A new era of corporate taxation? A matter of give and take for Switzerland 

Times are changing – including in the world of taxation. Motivated by international competition, global mobility and cross-border transparency, economic integration is being followed by fiscal integration. This overarching trend has now entered a new chapter. It is not only the industrialised nations that wish to be integrated. While they are the ones that have shaped international tax law for the past century via the League of Nations and the OECD, more and more emerging and developing countries are now seeking to secure a slice of the global tax pie for themselves. The Inclusive Framework gave them a seat at the OECD’s table, but they do not appear to be happy with the portion they have been served after ten years of intensive wrangling. In a remarkable resolution on 30 December 2022, they handed responsibility for the further development of international taxation to the UN. What is at stake here is the standard underlying some 3,000 double taxation treaties worldwide that serve to divide tax revenues arising from cross-border business between the countries involved. The UN, i.e. before it the League of Nations, was in fact instrumental in the creation of the OECD standard 100 years ago, but it has also had its own standard for decades. However, the latter is relatively insignificant, given that around 80% of economic output covered by double taxation treaties falls under the OECD standard. This, it would seem, is about to change.

Trend towards more widespread taxation at source, services included

We may question how much more likely the UN’s 193 member states are to reach a political compromise than the 142 members of the Inclusive Framework. Indeed, Switzerland approved the UN resolution subject to such doubt. The fact is, however, that the UN standard already exists and has now received a boost from the resolution. Unlike the OECD standard, it includes clauses allowing the country in which a customer is located (the source or market country) to tax revenues from services provided to that customer, even if those services are provided from Switzerland, for example, rather than the source country. This effectively qualifies the customer as a “place of business” and thus requires the Swiss company to pay local tax in the source country, even though the customer has already paid value-added tax on the services in question. Another example concerns “technical services”, a very broadly defined term that also includes managerial and consultancy services involving “specialised knowledge, skills or experience in a particular craft, science, profession or activity”. In a service economy as highly specialised as Switzerland’s, this definition can probably be applied to almost all revenues. This is all the more surprising in view of the fact that these clauses were originally intended to protect the company’s country of domicile – in our case Switzerland – against taxation at source in the source country.

Broad impact, especially among banks

All of this is already a reality, as shown by the latest double taxation treaties – those with Saudi Arabia, Ethiopia and Angola, for instance, were all drawn up under the UN standard. Every new treaty under that standard sets a precedent that makes Switzerland’s position more difficult, especially if the other country is a powerful trading partner. As one of Switzerland’s most important export-oriented service industries, banking is directly affected by this trend. Only recently, the Inclusive Framework itself shielded the financial sector from just this sort of taxation at source for good reasons in line with the double taxation treaties. It is not clear why these reasons should cease to be valid just because responsibility has shifted to the UN. If tax is levied not on profits in one country but on revenues in many, it is not only banks and other companies that will end up paying more. The problem facing all of us as taxpayers is that the authority to which we pay tax is likely to have to deliver some its revenues directly to other countries. With an increasing share of Swiss-based companies’ costs determined by those other countries, Switzerland itself will give up some of its scope to shape its own economic policy. Indeed, this is precisely why Switzerland has reservations with regard to other taxation at source projects such as the OECD minimum tax rate. If it wants to protect its money from the OECD tax, it will still end up paying some of it to other countries under the UN standard. Switzerland’s position in the increasingly tough battle for tax sovereignty is not an easy one, which is why it needs to remain flexible.