Contribution by

Paolo Lezzi
CEO and Founder, InTheCyber Group
paolo.lezzi@inthecyber.com
http://www.inthecyber.com

Over the last few years, there has been a significant increase in the level of connectivity that was hard to be expected.

Adopting IOT devices has become pervasive in the world of commodity trading. These detectors can be found almost everywhere in the chain of the commodity trading process, on ship containers, in the agriculture field in order to monitor land and production, in the oil field and inside mines. These technologies allow to monitor and predict anything that could slow down production and supplies.

Real-time trading. The central role of Internet of Things

The relation between Supply and Demand is the key of commodity trading. All goods must reach the right location at the right time. The Internet of Things allows to collect all real-time information which are needed to ensure that the whole process will not suffer of any kind of impediment. Do not forget all the online trading platforms where transactions take place at incredible rates.

What type of risks do these new technologies involve?

The described process has a very high level of technology, and it is sufficient to compromise a part of it in order to cause alterations on the market. Think about what impact a cyber-attack could have on the devices that provide all the information needed to manage Supply and Demand.

Why do IoT devices often have a low level of security?

One of the first issues is the use of default credentials in IOT devices, for example, the Mirai botnet took advantage of that to infect all the cameras. There are also market needs that encourage the lack of security in IoT devices. The high Demand forces manufacturers to produce new models, without paying the right attention to security issues and ignoring the current updates on older models, which have been replaced on the market by newer ones. Other than IoT devices, it is necessary to manage the whole communication system, which involves many actors in the commodity trading process, including producers, wholesalers, governments, regulatory agencies etc.

What repercussions could there be in the event of a cyber attack?

Definitely, one of them is the damage that could be caused by an actor who is able to alter the veracity of the information that is exchanged in the commodity trading process between the players mentioned before. In addition, there is the risk due to all those cyber-attacks that can reduce the availability of a player’s products by blocking its systems or damaging them, or even attacks that affect trading platforms. Think about the repercussions if a main supplier, such as an oil producer for example, were forced to stop the production due to a ransomware attack.

What is the correct approach that must be taken while facing this transformation? 

The pervasive digitalization has brought many advantages, such as the introduction of the block chain technology which allows to not modify Bill of Lading and so on, or the ability to access real time data which used to seem impossible. As always, great possibilities also bring high risks, and that is why even the commodity trading world must approach cybersecurity systemically, considering every single element of the process connected to the Net and therefore, as a potential weak point. It is also necessary to work on security improvement in order to cope with the constant evolution of the cyber threat, protecting processes, technologies and especially training on this threats all people involved.

Contribution by KPMG.

On 25 June 2018, the EU Directive 2018/822 (DAC6), which introduced mandatory disclosure rules, entered into force. These rules target all kinds of cross-border arrangements that fall under a hallmark of the Directive, irrespective of whether an advisor or intermediary is involved or not.

When will the rules enter into force?

EU Member States have until 31 December 2019 to implement the new rules, which will be applicable from 1 July 2020. As of 1 July 2020, qualifying intermediaries (or, in certain cases, the respective taxpayer) will be required to disclose information on reportable cross-border tax arrangements to their authorities within 30 days of the earlier of when the arrangement is made available for implementation, ready for implementation or actually implemented.

However, intermediaries and respective taxpayers will also be required to disclose information retroactively by 31 August 2020 on reportable cross-border arrangements that have been implemented since 25 June 2018.

Which transactions will be affected by DAC6?

In order for a transaction to be reportable under DAC6, it is required that:

• the arrangement has a cross-border dimension, i.e. it involves participants residing either in more than one EU member state or in a member state and a third country;
• the arrangement falls under a hallmark; and
• in the case of certain hallmarks, that the main benefit test is satisfied.

Who is required to report?

Under DAC6, the primary reporting obligation lies with the intermediary involved in the transaction.

In the following cases, however, the reporting obligation shifts to the taxpayer (individual or company):

• The intermediary is exempt by virtue of legal professional privilege; or
• there is no EU intermediary (in particular in the case of “in-house arrangements”).

