Guidance

UK-Swiss Confederation Taxation Co-operation Agreement: questions and responses

Published 6 January 2012

1. Introduction

1.1 Bankable assets - what is the overall intended meaning of bankable?

The term covers assets which will be in an account which the Swiss paying agent is able to readily value and apply the provisions of the agreement to.

1.2 Are asset managers included in the definition of paying agents?

They are not specifically excluded and, depending on their individual circumstances, may fall within the definition.

1.3 What are the ‘prevailing Swiss due diligence obligations’ assessed by reference to?

These are the ‘know you customer’ provisions and relevant money laundering provisions in Switzerland.

1.4 Examples would be useful of where ‘domiciliary companies’ are/ are not ‘subject to effective taxation’/companies treated as ‘non transparent’ under UK law etc

The intention is that this provision will follow the developing European Union Savings Directive (EUSD) provisions on effective taxation.

1.5 Are discretionary trusts covered?

Discretionary trusts are not excluded from the terms of the agreement. Any beneficiary of a discretionary trust who receives a payment or other benefit from a trust account could be a relevant person for the purpose of the agreement.

1.6 What steps is a paying agent expected to take in order to determine relevant persons?

HM Revenue and Customs (HMRC) expects Swiss paying agents to use all the information they hold – including but not limited to that obtained as part of their due diligence processes.

1.7 For date of entry 1 January 2013 please confirm appointed date 3 and 4

31 May 2013 and 30 June 2013.

1.8 In the definition of investigation, what does ‘supported’ by statutory information powers mean?

It means that the enquiry/investigation needs to be one where HMRC could, if required, invoke its statutory powers, for example Schedule 36 Finance Act 2008 to obtain information.

1.9 What was the policy behind this definition of investigation at Article 2(1)(m)(iii)?

The ways in which HMRC undertakes enquiries into tax positions is changing. An example of the type of investigation covered by this definition is the approach announced in respect of clients of HSBC Switzerland.

1.10 Please give examples of the way rules on residence interrelate?

The process taken on identifying the residence of relevant persons is based on the approach taken for the EUSD.

1.11 What if an individual uses a ‘care of’ address in the UK and the bank does not know the principal private address? To what extent is the bank expected to delve deeper?

HMRC would expect the Swiss paying agent to use all the information it holds in identifying the principal private address.

2. The past

2.1 Can you give some examples of how the formula in the UK/Swiss Agreement works in practice?

Two examples are set out below. HMRC will add further examples.

Example 1

Swiss franc account opened in 1993 (so n = 8), cash amounts have been deposited in the account over the years and interest is credited each year.

Balance 31 December 2002 (Cb) = CHF1 million

Balance 31 December 2010 (C8) = CHF2 million

Balance 31 December 2012 (C10) = CHF2.1 million

First calculate Cr. In this case C10 is greater than C8, but less than 1.2 × C8, so Cr = C10 = CHF2.1 million

Second calculate C9’ and C10’. C9’= Cr × 103% = CHF2,163,000 and C10’ = Cr × 106% = CHF2,226,000. So ½ × (C9’ + C10’) = CHF2,194,500

T = 34% × CHF( 2/3 × (2,100,000 – 1,000,000) + 1/3 × ((8/10 × 2,100,000) + 2/10 × 2,194,500))

= 34% × CHF( 733,333 + 706300) = CHF489,475

Finally, check that this sum is greater than the minimum T of 19% × Cr (CHF399,000)

It is, so the one-off payment is CHF489,475 that is approximately 23.3% of the December 2012 balance.

Assuming the one-off payment is made in full, as the C10 amount is not more than 20% greater than the amount in the account at C8, the funds in the account at 31 December12 are ‘cleared’ (see Article 9(7)) - subject to the exclusions in Article 9(13).

Example 2

Sterling account opened in 2007 (so n = 3), deposits in 2008 to 2011 and a large withdrawal in 2012.

Balance at 31 December 2007 (Cb) = £200,000

Balance at 31 December 2010 (C8) = £1 million

Balance at 31 December 2012 (C10) = £500,000

First calculate Cr. In this case C10 is less than C8, so Cr = C8 = £1 million

Second calculate C9’ and C10’. C9 = Cr × 103% = 1,030,000 and C10’ = Cr × 106% = £1,060,000. So ½ × (C9’ + C10’) = £1,045,000

T = 34% × £( 2/3 × (1,000,000 – 3/8 × 200,000) + 1/3 × (3/10 × 1,000,000 + 2/10 × 1,045,000))

= 34% × £( 616667 + 169667) = £267,353

Finally, check that this sum is greater than the minimum T of 19% × Cr (£190,000)

It is, so the one-off payment is £267,353 that is approximately 26.7% of the December 2010 balance. Assuming the one-off payment is made, the funds in the account at 31 December 2010 (£1 million) are ‘cleared’ (see Article 9(7)) subject to the exclusions in Article 9(13).

2.2 Would it be possible for an individual with 2 accounts at the same bank to opt to treat each differently?

There is no bar in the agreement to a person telling a paying agent to disclose 1 account and pay the one-off levy on another. However the accounts would need to be separate accounts rather than 1 being the sub-account of the other. Where an account is a sub-account both would be treated in the same way by the paying agent.

