Switzerland is doing its best to overcome its reputation for being closely associated with tax havens. The latest step in its efforts is to eliminate a bribery loophole.
In the past, bribes that companies paid to individuals were tax-deductible on their corporate taxes. The same was true of money that financed crimes. The new law removes the tax deductibility of this money. It also removes tax deductibility from money paid for someone to commit a crime. The Swiss government says that this update is the result of more than five years of discussion and consideration.
According to the Swiss government, the criminal code banned private bribery five years ago in 2015. This new update will “harmonize” the tax law to match that criminal code. Even before this update, bribes paid to officials were not treated favorably with taxation.
The updates will also prevent Swiss companies from using foreign fines as tax deductions in their fiduciary management. These deductions would only be allowed in exceptional cases, not general tax planning. To qualify, either those cases must violate the public policy in Switzerland or the company has to show it took all reasonable measures to follow the law.
The new tax laws will go into effect on Jan. 1, 2022. The law is called the Federal Act on the Tax Treatment of Financial Sanctions. The Federal Council in Switzerland officially approved it with that start date on Nov. 11, 2020.
Parliament officially adopted this law (with 142 votes in favor and 101 opposed) on June 19, 2020. There was a referendum deadline until Oct. 8. No manager, passport holder, or shareholder used it during this time.
This Change Was a Long Time Coming
Notably, Switzerland has not let entities deduct certain bribes since 2001. That is when they could no longer ban deductions of bribes to public officials. But there was no similar ban on bribes paid to private individuals. This change has been in progress for years due to a great deal of pushback. Some political parties have opposed the change, resulting in delays.
The new law means that Switzerland is in line with OECD recommendations. The law specifically follows the Luginbühl motion (14.3450) called “Tax deductibility of fines.” That motion requested that international and domestic punitive sanctions not be tax-deductible.
The Former Rule Was Not Out of Place Several Decades Ago
The idea of tax advantages for bribery may seem odd to some, but it was fairly common practice by investment directors until recently. In 1996, around half of the OECD countries let companies deduct these bribes to foreign officials when paying taxes. In addition to Switzerland, these deductions were also allowed in Germany, Australia, and France. Those in favor of the deductions included them among standard business expenses.
Over the decades, this has changed. The OECD and other organizations have tried to change views on bribery and money laundering. One of the steps they took was to end tax rules that favored those practices.
Part of Switzerland’s Efforts to Comply with Recommendations
The planned changes follow the recommendations from the OECD. These specific recommendations come from its Financial Action Task Force on Money Laundering. There is still criticism of Switzerland’s tax haven reputation related to real estate, trusts, private equity funds, tax residency, and other foundation assets.
The OECD’s recommendations are the result of recent criticisms of Switzerland and its tax haven status. Switzerland has famously had an issue with legal bribery in the past 20 years. This has only improved slightly. It was only in the early 2000s that Switzerland moved to make bribing foreign public officials a crime.
The current ban stopping companies from bribing public officials and deducting it from their taxes appeared in 2001.
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