Why DAC6 even affects ‘ordinary’ corporate groups?

As mentioned above, if a transaction falls under a hallmark, but there is no EU intermediary involved, the reporting obligations fall to the taxpayer residing in the EU, i.e., for example, to the EU subsidiary of a Swiss company.

The hallmarks that trigger a reporting obligation are drafted very broadly. They even catch standard transactions such as the following examples:

Example A: transferring functions to another country

• A German group entity forming part of a Swiss based company transfers certain sales functions to its subsidiary in Poland, where taxes are lower. The additional income realized by the Polish company will be distributed to the German parent company, which leads to an overall lower tax burden.
• This transaction may fall under hallmark B.2 of the Directive: An arrangement that has the effect of converting income into capital, gifts or other categories of revenue, which are taxed at a lower level or exempt from tax.
• The main benefit test is satisfied if one of the main benefits of the transaction is a tax advantage, which is likely this case.
• Therefore, this transaction must in principle be reported by the German subsidiary.

Example B: granting a loan to an Italian subsidiary

• In December 2018, a Swiss holding company granted a loan to its Italian subsidiary. Whilst the interest is deductible in Italy, it is not taxable at cantonal and communal level in Switzerland (status of holding company). Even though the holding status will be abolished as of 1 January 2020, such transactions are caught by DAC6 because of its retroactive effect dating back to 25 June 2018.
• This transaction may fall under hallmark C.1(d) of the Directive: An arrangement that involves deductible cross-border payments (…) where (…) the payment benefits from a preferential tax regime in the jurisdiction where the recipient is resident for tax purposes.
• As one of the main benefits of this transaction is a tax advantage, the main benefit test is satisfied, too.
• Therefore, this transaction must in principle be reported by the Spanish subsidiary.

Conclusion

Based on the above comments, DAC6 affects many Swiss companies with EU group entities. Non-compliance with these new rules is not an option, as some countries provide for penalties of up to several hundred thousand euros. Therefore, all Swiss companies with EU group entities should start analyzing their cross-border transactions now, so that they are in a position to comply with the reporting obligations as from July 2020.

Please find here the factsheet for additional examples.

Not sure if any transaction within your group might be caught by DAC6? Our specialist are available for a call or a meeting to explain you the potential impact of the Directive:

Gernot Zitter, Partner Tax & Legal, +41 58 249 67 30, gzitter@kpmg.com

Simone Leonardi, Manager Tax & Legal, +41 58 249 32 49, sleonardi@kpmg.com

The Global Commodities Conference, organised by Lugano Commodity Trading Association (LCTA), was successfully held in LAC Lugano on November 13 – 14, 2019. More than 300 people attended the two-day conference that brought together numerous experts and important players in the commodity trading and international trading sectors.

The annual international conference on commodities and commodity trading, organised by Lugano Commodity Trading Association (LCTA), was held in Lugano on November 13–14, 2019 at LAC Lugano Arte e Cultura. With a new format, the Global Commodities Conference has established itself as the pre-eminent gathering of world-renowned special guests, international trade experts, commodity traders, banking institutions and service providers.

Read here the full Event Review and Conference Pictures

Contribution by Ernst & Young.

Following the adoption of the Federal Act on Tax Reform and AHV (Old-Age and Survivors Insurance) Financing (TRAF) by popular vote in May 2019, all Swiss cantons are required to align their cantonal tax laws and ensure conformity with TRAF-regulations. Since the new measures are not all mandatory, the cantons have some discretion when adopting the new regulations, depending on the cantonal requirements and interest.

The Ticino Cantonal Government presented its proposal on how to implement TRAF in Ticino in a press conference on 10 July 2019. The new rules will enter into force as of January 2020, so planning for the change, based on the details that are published, is finally possible.

