Switzerland, long known as a tax haven, is changing its corporate tax landscape to be more in line with the global landscape. The new reform, referred to as Corporate Tax Reform III, will aim to increase transparency in the tax system, while remaining favorable and appealing to international businesses.

Countries around the world have been maneuvering to increase their abilities to combat tax evasion and increase the transparency of their taxpayers. For example, The United States recently passed the Foreign Account Tax Compliance Act which requires foreign banks to disclose U.S. customers to the U.S. government in order to do business with the country. In addition, some countries have entered into intergovernmental agreements to share information on taxpayers.

Switzerland’s new reform outlines the following provisions:

1. Taxation of hidden reserves — During the transition to the new tax reform, earnings accumulated before the reform would be taxed at the old law’s privileged rates. New earnings would be taxed at the new rates established under the reform.

2. Patent box regime — Income from intellectual property would be taxed at favorable rates. To determine if a company qualifies for these rates, Switzerland would adopt the “modified nexus approach” designed by the Organization of Economic Cooperation and Development to determine the preferential tax benefits given to income from intellectual property by countries across the world.

3. Research and development — The new reform allows for increased tax deductions for research and development expenses.

4. Cantonal tax reduction — It’s expected that each Swiss Canton will reduce its ordinary income tax rates. Similar to U.S. states, Cantons operate individually and establish their own tax rates.

5. Aligning the tax treatment of debt and equity — An interest-adjusted corporate income tax would be made available by allowing an interest expense deduction on equity.

This reform is expected to be phased in sometime between 2018 and 2020.

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2016 U.S. Model Income Tax Convention: What’s New?

by Irina Rangelova and Andy Barnes on March 28, 2016

On February 17, 2016, the Treasury Department released a revised 2016 U.S. Model Income Tax Convention (the 2016 Model), which is the baseline text the Treasury Department uses when it negotiates tax treaties. Here are the updates.

Special Tax Regimes

The 2016 Model denies treaty benefits for related party-interest payments, royalty payments, or guarantee fees within the scope of Article 21 if the beneficial owner of the payment benefits from a special tax regime with respect to the payment. The term “special tax regime” is defined as any legislation, regulation or administrative practice that provides a preferential effective rate of taxation on an item of income or profit.

Payments by Expatriated Entities (including Inverted Companies)

The 2016 Model denies treaty benefits for U.S. withholding taxes on U.S. source dividends, interest, royalties, and certain guarantee fees paid by U.S. companies that are expatriated entities. This provision applies only when the beneficial owner is a connected person with respect to the expatriated entity.

Revised Limitation on Benefits (LOB) Article

The following tests have been modified/added to determine qualification under LOB:

  • Active-trade-or-business: requires that the treaty benefitted income “emanates from, or is incidental to,” a trade or business that is actively conducted by the resident in the residence state
  • Derivative benefits: requires 95% of the tested company’s shares to be owned, directly or indirectly, by seven or fewer persons that are equivalent beneficiaries
  • Headquarters companies: requires a headquarters company to exercise primary management and control functions, and not just supervision and administration, in its residency country with respect to itself and foreign subsidiaries

Additional Changes:

  • Requirement of mandatory binding arbitration to resolve certain disputes between tax authorities
  • Requirement to evaluate if amendments to a treaty are necessary if a treaty partner’s general rate of company tax falls below the lesser of either 15 percent or 60 percent of the other country’s general statutory corporate rate
  • Incorporation of certain base erosion and profit shifting (BEPS) recommendations such as imposition of a twelve-month ownership requirement

 

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How will “Brexit” impact American businesses?

March 22, 2016

Between the Presidential primaries and an extended opening on the Supreme Court, the U.S. has its fair share of political challenges. When you look over to the U.K., however, which is currently voting on “Brexit”— Britain departing from the European Union (EU) — you’ll see we’re not alone. But do U.S.-based multinationals have an interest […]

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What guidance do IRS agents look at during an audit?

February 19, 2016

The IRS has developed an online reference library providing internal guidance, or “practice units,” to serve as international tax job aids and training materials for IRS agents. The practice units provide explanations of general international tax concepts as well as information about specific types of transactions. According to the IRS, practice units will continue to […]

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What a relief: Canada issues form for non-resident employer certification program

February 9, 2016

On January 12, the Canada Revenue Agency released the Form RC473 Application for Non-Resident Employer Certification. This is a big change for non-resident companies who can now apply for relief from Canadian payroll withholdings. Under Canadian tax rules, non-resident companies sending employees temporarily into Canada are required to determine the amount of salary/wages attributable to […]

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IRS releases new draft Form W-8BEN-E: How does this impact you?

January 27, 2016

Do you or your clients take advantage of reduced withholding rates by collecting Form W-8BEN-E from foreign vendors? If so, you should be aware of proposed changes that would require taxpayers to identify the limitation of benefits clause they meet in order to qualify for the benefit. Before we discuss proposed changes to Form W-8BEN-E, […]

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Internal control health assessment: What about your foreign affiliates?

January 18, 2016

As the pendulum of internal controls swings to a more conservative approach, many middle-market companies and larger, privately held organizations are starting ask, “What about my foreign affiliates?” To be sure, many organizations that have taken a holistic approach to risk management should have identified critical business and financial risks at foreign operations, but many […]

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Mexico modifies transfer pricing rules: It’s all about the BEPS

December 30, 2015

The Mexican government included several new transfer pricing provisions in the country’s 2016 federal budget. The changes reflect Mexico’s efforts to align its tax code with principles described by the Base Erosion and Profit Shifting (BEPS) project led by the Organization for Economic Cooperation and Development (OECD). Under new provisions in the Mexican income tax […]

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The Safe Harbor agreement has been overturned. Now what?

December 1, 2015

Recently, The European Court of Justice (EJC) overturned the Safe Harbor agreement between the European Union (EU) and the United States, leaving many companies questioning what to do. Here’s a quick Q&A to help you understand what’s transpired and what it means to companies who were operating under the Safe Harbor Law. What was Safe […]

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Transfer pricing for global structures…is your company prepared?

November 9, 2015

Did you know that the IRS is increasing scrutiny around transfer pricing? Transfer pricing is the method used to set a price for goods and services sold between related legal entities within a business structure.  For example, if a foreign subsidiary sells goods to its parent company, the cost of those goods is the transfer […]

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