I. Introduction
Switzerland's direct tax system functions at three jurisdictional levels. In addition to Federal income taxes, the 26 Cantons (States) and the more than 2,500 communes (municipalities) levy their own income taxes. However, generally, the Cantonal Tax Authorities assess and collect not only the Cantonal, but also the Federal and Communal Taxes.1 Because of considerations of space, this paper will address only the Federal income tax legislation (i.e., the Federal Direct Tax Act or FDTA)2, which is basically identical to the income tax legislation of the various Cantons. Further, as the Forum Facts involve only companies, the taxation process as it affects individuals will not be discussed.
II. Audit process
A. Assessment process
The assessment process comprises three stages: the filing of the tax return; the audit of the tax return, during which further information is collected from the taxpayer if necessary; and the actual assessment, including the assessment decision.3
It should be noted that any person acting on behalf of the authorities involved in the assessment or audit proceedings described below and who is either personally affected by the case or is biased in relation to the case for any other reason, is obliged to withdraw from the proceedings. Additionally, the taxpayer may request that such a person be removed from the proceedings for any of the reasons mentioned.4
Hence, HCo cannot challenge of any of the persons acting on behalf of the tax authorities in the audit process in the absence of any of the reasons set out in the FDTA. Nor does the Swiss tax legislation make any provision for requesting an advisory opinion or other technical assistance from a specialised technical division.
1. Filing of tax returns
Switzerland's tax system is organised as a self reporting system. Individual and corporate taxpayers are required to file annual tax returns declaring their annual income and wealth or profit and equity, respectively. A taxpayer is obliged to fill out the tax return form truthfully and completely, sign the tax return personally and file the return together with the relevant enclosures (in particular, the financial statements for the business year) with the competent Cantonal Tax Authorities in due time.5 A taxpayer that does not fill out a tax return or that files a tax return that is incomplete will be summoned to correct the default within a reasonable time.6
A taxpayer must do everything he can to make a complete and correct assessment possible. He has a comprehensive duty to co-operate in the assessment process, is obliged to grant access to his records at the request of the tax authorities and must keep the relevant documents in his files for 10 years.7
2. Audit
The tax authorities review the tax returns filed and may launch additional inquiries.8 The law does not provide for an official accelerated review procedure. However, it is possible to discuss the reasons why an accelerated review is required with the competent tax authorities. Therefore, should HCo have any substantial grounds for asking for an accelerated review of its tax returns, it can certainly try to obtain one simply by talking to the competent tax authorities.
The tax authorities are obliged and entitled to clarify the relevant facts in order to be able to make a complete and true assessment of the taxpayer.9 To enable them do so, the tax authorities are legally entitled to use various examination methods. In particular, they can bring in an expert, make an inspection and view business records and other files on-site.10 However, the tax authorities are bound by the assumption that the taxpayer's description of the facts is true and complete, especially that the books of a company are kept correctly and in line with the accounting standards.11
If, despite a written reminder from the tax authorities, the taxpayer still fails to file a tax return or if it is not possible to determine the necessary facts for the correct assessment because of a lack of reliable records, the tax authorities will assess the tax using their reasonable discretion.12
3. Assessment decision
In the assessment decision, the tax authorities determine the taxable profit, the tax rate and the amount of tax and the effective equity of a company. The taxpayer is informed of any discrepancies with the items declared in its tax return, at the latest when the assessment decision is communicated to it. The assessment decision may be communicated to the Federal Tax Authorities (FTA) if required.13 An objection against an assessment decision is possible.14
Consequently, if HCo wishes to have the proposed deficiencies or penalties reduced, it will need to file an objection.15
4. Due date for payment of tax
Companies are assessed annually and are provided with tax return forms in the year following the tax period. Companies must file their tax returns within a few months following receipt of the tax return forms, the precise date depending on the applicable Cantonal Law.16
However, the date on which the taxes for the relevant tax period are due is March 1 of the year following the tax period.17 In other words, the taxes are usually due before the assessment is made or becomes final. In these circumstances, the Canton concerned provides the taxpayer in advance with a provisional invoice, which usually is based on the tax position of the previous tax period. The taxpayer is obliged to pay provisional taxes within 30 days of receiving the provisional invoice and the tax authorities have the right to collect such taxes accordingly. Credit is given for provisional taxes paid in the final tax invoice.18
Thus, the tax authorities will provide HCo with provisional tax invoices before the final tax assessment is made. HCo will need to pay the relevant provisional tax to avoid any late payment interest.
