SWISS CAMPAIGN AGAINST PROPOSED OFFSHORE

UNCLAS BERN 000443 SENSITIVE SIPDIS PLEASE PASS TO USTR FOR J.BUNTIN DEPT OF TREASURY FOR J.HARRINGTON E.O. 12958: N/A TAGS: ECON ETRD EFIN SZ SUBJECT: SWISS CAMPAIGN AGAINST PROPOSED OFFSHORE REINSURANCE TAX BILL ¶1. (SBU) SUMMARY: The Swiss Secretariat for Economic Affairs (SECO) and the Swiss embassy in Washington raised concerns with post and USTR regarding a draft U.S. offshore reinsurance tax bill. SECO argues that the draft bill if enacted will violate both the U.S.-Swiss Double Taxation Treaty and U.S. obligations under the WTO General Agreement on Trade in Services (GATS). Letters to the Senate Finance Committee by Swiss Ambassador to the U.S. Urs Ziswiler and Swiss Re, Switzerland's largest reinsurer outline the specific arguments against the bill. While Post cannot address the legal technicalities or legitimacy of the Swiss arguments, Post is concerned that the optics of Swiss claims that a US draft law will violate our existing double taxation agreement could have detrimental effects on the Swiss parliament's ratification of the recently revised double taxation agreement. END SUMMARY. ¶2. (SBU) The Swiss Secretariat for Economic Affairs (SECO) Head of Americas Division Philippe Nell raised concerns with post and USTR regarding draft legislation, H.R. 3424, which will amend the Internal Revenue Code to disallow deductions for excess non-taxed reinsurance premiums with respect to United States risks paid to affiliates. SECO argues that the draft bill if enacted will violate both the US-Swiss Double Taxation Treaty and U.S. obligations under the WTO General Agreement on Trade in Services (GATS). ¶3. (U) In support of these arguments, SECO shared a letter from Swiss Ambassador in Washington Urs Ziswiler to the Senate Finance Committee in opposition to the bill. According to Ziswiler, the draft bill is "incompatible with the Double Taxation Convention between the U.S. and Switzerland since the proposal violates the non-discrimination principle stated in Article 24 of the Convention. According to paragraph 2a an affiliate of a Swiss enterprise in the U.S. shall not be taxed more unfavorably than a U.S. enterprise. Paragraph 3 indicates that disbursements to a resident in the other Contracting State shall be deductible for determining the taxable profits to the same extent as disbursements paid to a resident. Therefore, reinsurance premiums ought to be deductible for an insurance company that does business in the U.S. regardless of whether or not the recipient is a related entity as long as the transactions are carried out under similar conditions as if they were independent entities, and regardless of the location of this entity. Finally, paragraph 4 states that a company the capital of which is wholly or partly owned or controlled by residents of Switzerland shall not be subjected to more burdensome taxation than similar U.S. companies." ¶4. (U) Ziswiler also writes that he is concerned "the proposed provisions would constitute a breach of the U.S. obligations under the WTO. Art. XVII (National Treatment) of the WTO General Agreement on Trade in Services (GATS) provides for a national treatment obligation for all services for which members have undertaken specific commitments." He argues that the US schedule of specific commitments provides for national treatment for cross-border provision of reinsurance services, so "conditions of operation in the U.S. for American and foreign companies should, in law or in fact, be the same." He notes that the Swiss believe the "proposal, by limiting the ability of insurance companies to reinsure their risk portfolio with related companies abroad, is creating a discrimination against imported reinsurance services." ¶5. (U) In summation, Ziswiler notes that the draft proposal would be "detrimental to the international conduct of global insurance, it would enhance the cost of insurance coverage for U.S. consumers, it would discriminate against internationally operating companies, and it would conflict with bilateral and multilateral conventions to which the U.S. is a party." Swiss Re, Switzerland's largest reinsurance company echoes these sentiments in their letter and notes that the proposed bill violates fundamental US income tax principles and treaties. Post can forward an electronic copy of Ziswiler and Swiss Re's letters to the Senate Finance Committee upon request. -------------- COMMENT -------------- ¶6. (SBU) While Post cannot address the legal technicalities or legitimacy of the Swiss arguments, Post is concerned that the optics of Swiss claims that a US draft law will violate our existing double taxation agreement could have detrimental effects on the Swiss parliament's ratification of the recently revised double taxation agreement. The Swiss Parliament is still reviewing for ratification the recent revisions, which expanded the agreement to include administrative assistance on tax evasion. Some Swiss politicians and press criticized the U.S. for previously violating the agreement in pursuing bank account information from UBS outside of the administrative process. A second claim of violating the agreement will likely cause political pundits and the press to opine that the Swiss should not ratify an agreement of which the U.S. continually fails to comply. This could place unexpected political pressure on Swiss Parliamentarians to refuse ratification. In addition, in a country with a public referendum process, strong press opinions could potentially influence public sentiment and result in a call for a referendum to nullify parliamentarian ratification of the revised double taxation agreement. BEYER