Both sides have won, one more than the other. In the recent amendments to the Indo-Swiss Double Taxation Avoidance Agreement (DTAA), India has managed to retain the same level of withholding taxes, as before, that it can levy on Swiss earnings. However, it may continue to be shortchanged while getting information on tax evaders in future.
It is not unnatural to question why these two issues are connected. They are, in fact, separate. DTAAs are more about the means to avoid double taxation on investments, than they are about tax transparency. But in the Swiss scheme of things, the issues of withholding taxes and sharing tax information have inadvertently become tools of negotiation in the backdrop of the dilution of banking secrecy something that used to be sacrosanct for the neutral country. Its strategy has been to tweak its policy on providing information on tax evaders in return for lower withholding taxes on their foreign investments. This is how it happened.
When Switzerland decided to liberalise its banking secrecy in March 2009 under pressure from the United States, it chose to address tax transparency within the framework of the DTAAs. That year, the country found itself on the OECD grey list of jurisdictions that had adopted the internationally agreed tax standard but had not implemented it. It has since moved to the white list ? jurisdictions that have substantially implemented the tax standard. Switzerland has concluded a host of agreements mostly with industrialized nations, most of whom have given concessions on withholding taxes.
DTAAs are based on the models of the OECD and the UN. The Indo-Swiss treaty, for example, is a hybrid of both the models. While the OECD model agreement tries to avoid the double taxation by eliminating source taxation in the country of production, the UN model underscores source taxation so that the developing country can mobilize more revenue. But the UN model does not specify an ideal rate of taxation. The OECD model assumes that partner countries have comparable investments between them. So it does not matter where the earnings are taxed. But this becomes an unequal arrangement, between a developing and an industrialized country, since rich countries invest more in poorer ones.
Earlier, Switzerland allowed for source taxation in its treaties ? a price that the country had to pay in order to maintain its banking secrecy. ?Now that the government is relaxing banking secrecy to some extent, the government has sought for lower source taxes as a counter demand,? Herkenrath, Programme Officer, International Financial Politics at Alliance Sud, a part of the Swiss Alliance of Development Organisations said.
Few developing countries have got any provision on tax information exchange from the Swiss. India has managed to negotiate a new clause on tax information, possibly because it is an important trade partner. Further, India managed to retain the same level of withholding taxes as before. ?India is the great exception. Apparently India was successful in resisting the pressure from the Swiss government to lower source taxation,? Herkenrath says.
Mario Head of communications, of the newly created State Secretariat for International Financial Matters (SIF) in the Federal Department of Finance of Swiss government, in Berne, said, ?When evaluating the result of negotiations, it is important to consider the whole context and not only one particular point (e.g. the rate of withholding tax). Since the DTAA was revised successfully, apparently both sides negotiated well.?
Even after the new treaty has come into force, requests to the Swiss will need to have a detailed explanation (including possible evidence) as to why the person under investigation is suspect of having committed tax evasion, and the request must also include the banking details (name of the bank). But this too could be relaxed. The Swiss Parliament is currently debating a unilateral amendment to all revised DTAAs to effect that the name of the bank has to be given only ?to the extent known?.
Olivier Longchamp, director of the financial and fiscal program at the Berne Declaration, a Swiss non-governmental organization, ?even if Switzerland recently softened its positions in the matter, India cannot really get greater access to any relevant information. As the new DTTA is based on the tax information exchange ?on request? standard, there is the eternal problem that India asks for information so hard to get, that the Swiss finance department can easily reject the mutual assistance, arguing that the request in incomplete.? Further the government plans to enact internal regulations that prohibit administrative assistance on requests based on stolen information.
What?s more, this agreement does not work retroactively. No information will be provided on account balances and transactions prior to the enforcement of the revised DTAA. Indian account holders who would like to circumvent a tax investigation still have time transfer their money via a trust outside Switzerland and can be undetected.