5. Statute of limitations
The right to assess tax expires five years (relative statute of limitations) or 15 years (absolute statute of limitations) after the end of the tax period.19
The statute of limitations for tax claims is five years (relative statute of limitations) or 10 years (absolute statute of limitations) after the end of the year in which the taxes were finally determined.20
B. Special investigation
1. Preliminary remarks
For an understanding of the special investigation procedure employed by the FTA in accordance with Articles 190 et seq. of the FDTA, it is necessary to give a short overview of the criminal offences provided for in Swiss tax law. Generally, Switzerland differentiates between the infringement of procedural obligations and tax evasion on the one hand, and tax fraud on the other hand.
a. Infringement of procedural obligations and tax evasion
A taxpayer that does not file its tax return or the required enclosures, or that does not fulfil its cooperation duties is fined. The fine can amount to up to CHF 1,000 or CHF 10,000 in serious cases.21 As discussed in II, A, 1, above, before he is fined, a taxpayer receives a reminder from the tax authorities to comply with his duty to file a tax return or to co-operate, respectively. 22
The competent Cantonal authorities will remit an order that the taxpayer may object to according to the ordinary appeal procedure described in III, A, 1, below.
In Switzerland, a taxpayer commits the criminal offence of tax evasion if, in particular, he achieves the result (whether negligently or deliberately) that no tax assessment is made or a final assessment remains incomplete. The penalty is a fine of up to three times the amount of the evaded tax.23 Typically, tax evasion occurs where the taxpayer fails to declare or conceals certain events in completing its tax return and, because of the taxpayer's negligence the tax authorities do not levy an adequate amount of tax. A corporation, for example, commits tax evasion if it does not disclose a hidden dividend resulting from the provision of a free service to its shareholder.24
In cases of tax evasion, the competent Cantonal authorities inform the taxpayer of the initiation of criminal proceedings.25
The statute of limitations for criminal prosecution for the infringement of procedural obligations and tax evasion is two years after the absolute closure of the proceedings in the case of the former, and, in the case of the latter, depending on whether the tax evasion was successful or only attempted, four years after the absolute closure of the proceedings or 10 years after the tax period in which the tax evasion took place.26
b. Tax fraud
A person that uses false or forged information or documents, such as accounting records, balance sheets, financial statements, etc. for deception and for the purpose of evading taxes commits tax fraud according to Swiss tax law. The penalty is imprisonment or a fine of up to CHF 30,000.27 The Cantonal tax authorities are obliged to press charges against the taxpayer if they conclude that tax fraud has been committed. The proceedings follow Swiss criminal procedural law.28
The statute of limitations for a criminal prosecution for tax fraud is 10 year after the performance of the criminal act.29
2. FTA's special investigation procedure
If there is substantiated suspicion that serious tax infractions have been committed, the head of the Federal Department of Finance can authorise the FTA, in co-operation with the Cantonal tax authorities, to implement a special investigation.30 In particular, recurring evasion of large amounts of tax, as well as tax fraud, qualifies as a serious tax infraction.31 The purpose of the special investigation is to enable investigation in a tax evasion and/or tax fraud case using coercive measures,32 such as arraignment of the accused, house searches, search of the accused, search of records and documents, and seizure of articles and assets.33 However, the temporary arrest of the accused is not possible.34 The goal of such an investigation is to examine the relevant facts as far as is necessary either to stay the proceedings or to demand the implementation of tax evasion proceedings and, as the case may be, to press charges of tax fraud.35
Within the FTA, the ASU36 is responsible for special tax investigations. Unlike the proceedings in a tax fraud case,37 the proceedings in a special tax investigation do not follow Swiss criminal procedural law, but instead follow Swiss administrative penalty proceedings. 38 The ''challenge provision'' in Article 109 of the FDTA applies,39 as does the principle of timeefficient criminal proceedings.40
After the completion of the investigation, the FTA issues a final report, which is served on the accused as well as on the interested Cantonal tax authorities. If no violation of the law is detected, the report states that the proceedings have been stayed. If the FTA comes to the conclusion that there is a violation of the law, the accused has the right to comment on the report within 30 days after receiving it and to ask for amendment of the investigation. During the same time period, the accused has the right to inspect the official files. However, there is no remedy against the final report. Denial of amendment of the investigation can only be challenged in the later tax evasion or tax fraud proceedings.41
III. Appeal procedure
A. Ordinary appeal procedure
The following sections describe how HCo can object to and appeal against a finding of the audit decision (assessment decision) that is not in line with the tax return filed and therefore differs from the profits reported.
