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Cablegate: Swiss Campaign Against Proposed Offshore

VZCZCXYZ0000
RR RUEHWEB

DE RUEHSW #0443/01 2871251
ZNR UUUUU ZZH
R 141251Z OCT 09
FM AMEMBASSY BERN
TO RUEHC/SECSTATE WASHDC 6122
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

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

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