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Switzerland, Italy Reach Agreement On Tax Treaty

Italy and Switzerland have agreed an amendment to their double tax agreement to enhance tax information exchange provisions. It is hoped that the agreement will be signed before the March 2 deadline set by Italy's new voluntary disclosure program to enable Switzerland's removal from Italy's 'black list.'

After three years of talks, the conclusion of the agreement follows a recent push by Italian lawmakers to approve the voluntary disclosure program, which will allow Italian residents to regularize undeclared capital held abroad. There is a 60-day deadline, from the date of its entry into force, for countries that have not yet signed an adequate tax information exchange (TIE) provision with Italy to do so. These countries otherwise risk inclusion on the Italian black list.

It is expected that the protocol to the DTA, which will incorporate the OECD global standard for the exchange of information upon request, and a roadmap covering other bilateral tax matters will be signed by the end of February 2015. The agreement's provisions on the exchange of information will apply from the date of signing, in recognition that it could take up to two years for the protocol to be ratified by both states.

Through its negotiations with Switzerland, the Italian Government is hoping to establish a 'pincer' movement, whereby it can flush out Italians with undeclared assets in Switzerland, whose details may be disclosed under the revised treaty, while also offering them a voluntary disclosure program to pay reduced fines.

Vieri Ceriani, Secretary for Fiscal Affairs within the Italian Finance Ministry, described the new agreement as 'unthinkable several years ago,' and said it marked 'the beginning of an epoch that provides measures against tax evasion.'

Italian Premier Matteo Renzi also strongly welcomed it and emphasized that 'now would be a good time for the return of large amounts of funds to Italy, because of the approval of the voluntary disclosure program, together with recent exchange rate movements.'

Removal from the Italian black list for Switzerland would lead to a substantial improvement in market access for Swiss financial service providers. Swiss financial institutions and their employees will not, in principle, be held responsible for the tax offenses of their clients, although their cooperative behavior with the regularization of their clients will be looked upon favorably.

The negotiations have included a roadmap with future commitments to make reductions to withholding tax rates on dividends and interest payments and to modify the taxation of cross-border workers.

The latter issue had previously been a sticking point in the DTA negotiations. Under an existing agreement, cross-border Italian workers employed in Switzerland are exempt from taxation in Italy, but Switzerland is required to transfer 38.8 percent of the Swiss fiscal revenue collected from them to Italy. The cantonal Government in Ticino has long complained of 'wage dumping,' involving the supply of less than market rate labor from Italy, and has sought a revision to this percentage.

It has now been proposed that, in the future, cross-border workers should be subject to reduced taxation in the state where they work as well as regular taxation in their country of domicile. The portion retained in the state where the person works will be a maximum of 70 percent of the total income tax withheld. A new agreement on the taxation of cross-border commuters will be the subject of an agreement to be negotiated in the first half of 2015, with both sides undertaking to ensure its swift conclusion.


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