Mandatory Measures

Abolishment of preferential tax regimes

Like all other cantons, Ticino must abolish tax privileges for holding companies, domicile companies and mixed companies. In 2016, only 3.7% of all taxpayers were taxed according to a preferential tax regime. However, these companies contributed over 20% of the annual tax revenue generated by legal entities (CHF 144 Mio.) and are important for Ticino. Therefore, the Ticino Government is proposing a set of internationally accepted measures to replace certain tax regimes and to maintain the attractiveness of the Canton from a tax perspective.

Disclosure of hidden reserves

The abolishment of preferential tax regimes would result in the ordinary taxation of hidden reserves that were generated during the time that the privileged taxation applied. To mitigate this effect, cantons are required to introduce transitional rules. For that purpose, the so-called “two-rate system” will be introduced. Hidden reserves, including any self-created goodwill, at the date of transition from privileged to ordinary taxation, can be confirmed by the tax authorities upon request. Profits relating to the realization of hidden reserves that were generated under a privileged tax regime are subject to a separate tax rate over a period of 5 years. Ticino plans to apply a competitive tax rate of 1% to these profits. At the same time, the current step-up practice, set out in circular letter 29/2017, will be abolished from 2020. This means that the two-rate system will also be applied to companies that disclosed hidden reserves under the circular in the past.

Since trading companies often benefitted from a special tax regime, this measure is essential for them. It is important to start analyzing the opportunities presented by the transitional rules by evaluating the various scenarios. The different options for application of the transitional rules may present different benefit outcomes for a company. Amongst others, aspects to be considered include timing, valuation method, and the application of other available measures. EY has developed a comprehensive tool to simulate potential outcomes based on a variety of different scenarios and parameters. Using this tool, we are able to assist in identifying the most beneficial option.

In the case of a migration to Switzerland, the so-called step-up system is applied. Hidden reserves, confirmed by the tax authorities, can be tax effectively depreciated. According to the Ticino Cantonal Government proposal, the tax-free disclosed hidden reserves can be depreciated annually over a period of 10 years.

Patent box

According to federal legislation, all cantons must introduce a so-called “patent box”. This measure provides tax relief of a maximum of 90% of the income derived from patents and similar rights at cantonal and communal level. Ticino plans to make full use of this measure by introducing the maximum relief of 90%. However, as trading companies are typically not patent owners, this measure is unlikely to be too relevant for trading companies.

Overall tax relief

The Canton of Ticino intends to introduce a maximum tax relief of 70%. This is a very positive development, as a lower relief limitation was previously planned. With the 70% limit, the Canton of Ticino reaches the maximum possible tax relief in order to maintain the attractiveness compared to other Swiss cantons.

Optional measures

Capital tax relief

Companies with a preferential tax regime usually benefit from a reduced capital tax rate, which is often the case for trading companies. To mitigate the increase from the reduced capital tax rate when moving to ordinary taxation, the cantons can introduce a capital tax relief on patents and similar rights, qualifying participations, and intra-group loans.

Since 2018, a capital tax relief on qualifying participations has been available in Ticino. In addition, the Government has proposed to introduce capital tax relief on qualifying patents and similar rights. Regarding intra-group loans, the Government has decided (at this stage) not to implement a specific deduction. However, such a measure may still be introduced in a second step should this be necessary.

The change from privileged to ordinary taxation generally results in a significant increase of a trading company’s capital tax burden. Such increase might be mitigated in case a company can apply for additional tax relief that will be introduced for capital tax purposes.

R&D super deduction

The reform allows for the introduction of a super deduction on domestic R&D costs at the cantonal level. This measure aims at promoting R&D activities. Cantons may allow the deduction of up to 50% of qualifying R&D costs from the taxable income. In order to promote and develop R&D activities in its territory, the Ticino Cantonal Government has decided to propose the maximum deduction rate of 50%. This measure should have little impact for trading companies as they are typically not carrying out R&D activities in Switzerland.

