Bankers Association (SBA), reacts cautiously: The new rules apply to all types of companies, not just financial institutions. “The deduction of fines is clearly limited to special cases that need to be assessed individually as they arise,” he said.

Could a company deduct a fine like the one Swiss bank UBS received in France in 2019 (€ 4.5m) for participating in a large-scale tax evasion program?

In theory no. This fine punished the crime of money laundering which was exacerbated by tax fraud committed by the bank between 2004 and 2012, a crime that is also illegal in Switzerland. In addition, since 2016, Swiss banks have been required to uncover tax crimes that their customers commit inside or outside Switzerland in order to inform the authorities.

However, the courts will play a key role in the correct application of the new law, emphasized Fabien Liégeois.

Adapted from Spanish by Julia Bassam.