Rejection of Swiss Corporate Tax Reform III by voters

The Swiss proposal for a third Corporate Tax Reform (CTR III) was rejected by a popular vote on Sunday, Feb 12th 2017. However, this is not the end of the political discussion or process. Switzerland has promised to show its commitment to the OECD, and to be compliant with international tax regulations by 2019.

The CTR III was rejected by 59.1% of the Swiss voters. Only three cantons and one half-canton (respectively VD, ZG, TI and NW) were in favour of the text – with a voting ratio of 60-40%. The proposal was a complete failure.

Why the CTR III failed

  • The vote should not be seen as the unwillingness of Switzerland to change its tax system in order to be compliant with international regulations. This clear result demonstrates a feeling of unease and uncertainty in Swiss voters regarding the reform and the possible consequences on public finances, especially on cantonal and communal levels, but also on individuals as tax payers.
  • Although the CTR III was broadly supported by the Federal Council, a clear majority of the parliament, all cantons, key business associations as well as the centre to right-winged political parties, the supporters did not succeed in establishing public trust in the reform. It is a rarity that a referendum launched by the Socialists is approved in a public vote.
  • Undoubtedly, the public intervention of former Minister of Finance Eveline Widmer-Schlumpf, who expressed her strong scepticism, represented a change in the political debate.
  • The opponents of the CTR III ran a professional and smooth campaign in the public and on social media. On the side of the supporting committee, several mistakes were made during the campaign and many of the political representatives supported the reform only half-heartedly.

swiss Source: NZZ online, 13.02.2017

What it means

  • From the OECD side, there are no immediate consequences to expect (such as sanctions or being on a blacklist) in reaction to the vote. The international organisation respects the internal political processes in Switzerland and considers it as a mainly internal discussion at present.
  • Less clear is the reaction from the European Union. It is currently evaluating the tax system of more than 90 non-member States and discussing the intention to set possible tax heavens on a black list. Due to the current weakness of the EU, a joint action against tax heavens is however rather unlikely.
  • There is nevertheless a possibility that some EU member States will take action using their own initiative. Possible actions would include the end of double taxation agreements (which is unlikely), the introduction of a deduction at source, or the unwillingness to accept financial transactions from company groups to non-BEPS conformed States.
  • Retaliation measures from the EU, the OECD or individual countries are unlikely in the short term due to Switzerland’s commitment to the abolition of tax regimes. However, they cannot be excluded in case Switzerland does not succeed in changing its taxation system in due time, i.e. sometime in 2019.

What happens next

  • On a political level, there is a broad consensus from left to right winged representatives to set up a new corporate tax reform as quickly as possible. The necessity of a reform and the willingness to be compliant with an international taxation system is unquestionable.
  • To begin with, the Federal Council will analyse why the reform failed in the first place. No similar mistakes should be made in a second bill. According to current discussions, it is for instance likely that the so-called Notional Interest Deduction (NID) will be cut out and taxation for dividends increased.
  • What remains clear: cantons, but especially the municipalities and the public, will need to be better included in the discussion and their scepticism considered. This also means that a new consultation procedure will take place, taking into account the positions and comments of stakeholders.
  • The Federal Council is likely to decide on the timing in its meeting of Wednesday, Feb 15th. A new proposal is to be expected this autumn whilst the parliamentarian debate should start at the beginning of 2018. Due to internal and external pressure, it is highly probable that the political discussions will be prioritised so that a new taxation system can be implemented sometime in 2019.
Words Alexandra Thalhammer & Timothée Beckert
Photo CC/Khairul Abdullah

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