Notional interest deduction (NID) on surplus equity

The notional interest deduction (NID) is basically granted on equity which, in the long-term, exceeds the average equity required for business operations. It is a measure only intended for application in “high-tax” cantons so will not be implemented in Ticino as Ticino does not fall under the definition of a high-tax canton.

Additional measures 

In addition to the mandatory and optional measures outlined above, the canton of Ticino has decided to implement further corporate tax measures.

Reduction of cantonal tax rate and cantonal multiplier

In order to maintain the tax attractiveness of Ticino, the corporate tax rate will be gradually decreased from 9% today to 8% in future for the period 2020 to 2024. From 2025 onwards, the rate will be further reduced to 5.5%. The cantonal multiplier will be reduced from 100% today to 98% for the period 2020 to 2024. From 2025 onwards, it will be further reduced to 96%.

These measures should lead to a future envisaged ETR of approx. 13.7% in the most attractive communes, which should allow the current tax privileged companies to almost maintain their current taxation level.

Differentiated communal multiplier

Today the canton Ticino applies one multiplier for both individuals and legal entities. From 2025 onwards, communes will be entitled to introduce different communal multipliers. The different multipliers are subject to the following conditions: (i) the communal multiplier must not be below 40% for both individuals and legal entities, and (ii) the spread between the communal multiplier for individuals and legal entities must not exceed 20%.

Increased creditability of corporate income tax against capital tax

The creditability of corporate income tax towards capital tax will be increased from 10% to 16% (as from 2025).

Conclusion

Trading companies, currently benefitting from a privileged tax regime such as the mixed company regime, should carefully consider the potential risks and opportunities arising from the upcoming tax reform. In particular, the fact that the tax regimes will be abolished requires them to properly analyze the different options available under the transitional rules and other new measures to be implemented. Any review should include the quantification of the financial implications, taking into account a number of parameters including, but not limited to, financial forecasts, hidden reserves, and goodwill, together with the application of the various measures and relief limitations. To be effective, planning and implementation should be completed before the end of 2019. Therefore, we recommend you take action now.

Cover Image © Fabio Marchese – Unsplash

Contribution by Ernst & Young.

On 19 May 2019, in a popular vote, Switzerland approved the Federal Act on Tax Reform and AHV (Old-Age and Survivors Insurance) Financing (TRAF) as adopted by the Federal Parliament last fall. The tax reform’s objectives include: (i) securing the long-term tax attractiveness of Switzerland as a business location; (ii) restoring international acceptance of the Swiss tax system; and (iii) securing an appropriate level of tax revenue. The tax reform brings the replacement of certain preferential tax regimes with a new set of internationally accepted measures. The legislative changes align with the broad reduction of the cantonal corporate tax rates.

The last proposed tax reform with the same aim – Corporate Tax Reform III – was rejected by the Swiss voters at the beginning of 2017. Since the need for tax reform was undisputed, the Federal Council immediately drew up a new proposal. Based on the rejection of Corporate Tax Reform III, TRAF was combined with additional AHV financing as a form of socio-political compensation.

Core tax measures

Abolishment of preferential tax regimes

At the cantonal level, tax privileges for holding companies, domicile companies and mixed companies are terminated. At the federal level, the profit allocation rules for principal companies and Swiss finance branches no longer apply.

Tax-free disclosure of hidden reserves

Hidden reserves including any self-created goodwill at the point in time of transition from privileged to ordinary taxation or migration to Switzerland are confirmed by the tax authorities. In the case of a migration to Switzerland, the so called step-up system is applied. The tax-free disclosed hidden reserves are to be depreciated annually at the rate applied for tax purposes to the respective assets. In the case of a transition, the so-called two-rate system is applied. Profits relating to the realization of hidden reserves that were generated under a (now abolished) privileged tax regime are subject to a separate tax rate. The cantons are free to determine the amount of this special tax rate. The two-rate system ensures a competitive income tax burden during a five-year transition period. It should be noted that taxpayers may revoke voluntarily their tax privileged status before the reform enters into force (so-called early transition). Depending on the transitional regulations offered by the cantons, this may be a beneficial option.

