Our attention has been drawn to a fascinating new report (sadly, in German only, an English language summary is here) on Switzerland’s double tax agreements (DTAs) with developing countries. Interestingly, although the report was produced by researchers from the renowned World Trade Institute at the University of Bern, the underlying study was commissioned by the development agency of the Swiss foreign ministry. However, since the findings are critical of Switzerland’s current international tax policy, the report has been hidden away in an obscure corner of the ministry’s website; we think its findings deserve a wider airing.
En bref, the report confirms what we have long argued: Swiss DTAs, while stipulating on-request tax information exchange, put developing countries at a substantial disadvantage.
First, the report notes there is no convincing empirical evidence substantiating the widely used claim that DTAs foster foreign direct investment to developing countries (our emphasis added: see page 21 of the German-language original).
Second, according to the report:
“Switzerland has a DTA with only one quarter of the world’s 134 developing countries. Only four of those ratified DTAs contain a commitment to the internationally agreed tax standard on exchange of information developed by the OECD [=on-request exchange].” (p.2 of the English-language summary).
We’ve previously noted how slippery Swiss DTA commitments can be, and this report clarifies how weak the positions of poorer countries are when it comes to being able to track tax evading monies.
Third, alarmingly the report notes:
“In order to create more favourable conditions for foreign investment, Switzerland is pursuing, together with other OECD countries, a unilateral strategy of committing developing countries to low withholding tax rates.” (ibid.)
In this context, it is important to note that withholding taxes on income from royalties and interest are an effective defence against the use of license agreements and intra-firm credits for transfer mispricing and abusive profit shifting. This is something we have previously reported on in the Switzerland edition of Tax Justice Focus (published October 2010)
Fourth, and presumably this will come as no surprise to anyone, the report notes:
“Also, the ‘arm’s length principle’ contained in most DTAs is inadequate to prevent transfer mispricing.”
Fifth, with regard to the definition and taxation of permanent establishments, the report says:
“Swiss DTAs with developing countries show a mixed picture. They are quite evidently the result of bargaining between stronger and weaker partners and tend to contain provisions that are more favourable to Switzerland.”
Sixth, developing countries seeking to establish on-request information exchange with Switzerland would probably find straightforward tax information exchange agreements (TIEAs) preferable to DTAs.
“As TIEAs are limited to the exchange of information, there is less of a risk that low withholding tax rates will have to be accepted in return for the exchange of information.” However, as Switzerland “has not received any requests to do so, Switzerland has not yet concluded any TIEAs with developing countries.”
TJN, of course, advocates multilateral and automatic information exchange as the effective tool for tackling tax evasion, especially in circumstances where political elites have no desire to curb their own – and their funding cronies – use of offshore.
Switzerland is not the only tax haven which offers DTAs highly favourable to investors, and highly unfavourable to poorer countries. Last year our colleagues at SOMO published a report which concluded that Dutch DTAs cause considerable revenue losses to other countries and, in similar vein, our colleagues at Trocaire in Ireland concluded that the Irish network of double tax treaties present
“significant risks and potential disadvantages to developed and developing countries alike.”
Their report is available here.
These reports confirm what we’ve been saying for many years: tax havens harm development. Sadly, all talk about the days of tax havens being over is just that: talk.