In a recent release, the Swiss Private Bankers Association (SPBA) warned the society that a hasty reform of withholding tax in the Confederation may lead to serious long-term problems for the Swiss financial center.
A new withholding tax system may be adopted, in the case of interest paid on bonds and money market instruments, the so-called “paying agent” system.
According to SPBA the tax will no longer be paid directly by the debtor, which is presently the case. The new responsibility will be transferred to banks and their paying agents, whose job will be to collect the tax according to the legal form and country of residence of the beneficial owner.
The new withholding tax is referred to as a dual system, so for some dividends the current procedure will remain in force.
SPBA says that the modification will offer some advantages. There is hope, in particular, that the reform will revitalize the Swiss capital market and boost the investment banking activity in the country (essentially the big banks).
The association maintains that for the majority of natural persons, the overall situation will remain unchanged since the withholding tax will continue to be a safeguard tax.
SPBA pointed out that there will be some disadvantages of the proposed reform. Here are a few:
The Swiss banks will have new responsibility for collecting the tax and they will have to follow very complicated rules in order to ascertain when or when not to apply the levy. The association argues that banks will be faced with substantial operational risks as a result.
The complexity is multiplied through the fact that some sources of financial income will be subject to the new paying agent rule while others will remain under the old debtor rule.
SPBA also notes that for investment vehicles incorporating the two kinds of underlying securities (for example shares and bonds), it would mean setting up an unattractive certification system, which is not currently in place. The association adds that some foreign products could even be banned from the Swiss market quite simply because their issuers would not want to comply with these conditions.
The SPBA highlights the fact that from an operational point of view, the planned reform would come into effect at the worst moment for Swiss banks, coinciding possibly with the introduction of tax agreements recently signed with Germany and the UK for example, with the possible reform of the taxation of savings with the other European Union countries and with the FATCA (Foreign Account Tax Compliance Act) due to be introduced in the US.
Concluding its statement, the SPBA underlines that in view of the complexities of the plans, the Federal Council would be “ill-advised to plunge head first into such a fundamental reform of a 67 year-old tax”, which, the association adds, yields between CHF3bn (USD3.3bn) and CHF6bn for the Confederation.
For sure there will be a lot of debates around this withholding tax reform and the decision shouldn’t be taken so fast, because this could have serious long-term consequences for the Confederation..