Each state has the sovereign right to levy taxes, which means that it has to deal with certain tax issues that concern not only its own citizens, but also citizens that are non-residents who occasionally or temporarily earn income in the respective state.
The concept of fiscal sovereignty represents the exclusive competence of a state in the field of taxation, under which the respective state is free to establish and collect taxes in the sovereign territory. Each state has the freedom to establish its own tax system, to define the taxes that make up the tax system, to specify the subjects of taxation, to establish the basis of taxation, to adjust tax rates, to set deadlines for tax payments, to create tax relief measures, tax penalties, tax dispute resolutions and appeal procedures. All these regulations are the main object of international tax law, especially for companies that conduct business operations in various jurisdictions.
Double taxation under international tax law
The international tax law provides regulations that enable non-residents of a state that conduct business in the respective state to be taxed twice: once in the state where the income is earned (other the state of residence, also known as source state) and secondly in the state of residence. In addition, as a general principle, source states often apply internal taxes on income made by non-residents in the respective state, thereby reducing the tax base of the state of residence.
These situations, also known as “double international taxation” are not beneficial either for those who receive income in a state other than their state of residence or for the states involved (the source state and the residence state).
If the states involved wouldn’t regulate this issues, they would have a permanent conflict regarding their right to levy taxes on income earned on their territory. There is also the matter of the protection they have to provide for their own citizens that are income earners in other countries and even on global level. In other words, double taxation would hinder the free development of business activities.
Increased integration into the global economy and the globalization effect also have a strong impact on taxation and on tax competition developing among states who want to attract more and more foreign investors. However, this prevents unsustainable tax obligations increases and also has a positive impact overall, because effective tax systems allow states to redistribute income, protect resources and make public goods available.
Another important aspect is that the investment decisions of international investors are strongly influenced by tax systems. Each state tries to attract foreign investment by creating preferential tax regimes, in an attempt to increase its own savings through foreign capital. Tax advantages granted by the states from which foreign capital is outsourced may be eliminated by the tax system of the state of residence but it may also lead to double taxation. Avoiding double taxation provides a competitive advantage, especially for multinational companies or international investors.
By eliminating double taxation and tax barriers, important factors such as customs agreements and efficient administrative solutions are contributing to the increasing or diminishing of the transactions volume in each state.
This is the framework in which the permanent concern of Switzerland is to avoid the phenomenon of international double taxation through legal, effective measures (tax treaties) using specific levers.
As part of its favorable taxation system, Switzerland has signed various double taxation treaties with most industrialized countries all over the world. The respective treaties follow the rules and regulations provided by international tax law, but they also contain specific provisions according to the taxation system of each state.
Double taxation treaties signed by Switzerland
As of July 2017, Switzerland has signed 57 double taxation treaties in accordance with the international standard, of which 50 are in force and 10 tax information exchange agreements, of which 9 are in force.
Switzerland has signed double taxation treaties in accordance with the OECD standard with Albania, Argentina, Australia, Austria, Belgium, Bulgaria, Canada, China, Chinese Taipei, Cyprus, Czech Republic, Denmark, Ecuador, Estonia, Faroe Islands, Finland, France, Germany, Ghana, Great Britain, Greece, Hong Kong, Hungary, Iceland, India, Ireland, Italy, Japan, Kazakhstan, Kosovo, South Korea, Latvia, Liechtenstein, Luxembourg, Malta, Mexico, Netherlands, Norway, Oman, Pakistan, Peru, Poland, Portugal, Qatar, Romania, Russia, Singapore, Slovakia, Slovenia, Spain, Sweden, Turkey, Turkmenistan, United Arab Emirates, USA, Uruguay and Uzbekistan.
Double taxation treaties without the OECD standard were signed with Algeria, Antigua, Armenia, Azerbaijan, Bangladesh, Barbardos, Belarus, Chile, Colombia, Croatia, Dominica, Egypt, Gambia, Georgia, Indonesia, Iran, Israel, Ivory Coast, Jamaica, Kuwait, Kyrgyzstan, Lithuania, Macedonia, Malawi, Malaysia, Moldova, Mongolia, Montenegro, Montserrat, Morocco, New Zealand, Philippines, Serbia, South Africa, Sri Lanka, St. Christopher, Nevis and Anguilla, St. Lucia, St. Vincent, Tajikistan, Thailand, Trinidad and Tobago, Tunisia, Ukraine, Venezuela, Vietnam, Virgin Islands and Zambia.
Switzerland has also signed tax information exchange agreements with Andorra, Belize, Brazil, Grenada, Greenland, Guernsey, Isle of Man, Jersey, San Marino and Seychelles.