The Federal Council aims to change the withholding tax regime and adopt, in the case of interest paid on bonds and money market instruments, the so-called paying agent system. This means that the tax will no longer be paid directly by the debtor, as now happens. Instead, responsibility for this will be transferred to banks (paying agents), whose job it will be to collect the tax according to the legal form and country of residence of the beneficial owner.

“From an operational point of view, the planned reform would come into effect at the worst moment for Swiss banks, when they will already be confronted in the next two years with the probable introduction of tax agreements recently signed with Germany and the UK, the possible reform of the taxation of savings with the other EU countries and a Kafkaesque tax reform being drawn up by the US, known as FATCA,” the Swiss Private Bankers’ Association said in a statement.

(FATCA is a set of rules designed to catch expat US citizens thought to be evading their tax obligations; the legislation has been criticised for its severity and violation of national legal and economic sovereignty.)

“For all the banks, but particularly the small and medium-sized establishments, it will be very difficult to cope with this simultaneous accumulation of major IT projects,” the banking association continued. Its 13 members include private banks such as Mirabaud & Cie, Pictet & Cie and Lombard Odier Darier Hentsch & Cie.

Colder climate

The Swiss banking industry, long a beneficiary of cast-iron bank secrecy laws, a stable currency and calm political order, is in a chillier climate. Its status as a tax haven has come under unprecedented assault from nations such as the US, Germany and the UK; the strong Swiss franc has hit bank earnings from business booked abroad. Negative real interest rates have also hit deposit-based income.

The association did have some good words to say of the proposed rule changes, however. “The proposed modification will offer some advantages. It is hoped, in particular, that it will revitalise the Swiss capital market and boost the investment banking activity in Switzerland (essentially the big banks). For the majority of natural persons, the overall situation will remain unchanged since the withholding tax will continue to be a safeguard tax.”

The new withholding tax will not apply to dividends for which the current procedure will remain in force, which is why it is referred to as a dual system.

But in general, the association is unhappy about the planned move. “The new rule change will “make life difficult for Swiss banks as the responsibility for collecting the tax will be theirs and they will have to follow very complicated rules in order to ascertain when or when not to levy it…. They will be faced with substantial operational risks as a result of this,” the SPBA said.

The SPBA said that legislators plan to identify the beneficial owner according to procedure designed for use in anti-money laundering cases and adapted to tax law.

“The complexity of the system will be reinforced by 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,” it said.

“For investment vehicles incorporating the two kinds of underlying securities (such as shares and bonds), it would mean setting up an unattractive certification system which is nowhere near ready. 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 association continued.

The SPBA said it would be “ill-advised” to reform the tax that brings in between SFr3 billion and SFr6 billion of state revenues.