Patent box with a maximum relief of 90%, mandatory at the cantonal level

A core element of the reform is the introduction of a patent box regime in accordance with the Organisation for Economic Co-operation and Development standard. In the box, net profits from domestic and foreign patents and similar rights are to be taxed separately with a maximum reduction of 90% (rate at cantonal discretion).

R&D super deduction of maximum 50%, optional at cantonal level

The introduction of this super deduction for domestic R&D is Switzerland’s commitment to be recognized as an attractive location for R&D. The maximum deduction of 50% (rate at cantonal discretion) is limited to personnel expenses for R&D plus a flat-rate surcharge of 35% for other costs and 80% of expenses for domestic R&D carried out by third parties or group companies.

Notional interest deduction (NID), optional at cantonal level

So-called high-tax cantons have the possibility of introducing a NID on excess capital. According to the currently published intentions of the cantonal governments regarding tax rate developments, only the canton of Zurich meets the requirements.

Overall tax relief of 70%, mandatory at the cantonal level

The patent box, R&D super deduction, and NID as well as possible depreciations from the early transition from privileged to ordinary taxation are subject to the overall tax relief of 70%.

Additional measures

Adjustments in taxation of dividend income from qualifying participations

Dividend income of individuals from qualifying participations is currently partially exempt from taxation to mitigate double taxation at the shareholder level. At the federal level, the taxation rate increases from 50% (business investments) and 60% (private investments) respectively to a standard rate of 70%. At the cantonal level, there is a harmonization of the relief method and an introduction of a minimum taxation rate of 50% (rate at discretion of cantons).

Capital tax relief, optional at the cantonal level

Privileged taxed companies usually benefit from a low capital tax rate. To compensate for the loss of this tax advantage, the cantons are given the possibility to reduce the taxable capital on patents and similar rights, qualifying participations and intra-group loans to also remain competitive from this angle.

Adjustments of the capital contribution principle

Swiss-listed companies may only pay tax-free capital contribution reserves if they pay taxable dividends in the same amount. Intra-group dividends and capital contribution reserves from assets transferred from abroad after 24 February 2008 and in the case of a liquidation are not affected by this scheme. The above rules shall also apply to the issue of bonus shares and nominal value increases from capital contribution reserves.

Extension of the flat-rate tax credits on foreign companies’ permanent establishments

To prevent international double taxation, Swiss permanent establishments of foreign companies should be able to claim withholding taxes on income from third countries with a flat-rate tax credit.

Social compensation via the AHV (Old-Age and Survivors Insurance)

It is assumed that the loss of tax receipts due to the tax reform will amount to CHF2b (in a static view). This shortfall will be compensated through the AHV: (i) 0.3% increase in salary contributions (employers and employees one half each); (ii) allocation of the federal share of the demographic percentage of value added tax to the AHV; (iii) increase in the federal contribution to the AHV from currently 19.55% to 20.2%.

Reduction of cantonal profit tax rates

The reduction of cantonal profit tax rates is not directly covered by TRAF but is necessary to remain attractive from a tax perspective for former tax privileged companies and thus a key part of the proposed tax reform. The increase of the canton’s share of the federal direct tax from 17% to 21.2% enables the cantons to reduce their tax rates.

Based on official announcements made by the cantonal governments, it is expected that the majority of the Swiss cantons will provide attractive tax rates on pre-tax income between 12% and 14% (including federal tax).

Implications

The tax reform measures will enter into force as of 1 January 2020. The tax reform achieves its main goal of retaining Switzerland’s international attractiveness while having an internationally accepted tax system. The tight time frame requires prompt planning from taxpayers regarding the transition to the new regulations.

The reform represents the greatest change in the Swiss corporate tax system in decades and affects essentially all enterprises in Switzerland. Analysis has to be undertaken within the next few months to properly adjust to the new tax landscape and to avoid a competitive disadvantage.

Cover Image © Seb Mooze – Unsplash