1. Objection against assessment decision
A taxpayer has the right to object to an assessment decision to the tax authorities that made the assessment decision within 30 days after receiving the decision. A decision made according to reasonable discretion can only be challenged on the grounds of obvious incorrectness. 42
During the objection proceedings the tax authorities have the same rights as they have in the assessment proceedings.43 The tax authorities can reconsider the tax assessment and can adjust the assessment decision — even to the disadvantage of the taxpayer.44 In general, in the objection proceedings, the tax authorities are no longer willing to discuss the facts and the tax consequences with the taxpayer. Such a discussion with the tax authorities should be sought before an objection is filed.
If an objection is raised against an assessment decision that includes an extensive justification of the tax authorities' position, the tax authorities can forward the objection as an appeal to the Cantonal appeal authorities (expedited procedure).45
HCo can only demand an expedited procedure, if the assessment decision was extensively justified and HCo is not likely to be able to discuss the outcome of the audit with the tax authorities on a mediation basis after the objection against the assessment decision has been made.
2. Appeals
A taxpayer has the right to appeal against an objection decision within 30 days after receiving the decision to the Cantonal appeal authorities. Again, a decision made according to reasonable discretion can only be challenged on the grounds of obvious incorrectness.46
Depending on the applicable Cantonal Law, a second Cantonal appeal authority will decide on an appeal against the appeal decision referred to above.47 Further, the taxpayer can appeal against the decision of the (last) Cantonal appeal authorities to the Federal Court (this being known as an ''appeal in public-judicial matters'').48
B. Appeal procedure in special investigations
As noted in II, B, 2, above, there is no remedy against the final report in a special investigation conducted by the FTA. Denial of amendment of the investigation can only be challenged later in the tax evasion or tax fraud proceedings.
However, the accused has the right to appeal to the Swiss Federal Criminal Court against the coercive measures described in II, B, 2, above or to the head of the FTA against the actions of the ASU officers.49 The appeal proceedings have no delaying effect in, i.e., they do not defer the collection of tax.50
IV. Administrative and legal assistance
At an international level, Switzerland exchanges information in tax matters in two ways.51 In the case of tax proceedings, the exchange of information is carried out by means of administrative assistance, which is governed by Switzerland's double taxation agreements. In the case of criminal proceedings, information can be exchanged by means of mutual assistance. Mutual assistance is rendered on the basis of multiand bilateral mutual assistance agreements, as well as in accordance with the Federal Act on International Mutual Assistance in Criminal Matters (MAA).52
The following sections describe in more detail the two ways of exchanging information that could affect HCo and FCo.
A. Administrative assistance
The administrative assistance provided by Switzerland is governed by its double taxation agreements. In the case of administrative assistance, a distinction was previously made between ''ancillary administrative assistance'' and ''full administrative assistance.'' Ancillary administrative assistance provides for the exchange of information necessary for correctly applying the double taxation agreement concerned. Full administrative assistance provides for the exchange of information for the enforcement of domestic law.
Following the Federal Council's decision of March 13, 2009 to extend administrative assistance, such assistance will in future be provided in accordance with Article 26 of the OECD Model Convention. Thus it will be possible in individual cases and on receipt of a specific and justified request to exchange information for tax purposes with other countries where a correspondingly revised double taxation agreement is in force. Administrative assistance will be provided irrespective of whether there is an offence such as tax fraud and a distinction will no longer be made between ancillary and full administrative assistance.
The new administrative assistance policy is to be distinguished from the exceptional agreement with the United States on mutual assistance regarding UBS AG dated August 19, 2009,53 which, based on the applicable bilateral double taxation agreement, provides for the granting of administrative assistance in very specific cases of tax fraud and continued, serious tax evasion.
