An article in the Neuer Zürcher Zeitung is practically a case study of some of the key issues at stake in the international tax debate.
Under the headline “Switzerland suffering under Brazil’s arbitrariness”, it portrays Switzerland as a constant victim of Brazil’s random decision-making.
The good news first: Switzerland is no longer on the Brazilian blacklist of tax havens. A Finance Ministry decree at the end of June took Switzerland off the list it had been surprisingly placed on four years ago.
The article continues
The bad news: It continues to be unclear which taxes the Brazilian tax authorities will apply to companies doing business in both countries.
Swiss diplomats are concerned about the legal uncertainty. Nobody knows how taxes will be charged. Arbitrariness prevails in the setting of tax rates. This is a burden on the flow of investments between the two countries.
and then quotes the Director of the Swiss Business Hub in Sao Paolo:
…the interest of Brazilian companies in having a presence in Switzerland is growing. The companies want to carry out research in Switzerland or take advantage of Switzerland’s free trade agreements to trade their products and services worldwide. The unclear tax situation makes these companies feel insecure…
A couple of first comments:
What kind of “investments” and “presence” in Switzerland is the article talking about? Is this a real presence or is it perhaps setting the scene for multinationals to perform tax inversions?
After all, according to tax expert Lee Sheppard the international tax system is basically rigged in favour of multinationals already, at the expense of regular citizens and of developing countries. This Tax Justice Network post has a detailed explanation drawing on a Lee Sheppard talk:
“For multinationals, “there are countries for which there is extraction, and countries where there are customers, and these are all countries from which income has got to be stripped. And the rubric that allows this is the international consensus. It is the whole treaty network. The treaties protect multinationals primarily. That’s all they were ever for: to make life comfortable for multinationals”. . . The international consensus is “basically a load of nonsense that protects multinationals.”” (emphasis added by TJN).
Back to the NZZ article:
A double taxation treaty is also under discussion, such as the one Brazil has had with Argentina for a long time.
First off, this comparison doesn’t make sense, as there is a key difference between Argentina and Switzerland: Switzerland is a major tax haven – ranked number 1 on the Financial Secrecy Index – and Argentina is not.
Secondly, here is Lee Sheppard on treaties again: “The US does a lot of business with Brazil. The US has no tax treaty with Brazil. You can do business with a country without a tax treaty. You don’t need one. You do need a bilateral investment treaty.”
and even more to the point:
“…the other ones you don’t want to sign treaties with are the international enablers: the Netherlands, Switzerland, Ireland”
The NZZ article closes on a note of corporate optimism:
Corporations draw some hope from another surprising Brazilian decree in June which demonstrated it might not take tax decisions so one-sidedly in its own interest in future.
Since June technical services provided from abroad to Brazilian clients are free of tax deducted at source, if there is a double taxation agreement between the two countries involved. These services could be machine maintenance or any kind of service delivered over the internet.
Funny the article should mention these two examples, internet services and machine maintenance. The use of “tax minimization” strategies applied to internet sales by multinationals has been well documented.
Machine maintenance, meanwhile, was found by the US Senate to be a key component of Caterpillar’s Swiss tax strategy. According to a highly critical US Senate report (pdf) in April this year, Caterpillar managed to reduce its US tax bill by USD 2.4 billion partly by accounting for the purchase of all replacement machine parts – the part of its business with the highest profit margins – via its Switzerland subsidiary (see for example page 84).