2.3 The relevant person must make a notification of option by appointed date 3. Please confirm the following understanding is correct: a notification before the agreement enters into force is revocable, when the agreement enters into force, any existing notification becomes irrevocable and any notification from then on is irrevocable.

Any notification which has not been otherwise withdrawn will become irrevocable when the agreement comes into force.

2.4 What is the process if a person objects to any aspect of the certificate?

Details of the process will be provided by the Swiss prior to the agreement coming into force.

2.5 Will the bank have to supply its calculations of the one-off payment?

Details of the calculation will be included in the certificate provided by the Swiss paying agent.

2.6 What happens if the number cleared is less than the amount in the account – how do you apportion what is cleared?

Apportionment may become important if the relevant person is subsequently investigated by HMRC. Rules on apportionment will be included in legislation included in the draft Finance Bill 2012 clauses.

2.7 What if the account has fluctuated in value during the period?

Because of a loss in value? For example buys marketable security worth £10 in 2003. Goes up in value to £50 in 2005. Cash out and reinvest in security B. B then loses value so that at 2010 value is £5.

The formula simply looks at the amount in the account at 31 December 2002 (or the date it was opened if later) and at 31 December 2010.

Or because the person has taken money out?

Subject to the specific rules for the period between 1 January 2011 and 31 December 2012 money taken out of the account is not included in the calculation and is not cleared.

2.8 What is the definition of outflow for the purposes of Schedule 1? What is the definition of inflow?

‘Outflows’ are sums which were taken out of the account between 31 December 2002 and 31 December 2010. ‘Inflows’ are amounts which go into the same account between 1 January 2011 and 31 December 2012 which the relevant person can evidence to the Swiss paying agent equate to the outflows.

2.9 What is the policy underlying the way the calculation of the formula is set?

The aim of the formula is to take into account the speed of growth in the account balances, so that the faster the assets accumulate, the higher the rate that is charged. The effective tax rate is positively dependant on the growth in capital and the level of the final capital in the account (which captures deemed interest). The formula also takes account of the length of time the account has been open.

2.10 What does capital stock mean as used in the formula?

Capital stock is the account balance.

2.11 If a bank miscalculates the liability and deducts too much tax, will there be a process for claiming damages in a way that preserves anonymity?

Article 15 states that where the one-off payment has been wrongly levied it will be refunded. (This will be to the Swiss paying agent.)

2.12 When is the earliest the one-off payment instruction can be made? It doesn’t state it must be irrevocable. Is it possible to make irrevocable instruction before the agreement comes into force?

There is no practical constraint on when the instruction can be made. However for the purposes of the agreement it will only be treated as irrevocable following the agreement coming into force.

2.13 Please confirm: a criminal or civil investigation started after the one-off payment instruction has been made, not concluded before appointed date 3, and where neither (c) (previous disclosure opportunities), (d) (proceeds of non tax crime) or (e) (proceeds of criminal attacks and systemic fraud) apply, is not a bar to clearance

Clearance will not be available where the one-off payment instruction is revocable. For the purposes of the agreement the instruction cannot be irrevocable before the agreement comes into force. So where a civil investigation commences after 1 January 2013 that will not be a bar to the clearance of Swiss assets if there is an irrevocable one-off payment instruction in place.

3. The future

3.1 What is the expectation on the banks to determine whether income/gains have a UK source?

Simplistically, obvious items such as UK dividends, UK bonds etc can be captured, however it may be more difficult to analyse structured products and derivatives.

In the context of there being no clearance if the withholding tax is not paid, the expectation is that the banks will do the best they can.

3.2 Please can you explain the reasoning behind differences in the definitions of income etc from EUSD definitions?

The intention is that this agreement goes wider than the EUSD and that all income and capital gains will be covered by it. To assist in this a ‘table of concordance’ will be published which provides guidance to Swiss paying agents on the UK tax treatment of a wide range of instruments.

3.3 Has joint commission got agreement of maximum 500 for first 3 years or is this still to be confirmed?

The maximum for the first 3 years will be 500 per year.

4. General

4.1 HMRC statement re criminal investigations - please confirm what period this is aimed at: the interim period and/or after the agreement enters into force?

The statement was given in the context of the position once the agreement comes into force.

4.2 Please clarify interaction between the statement on criminal investigations and the exclusions from tax clearance included in the agreement

The statement sets out HMRC’s position in respect of those who fully comply with the agreement and who co-operate with HMRC.

4.3 Is there a helpline we can call as and when client queries arise?

HMRC will not be providing a helpline but will be providing further guidance between now and the date when the agreement comes into force.

4.4 What measures are banks expected to take to identify the destination of funds withdrawn from accounts prior to the date the agreement comes into force?

As in the UK, Switzerland will need to introduce domestic legislation to give effect to the terms of the agreement.

4.5 Some banks have strict arrangements with clients that they will never contact them - what is the expectation here?

The expectation is that Swiss paying agents will take all reasonable steps to successfully implement the terms of the agreement. Where the withholding tax under the agreement is not paid, no tax clearance will be available.