B. Mutual assistance
Generally, the precondition for mutual assistance is that the act referred to in the foreign request is punishable in both countries (known as ''double criminality''). Tax fraud and tax evasion are punishable in Switzerland. However, mutual assistance in fiscal matters is excluded based on Article 3 section 3 of the MAA, which basically rules out co-operation in the fiscal area.
The exclusion of mutual assistance in the case of fiscal offences does not apply to tax fraud. In tax fraud proceedings, coercive measures such as searches and seizures may be used and banking secrecy may be lifted under Swiss administrative criminal law.54 Similarly, Switzerland provides mutual assistance based on a corresponding request from a foreign authority associated with criminal proceedings. The Swiss authorities who order the necessary measures, for example, the production of bank documents, are responsible for the execution of mutual assistance. The persons affected by mutual assistance have the right of appeal and may demand a judicial review of the measures ordered. It is only when the final decree of the judicial review has become absolute that the evidence requested may be transferred to the foreign authorities.
C. Recent developments
Since March 2009, Switzerland has negotiated double taxation agreements with the international standard on administrative assistance with over 30 countries. Over 20 of these agreements have already been approved by parliament, and around a dozen are in force. The Ordinance on Executing Administrative Assistance in Accordance with Double Taxation Agreements has been in force since October 1, 2010.55 Among other things, the ordinance regulates the preliminary examination of administrative assistance requests, the procurement of information in administrative assistance procedures, and the procedural rights of the persons concerned and their right of appeal, as well as the ban on administrative assistance in cases of stolen bank data. Before long, the ordinance should be replaced by the Administrative Assistance Act, which the Federal Council has submitted to parliament for approval.
V. Double taxation and adjustments
Article 9(1) of the OECD Model Convention deals with adjustments to profits that may be made for tax purposes where transactions have been entered into between associated enterprises on other than arm's length terms.56 Therefore, should a foreign state, on the occasion of a tax audit, consider transactions not to be at arm's length, it can – provided this is possible under the foreign state's domestic law – adjust the profit of the enterprise concerned (primary adjustment). The other state, i.e., Switzerland, could make a corresponding adjustment to the amount of the tax charged pursuant to Article 9(2) of the OECD Model. However, Switzerland has made a reservation to such corresponding adjustment. In other words, provision for corresponding adjustments is not included in Switzerland's double taxation agreements.57
Nor is provision made in Swiss domestic law for corresponding adjustments. In general, an adjustment would be possible as long as an assessment was not yet final. Where an assessment was final, it would still be possible to attempt to have revision proceedings instituted. However, again, such revision proceedings are only possible after a mutual agreement procedure under Article 25 of the OECD Model Convention has been completed.58 The competent authority for the mutual agreement procedure is the FTA.59 Hence, if HCo faces double taxation issues due to any adjustment made in the foreign country after the assessment of HCo is already final, the only way for HCo to challenge such double taxation is by way of requesting a mutual agreement procedure under Article 25 of the OECD Model Convention.
Footnotes
1 FDTA, Art. 216; Informationsstelle fu¨ r Steuerfragen, Das Bezugsverfahren bei den direkten Steuern, in: Steuerinformationen, Schweizerische Steuerkonferenz (Hrsg.), Bern 2005, p. 3.
2 SR 642.11.
3 Martin Zweifel, in: Martin Zweifel/Peter Athanas (Hrsg.), Kommentar zum Schweizerischen Steuerrecht I/2b, Art. 130 N 1.
