Tax evasion: The evolution of the Swiss Criminal Tax Law

One has to remember that, contrary to a rather well-established belief, tax evasion in the sense of avoiding taxes as a consequence of non-disclosure of taxable items has always been treated as an offence in Swiss legislation.

The enforcement system, however, was – and still is – somewhat different to what is applied in the majority of other countries. More precisely, the mere non-disclosure of taxable events is, from a technical standpoint, considered an infringement. This belongs to the lowest category of criminal offences and is only subject to a fine. The extent of this fine ranges, in what concerns direct taxes, from one-third to three times the amount of tax evaded, with the statute of limitation of 10 years, and sometimes even 15 years.

This offence is enforced by the tax authorities, which have limited powers of investigation in particular in terms of obtaining information on bank accounts directly from the banks themselves, as well as searching premises and forcing taxpayers to testify. So, subject to the specific case of the so-called severe tax evasion, the principle of bank secrecy can be used by the taxpayer with the tax authority even when the said taxpayer is facing an investigation for tax evasion (under suspicion of non-disclosure of taxable items without the aggravating factor of the use of forged documents).

However, the tax authorities can, in such an event, issue a forced assessment based on factors such as the standard of living of the taxpayer for the years within the statute of limitation and can include a penalty which, as a rule, amounts to 100% of the evaded tax but which more frequently tends to be significantly higher in the event of non-collaborative taxpayers.

If the taxpayer has made use of fraudulent documents (such as a statement not showing the reality of certain transactions, a balance sheet not showing the correct assets and liabilities, or documents showing transactions which actually did not take place or mentioning wrong amounts, as opposed to the tax return itself which is not considered as a document subject to forgery under Swiss tax law), the tax authorities can defer the matter to the criminal prosecution authorities which may, in turn, make use of all the means at their disposal, including arresting suspected taxpayers. As a consequence, this type of tax avoidance is considered as qualified tax fraud which is considered more serious in the Swiss criminal legislation, with the consequence of possible imprisonment (as well as to the financial penalties imposed by the tax authorities).

In the event of suspicion of severe tax evasion (the non-disclosure of substantial amounts of taxable income or wealth over a significant period of time) the Federal Tax Authority can also apply a specific procedure where its officials can search premises and require banks to deliver information to assess the situation of the suspected taxpayer. This is a mere procedural course of action and the outcome is then passed to the relevant cantonal tax authority to issue additional assessments and impose a fine. If the conclusion is that there might have been the use of forged documents, then referral to the criminal prosecution authorities takes place. It is worth mentioning that this procedure, which has existed for decades yet was not applied often until some years ago, is now becoming more frequent. This may be because the Federal Tax Authority has set up a more powerful investigation squad. It is interesting to consider that this possibility of upgrading basic tax evasion to a more serious criminal behaviour has similarities with the concept of tax fraud or the like, which was one of the significant innovations in the US-Swiss tax treaty in its version of 1996.

Switzerland has, for a number of years, allowed taxpayers the possibility to make voluntary disclosures of income and wealth items which were previously hidden. This possibility is now specifically mentioned in the Federal Direct Tax Law as well as in the Federal Law on Harmonisation of Direct Taxes. It is therefore possible to make a voluntary disclosure once in a lifetime (at least in principle) which, if the spontaneous nature of this action is accepted by the tax authorities, limits the financial consequences to the additional taxes according to the statute of limitation regulations plus late interests but excluding any penalty. In the event of a voluntary disclosure made after the death of a taxpayer, the heirs can also make use of this possibility, however with a statute of limitation of three years.

There have also been periodically general amnesties for tax purposes in Switzerland, the last one having taken place in 1969. Despite several attempts to establish a new general tax amnesty since then, the Federal Parliament has rejected all such proposals until now, mainly based on ethical considerations (that is, the unfairness of the possibility of hiding taxable items for a generation and cleaning up situations periodically, as opposed to the honest taxpayers).

It is, then, incorrect to state that the Swiss criminal tax system does not actually pursue tax evasion. It is true that it is done differently than in the traditional systems, in the sense that the tax authorities usually have limited access to relevant information. It is also fair to state that the Swiss system developed counter-measures, including the possibility of making forced assessments and imposing high penalties over many years.

Based on this concept of protecting banking secrecy in the event of mere tax avoidance, Switzerland traditionally objected to providing foreign tax authorities with information regarding the enforcement of their own domestic tax regulations within the framework of the tax treaties entered into by Switzerland. Technically speaking, this took the form of a reservation made on the interpretation of article 26 of the Model Tax Convention on Income and Capital of the OECD (MOECD), in the sense that Switzerland only agreed to provide information to the extent that this information was required for the correct application of the said treaty, as opposed to the use of the information for domestic tax purposes of the requesting state. It was therefore possible for the foreign tax authorities to require such information from Switzerland only by means of the International Mutual Assistance in Criminal Matters rules (IMAC). This required – and still requires if this route is chosen – to formulate the requests through the Ministry of Justice of the requesting state, which in turn requires the Federal Department of Justice in Switzerland to provide this information. In examining the request, the Federal Department of Justice asks the Federal Tax Authority for advice and then, depending on the result of this consultation, instructs the relevant Swiss prosecution authority to collect the information.

In the aftermath of the 2008 financial crisis and of the difficulties experienced by major Swiss banks in the US because of the charges brought against them concerning assistance in US tax evasion, the G20 countries and the OECD decided to threaten to put a number of so-called non-cooperative countries in tax matters, including Switzerland, on a grey (if not black) list which would have prevented their access to the financial services market. Based on this, the Swiss Federal Council stated on March 13 2009 that Switzerland would withdraw, with immediate effect, its reservation to article 26 MOECD and start renegotiating a number of existing treaties as well as entering into new ones with an article on exchange of information fully compliant with the wording of article 26 MOECD.

