Switzerland’s tax shake-up

The third series of corporate tax reforms (CTR III) have lately become one of the biggest political and economic issues on the national agenda.

The Swiss tax system offers tax privileges on the foreign revenue of holding, domiciliary and mixed companies, and has been facing increasing international pressure since 2007. The OECD, with support from the G20 and the EU, have worked towards the standardisation of global tax practices. Since 2010, the CTR III were designed to bring in new tax measures consistent with international standards.

The cantonal tax statuses are of significant economic importance. In 2012, the Confederation’s total earnings from companies with cantonal tax status were approximately CHF 4.1 billion. The end of this favourable tax system is expected to lead to a loss of both fiscal entries and competitiveness. That is why new measures, that are internationally acceptable, will come into force. The Federal council defined the parameters for the reforms based on its consultation hearings in April 2015.

The corresponding draft bill was then loudly and fiercely debated in both chambers. On June 17th, they finally came to an agreement. Among the numerous measures, royalties should be taxed at a reduced rate at cantonal level by means of a royalty box. Cantons can now also grant increased tax deductions for R&D. And lastly, a patent box (so called “output promotion”) will be created.

Estimates for the tax policy measures suggest a decline in the Confederation’s earnings of CHF 1.3 billion. Unsatisfied with the reform and suggested losses, a political committee composed of the Greens, socialists, unions and ATTAC successfully collected the necessary 50,000 signatures to hold a national referendum. Thus, the Swiss population is expected to vote on the CTR III in February 2017.

In parallel, and because they have the autonomy to take such fiscal decisions, the 26 Cantons have been reviewing their own tax policies too, in order to ban privileges for foreign companies. The goal is to have one unique flat tax rate on earnings. Thereby, Swiss companies would see their rate drop while foreign companies would see their rates rise. This equation is not easy to solve for the cantonal Ministers of Finance. On the one hand, this flat rate must remain attractive for foreign companies and on the other, it will bring in less income from local firms, and so cause big losses for their cantonal budgets. Some cantons, like Geneva, host numerous multinational companies (including EMEA Headquarters), and so are more exposed than others.

While some of the Cantons have already defined and voted on the flat tax rate (Vaud set it at 13,8%, Zurich at 18,2%), others, like Geneva, are still in discussions. Despite the wish for greater fiscal harmonisation across the country, domestic competition still remains.

The road may be long but at the end of the federal and cantonal processes, privileged statuses will have disappeared in Switzerland. The CTR III is planned to come into force in January 2019.

Words Timothée Beckert (Burson-Marsteller Switzerland)
Photos CC/Flickr Malias

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