It is a practice that has been totally legal for decades and will be terminated from January 1, 2022.
Suppose you run a business and you intend to win a contract to provide some type of service to another business. This contract will give you work and activity for years and will guarantee your employment. What can you do? You can wait for the second company to decide and pray that you are lucky that your company is chosen to provide that service. Or you can go another way and give some money to the person in charge to make the first decision in the first company. It is illegal, yes. Sometimes it works, yes. And it is an expense. Except if your company is from Switzerland.
An unscrupulous Swiss businessman would pay the bribe and then, thanks to the country’s legislation, he could get that money back. How? Well, legally, deducting it when you go to pay taxes that correspond to pay your company. A practice that has been totally legal for decades and that will only end on January 1, 2022.
The Swiss government announced on Wednesday a bunch of tax reforms to bring it closer to OECD standards. Among them, it will no longer allow companies to deduct the expense on their tax return that have had the previous year in bribes to individuals or private entities. The reform will come into force in January 2022, so bribes for 2020 can be safely deducted in 2021.
Switzerland will go further. Their companies will not be able to deduct the expenses they have had to finance either criminal activities or the money they have paid in exchange for a third party committing a crime that favors them.
The new reforms will affect payments to individuals or private entities. In the case of the payment of bribes to public officials, national or foreign, it was legal to deduct it in Switzerland until a reform approved in 2001. Thus, their companies could bribe foreign leaders in exchange for contracts and deduct that expense on your Corporate Tax return.
Switzerland has been for centuries the paradise of banking secrecy and destiny of the illegal money of the lucky, corrupt or thieves of half the world. Pressure from the European Union and the United States until 2016 has led successive Swiss governments to reform both their tax system and their banking practices. Its judicial authorities have increased cooperation with judges in other countries when they investigate the fate of corruption money.
Expenses for some old somewhat strange practices will remain deductible. Thus, Swiss companies can deduct from their corporate income tax return what they have paid abroad as fines if there is no equivalent fine in Switzerland.
The Swiss Executive explained on Wednesday that “as in the past, punitive financial sanctions, such as fines or punitive administrative sanctions, which also exist in Switzerland, will not be tax-deductible.” But, “foreign financial penalties will be tax-deductible in exceptional cases if they violate Swiss policies (if they don’t exist in their law) or if the company credibly demonstrates that it took all reasonable steps to comply with the law.”
The Swiss Executive considers that as soon as these reforms come into force will be complying with the recommendations of the OECD against money laundering.