As a result, there was no longer any difference, for the purpose of the exchange of international information in tax matters between tax authorities (if an applicable treaty allowed it), between mere tax evasion in the sense of the Swiss criminal legislation and qualified tax fraud.

To implement this new paradigm, the Federal Council first issued an ordinance regulating the exchange of information from a procedural standpoint, including the minimum content of a request. Due to its provisional character, this ordinance had to be replaced by a formal law, which was simplified in certain aspects, in particular regarding the necessary conditions to grant the exchange of information. This law was submitted to the Parliament, it was adopted, and it entered into force on January 1 2013.

Switzerland is undergoing a peer review from the OECD to ascertain whether the exchange of information is effective. This review consists of two phases, the first being the examination of the legal framework, and the second being the audit of the actual implementation of this framework. During phase one, which has not yet been completed, the OECD inspectors first believed that the conditions set forth in the ordinance were more restrictive than the ones deriving from the article 26 MOECD and its commentary. They further highlighted that the rights of the concerned people in terms of appeals could lead to inefficient exchange of information. A last objection concerned the possibility in Switzerland to still issue bearer shares for companies, with the consequence of rendering the identification of the holder of companies and/or properties inefficient.

The formal law which Switzerland enacted to apply the exchange of information contains a specific provision stating that the information provided to foreign tax authorities can also be put at the disposal of the Swiss cantonal tax authorities. The Parliament had to decide whether access to the information passed to foreign requesting authorities was unrestricted for the Swiss authorities, or whether information still covered, according to the Swiss domestic tax legislation, by the bank secrecy law had to be excluded from this possibility. Eventually, the Parliament decided to exclude information covered by the bank secrecy law. The rationale was that this would constitute a significant change in the Swiss criminal tax system, and therefore it was inappropriate to introduce it by means of an ancillary clause to a legal act which regulates relations with foreign tax authorities.

Moreover, the Swiss Federal Council issued, at the beginning of 2012, a report explaining its future strategy (Weissgeldstrategie) with respect to a Swiss financial sector which would be compliant with the tax rules and nevertheless attractive. This strategy paper describes the present situation in terms of acceptance of undeclared funds by foreign residents and lists the ways to reach the international standard of tax compliance. More precisely, this document analyses the possible ways of making undisclosed funds compliant, to ensure the future taxation of income and capital gains, as well as to implement international cooperation which aims to ensure accurate taxation of the funds deposited by foreign residents in Switzerland. This report ends stating that it will also be necessary to increase the possibility for the Swiss authorities to enforce tax compliance of Swiss residents. In other words, the report suggests that the evolution of the Swiss criminal tax legislation cannot be treated separately from the evolution of the international exchange of information for tax purposes.

This is a clear signal of an imminent change in the Swiss tax system as it moves closer to international standards in terms of enforcement against tax fraud.

Another major development, which originated at the OECD, took place in 2012. As a rule, severe tax fraud is now recognised as a predicate offence in terms of money laundering. In other words, the financial product of severe tax fraud (that is, the tax evaded) will be pursued, in addition to penalties linked to the tax fraud itself.

As this standard has been adopted by Switzerland, the Swiss Federal Council is to draft a definition of severe tax fraud.

It appears that the relevant criteria will focus on the amount of the tax evaded, combined with the sophistication of the mechanism used. This evolution has to be viewed in parallel with the concept of severe tax evasion as described above and already applied by the Federal Tax Authority. This will certainly be a logical starting point in the definition of the new Swiss criminal tax law.

The evolution of the Swiss criminal tax law in the future will be an upgrade of the present concept of tax avoidance as a criminal offence. This will be justified on the one hand for the purpose of compliance with the money laundering requirements; on the other hand it will also give access to information covered by bank secrecy to the enforcement authorities. It may be possible that the present system will be kept for amounts evaded below a certain threshold (the de minimis rule). The Swiss tax authorities will therefore have to operate in a different way, as they will have the possibility to apply more intrusive investigation methods.

On the legislative side, and taking into account taxpayers' rights and the need to keep a fair balance between the rights and duties of both parties, the statute of limitation periods would need to be reexamined, and possibly reduced, if only because experience shows that assessing exact tax basis over an extended period of time can be difficult in practice. Similarly, the level of the penalty deserves some thought because of the enhanced investigation powers of the tax authorities.

All or part of these possible developments may be plain wishful thinking, but they should nevertheless be taken into consideration to preserve a somewhat tax friendly – and therefore sustainable – climate in Switzerland.

Pietro Sansonetti
		Schellenberg Wittmer Tel: +41 22 707 8000 Fax: +41 22 707 8001 Email: pietro.sansonetti@swlegal.ch Pietro Sansonetti is a partner in Schellenberg Wittmer's taxation group in Geneva. He specialises in domestic and international corporate tax matters, with a focus on complex situations requiring discussions with tax authorities. He also advises individuals – especially in partnerships – and private clients on tax issues and assisting clients in enforcement matters, including international exchange of information. Pietro is the head of the Geneva taxation group at Schellenberg Wittmer and is a member of the firm's management committee. Pietro was admitted to the Bar in Switzerland in 1985, after graduating from the University of Geneva where he obtained a law degree in 1982. He became a Swiss certified tax expert in 1990 while working as a tax manager with Arthur Andersen. He was the director of tax affairs (chief tax officer) at the Geneva Tax Authority before joining Schellenberg Wittmer as a partner in 1999.