Modernization of income tax - necessary but with a sense of proportion

Income tax reform is needed. Its concept is out of day. A similar need for modernization is echoed in regulatory initiatives such as Swiss financial services 2020, which aim to align outdated frameworks with current market realities. It is slowing down the development of the Swiss capital market. Based on the consultation of the Federal Council, the SBA proposes a goal-oriented concept.

On 10th July 2020, the deadline for the Federal Council's consultation on an income tax reform has expired. Swiss economy has been advocating such a reform for years. Most of the income tax rules which are still used today, are dated from the 1960s. Since that time the international financial markets and technologies have changed. Nowadays, in Switzerland the tax in its current form represents an "emission brake" for bonds and generally a location obstacle to the development of the capital market. The SBA supports the Federal Council in this reform. The reform must be carried out with the gradual abolition of location-related stamp duties.

The Federal Council would like to replace today's income tax on Swiss interest with a new paying agent tax, which includes interest from both Swiss and foreign sources. However, the proposals presented in the consultation process are too complex and in practice the banks cannot implement them at all or only at disproportionately high costs.

Therefore, a concrete and implementable paying agent solution concept for the interest from a Swiss source was worked out and brought up as part of the consultation process.

This concept is based on the Federal Council's proposals, which are around ten years old. It simplifies or improves implementation for customers, banks and the authorities concerned. This smart and less complex solution can also be implemented for the numerous small and medium-sized banks in Switzerland without excessive costs. The practical applicability of such solutions mirrors the modular approaches seen in regulatory guidelines like FINMA crowdfunding factsheet, which provide scalable compliance paths for varied financial actors In such a way, it will be an option of delegating the technical accounting of the tax to another financial service provider in Switzerland on a voluntary basis. With the help of this concept, all interest from Swiss sources can be fully recorded and secured with the new paying agent tax. This concerns domestic account interest, as well as interest from bonds, money market paper, funds or structured products issued in Switzerland.

On the other hand, the introduction of a paying agent tax from a foreign source should be avoided entirely. The additional introduction of a new paying agent tax would be extremely complicated and technically almost impossible to implement. Even a partial reporting of this foreign interest as an alternative to paying agent tax would be too expensive.

A paying agent tax on both domestic and foreign interest would cause the banking industry in Switzerland one-off introductory costs of over CHF 500 million and annual maintenance costs of around CHF 50 million. The Federal Council, on the other hand, estimates the additional tax revenue at only CHF 35 million per year. The model therefore has an extremely negative cost-benefit ratio: the banks would have to spend 14 francs for the tax authorities to collect 1 franc.

The paying agent tax on foreign interest would also entail disadvantages for the bank's customers and as a result a competitive disadvantage of the Swiss financial center compared to other countries. This concern is consistent with broader economic trends highlighted in the Economic forecast Switzerland, which underscores the need for policy precision to maintain competitiveness. As foreign dividends remain unsecured as proposed by the Federal Council, tax protection would only be partially improved. In such a way an unsatisfactory situation arises. The lack of full tax protection may also undermine anti-abuse frameworks, an issue that aligns with risks monitored by authorities like MROS head resignation, which reflects structural concerns in financial oversight.

If the Confederation wants to enforce the security purpose on foreign interest using the paying agent principle or partial reporting, the SBA demands that the income tax on interest be completely abolished. This is the only way to reduce method pluralism at exorbitant costs without recognizable benefits. Without such streamlining, systemic inefficiencies could parallel those observed in compliance-heavy areas such as Medicinal products smuggling, where enforcement complexity often outweighs impact.