Switzerland: Tax Crime Regime To Be Revamped

Authors: Bernhard Lötscher & Axel Buhr (Lexology)

Introduction

In May 2013 the government opened public consultations for a proposal on a comprehensive overhaul of the Swiss tax crime regime. Following the government's February 2013 proposal to implement the Financial Action Task Force (FATF) Recommendations 2012 and redefine the criteria characterising tax offences under Swiss law, the new proposal takes a further significant step towards implementation of the 'White Money' strategy adopted by the government. It recommends, among other things, that the cantonal tax authorities be granted extensive powers to investigate suspected tax offences, even in non-serious cases – including access to bank records.

New criteria for tax offences

The FATF recommendations on International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation require, among other things, that serious tax offences in matters of direct and indirect taxation constitute predicate offences to money laundering. Whereas money-laundering regulations consider any felony (ie, an offence which is punishable by more than three years imprisonment) as a predicate offence to money laundering, evading direct taxes under the current tax crime regime does not constitute a felony – regardless of the circumstances.

Under the existing tax crime regime, evasion of direct taxes – whether committed wilfully or negligently, and irrespective of the amount of tax evaded – as a rule constitutes a mere contravention (ie, an offence which is subject to a fine, but not imprisonment). Tax fraud (defined in applicable Swiss law as a combination of forgery of documents or the use of false certifications, in order to avoid direct taxes) qualifies as a misdemeanour (which carries a penalty of up to three years' imprisonment).

In February 2013 the government proposed to redefine the criteria characterising tax offences and to implement a new structure for tax offences under Swiss law (for further details please see "Government proposes to tighten legislation on money laundering and tax crime"). To implement the FATF recommendations, the government published a draft bill for consultation, according to which tax fraud will no longer be limited to the forgery of documents for the purposes of evasion of direct taxes. The criteria characterising tax fraud will be extended to include any behaviour which may be considered fraudulent. Further, tax fraud will be considered as a misdemeanour only if tax factors of less than Sfr600,000 have been concealed from the tax authorities. Cases of serious tax fraud where tax factors of Sfr600,000 or more remained unreported will be considered as felonies, carrying a penalty of up to five years' imprisonment.

Overhaul of tax crime procedures

In May 2013 the government proposed to tighten the screws on tax offenders in direct taxation. The proposal introduces new procedural rules for the investigation and prosecution of tax offences to complement the new set of tax offences defined in the February 2013 proposal.

Competence

Under the current regime, the cantonal tax authorities are competent to investigate tax evasion. The cantonal tax authorities are required to report any cases of suspected tax fraud (ie, where the taxpayer is suspected of having submitted forged documents) to the public prosecutor as the competent authority to investigate and prosecute misdemeanours in direct taxation.

In its proposal the government suggests that cantonal tax authorities will be authorised to investigate and prosecute all tax offences, ranging from matters of negligent tax evasion to cases of severe tax fraud.

Investigative powers

In cases of tax evasion, the existing regime lacks teeth. Tax authorities have no meaningful powers to investigate tax evasion. While the tax authorities may estimate the evaded taxes if taxpayers fail to cooperate in properly assessing the taxes owed, the tax authorities have no means to access the records of Swiss banks. Swiss banking secrecy protecting Swiss and foreign tax payers from investigating Swiss and foreign tax authorities has long been understood and appreciated as a fundamental cornerstone of Swiss law on the protection of privacy.

With the revised tax crime regime, this cornerstone will be finally removed. The tax authorities will be vested with comprehensive powers to investigate suspected tax offences, even in cases of negligent tax evasion where no indications for fraudulent conduct exist. As a rule, and subject to the circumstances of each case, the tax authorities will be empowered to:

• examine suspects and third parties as witnesses;
• request information from third parties (including banks);
• seize documents (including bank records);
• freeze bank accounts;
• search offices; and
• arrest suspects temporarily.

Domestic reporting

Under the current regime, there is no consistent system requiring Swiss authorities to report suspected tax offences to the competent tax authorities. Moreover, Swiss tax secrecy prevents cantonal tax authorities from reporting any matters other than tax fraud to the public prosecutor.

In its May 2013 proposal the government suggested that any Swiss authority should report suspected tax offences to the competent tax authority, and that cantonal tax authorities should report any other suspected offences of which they become aware to the competent Swiss authorities (eg, the public prosecutor).

Comment

The modifications to the Swiss tax crime regime proposed by the government are ground breaking and mark a paradigm shift in the field of direct taxation:

• The procedural powers of the cantonal tax authorities to investigate and prosecute tax offences will be significantly extended. The Swiss authorities will henceforth be in a position to break banking secrecy.
• A comprehensive reporting system will be established to facilitate efficient information exchange among Swiss authorities. The Chinese walls which have thus far prevented tax authorities from benefiting from the findings of judicial authorities – and vice versa – will be eliminated.

The February 2013 and May 2013 proposals are yet to be adopted by Parliament. During public consultations the proposals met widespread criticism by political parties, lobby groups and organisations, and interested parties. The results of the public consultations are yet to be published by the government in respect of the May 2013 proposals. However, it seems likely that the essence of the proposed bill will be sent to Parliament unchanged, as the comments furnished in the consultation process mostly welcome the thrust of the reform.

This article first appeared in lexology.com.