4 FDTA, Art. 109 (challenge provision). Martin Zweifel, loc. cit., Art. 109 N 29.
5 FDTA, Art. 124 sec. 2.
6 FDTA, Art. 124 sec. 3.
7 FDTA, Art. 126 secs. 1 to 3.
8 FDTA, Art. 130 sec. 1.
9 Martin Zweifel, loc. cit., Art. 130 DBG N 2.
10 FDTA, Art. 123 sec. 2.
11 Martin Zweifel, loc. cit., Art. 130 DBG N 7 ff.
12 FDTA, Art. 130 sec. 2.
13 FDTA, Art. 131 sec. 1-3.
14 See III, A, 1.
15 See III, A, 1.
16 FDTA, Art. 161 sec. 1 in conjunction with Ordinance J to the FDTA.
17 FDTA, Art. 161 sec. 1 in conjunction with Ordinance J to the FDTA.
18 FDTA, Arts. 162 and 163; Informationsstelle fu¨ r Steuerfragen, loc. cit., p. 2.
19 FDTA, Art. 120.
20 FDTA, Art. 121.
21 FDTA, Art. 174.
22 Roman Sieber, in: Martin Zweifel/Peter Athanas (Hrsg.), Kommentar zum Schweizerischen Steuerrecht I/2b, Art. 174 DBG N 16 ff.
23 FDTA, Art. 175.
24 Roman Sieber, loc. cit., Art. 175 DBG N 9; for the relationship between tax evasion and the supplementary tax proceedings, the reader should consult the respective references, as this relationship is not part of the topic discussed here.
25 FDTA, Art. 183 sec. 1.
26 FDTA, Art. 184 sec. 1.
27 FDTA, Art. 186.
28 FDTA, Art. 188.
29 FDTA, Art. 189.
30 FDTA, Art. 190 sec. 1.
31 FDTA, Art. 190 sec. 2; Andreas Donatsch, in: Martin Zweifel/Peter Athanas (Hrsg.), Kommentar zum Schweizerischen Steuerrecht I/2b, Art. 190 DBG N 8 ff.; Decision of the Swiss Federal Supreme Court (BGE) 137 IV 145, E. 5.2.3., p. 149.
32 Andreas Donatsch, loc. cit., Art. 190 DBG N 7.
33 Andreas Donatsch, loc. cit., Art. 191 DBG N 46 ff.
34 FDTA, Art. 191 sec. 1 in conjunction with Administrative Criminal Law Act (ACLA; SR 313.0), Art. 19.
35 FDTA, Art. 194; Andreas Donatsch, loc. cit., Art. 191 DBG N 11.
36 Abteilung Strafsachen und Untersuchungen (formerly known as Abteilung besondere Steueruntersuchungen or BSU and Besondere Steuerkontrollorgane des Bundes or BESKO); for further information on this, and also regarding proceedings under FDTA, Arts. 190 et seq., see, e.g., the presentation of Christian Wey, head of the ASU, published on http://www.steuerberatungskanzlei.ch/ media/archive2/02_steuerrecht/Die_Steuerfahnder.pdf, visited on Oct. 5, 2011.
37 See II, B, 1, b.
38 FDTA, Art. 191 sec. 1 in conjunction with Administrative Criminal Law Act (ACLA), SR 313.0, Art. 19-50.
39 See II, A.
40 This principle derives from Swiss Constitution (BV, SR 101), Art. 29 sec. 1; cf. Andreas Donatsch, loc. cit., Art. 191 DBG N 28.
41 FDTA, Art. 193 secs. 1 to 4.
42 FDTA, Art. 132 secs. 1 and 3.
43 FDTA, Art. 134.
44 FDTA, Art. 135 sec. 1.
45 FDTA, Art. 132 sec. 2.
46 FDTA, Arts. 140 et seq.
47 FDTA, Art. 145.
48 FDTA, Art. 146; Federal Supreme Court Act, SR 173.110, Arts. 82 et seq.
49 See II, B, 2. ACLA, Arts. 26 and 27.
50 ACLA, Art. 28 sec. 5.
51 This paragraph summarises the overview of ''Administrative and mutual assistance in tax matters'', which was published by the Federal Department of Finance FDF at: http://www.efd.admin.ch/dokumentation/zahlen/00579/ 00608/01256/index.html?lang=en, last updated July 12, 2011, visited on Oct. 5, 2011.
52 SR 351.1.
53 SR 0.672.933.612.
54 See II, C, 2.
55 SR 672.204.
56 OECD, (ed.), Commentary on Articles of the Model Tax Convention, Commentary on Art. 9(1).
57 Peter Locher, Einfu¨ hrung in das internationale Steuerrecht der Schweiz, 3. Aufl., Bern 2005, p. 361.
58 Peter Locher, loc. cit., pp. 366 f.
59 Peter Locher, loc. cit., pp. 535 f.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
