World Economy

Bern Fine Tunes Plan to Retain Multinationals

Bern Fine Tunes Plan to Retain MultinationalsBern Fine Tunes Plan to Retain Multinationals

The Swiss government has backtracked on parts of its planned corporate tax reform following objections from cantons. A proposed capital gains tax has been thrown out, but tax breaks on research and innovation (royalty boxes) remains the central pillar of the proposal.

The so-called corporate tax reform III agenda is responding to pressure from the European Union and the Organization for Economic Cooperation and Development (OECD) over Swiss tax policies that are deemed to violate fair competition rules, Swissinfo reported.

The government has been under pressure to deliver a series of reforms that would both address those concerns and retain the attractiveness of Switzerland as a location for multinational headquarters.

In September, the cabinet outlined a plan that went to consultation among interested parties, including business lobby groups and cantons, which have largely autonomous tax collecting powers. The main thrust of the proposed reforms (replacing contentious tax practices with royalty boxes) was accepted, but some elements met with widespread disapproval.

In addition to the capital gains tax plan, the government has also shelved a proposal to introduce interest-adjusted profit tax. It will instead consider introducing a tonnage tax.

The exact nature of the royalty boxes would be determined once the OECD has given a definitive verdict on how they can be applied without distorting competition.

 Paying the Cost

The reforms would cost CHF1.2 billion ($1.24 billion) in lost tax receipts, offset by CHF100 million in new income from revising the taxation of dividends.

To offset the financial burden of these reforms on cantons, the amount of federal taxes that goes to cantons will be increased from 17% to 20.5%, the government proposes. In addition, the federal authorities will take on 50% of the cost burden should any canton decide to reduce its general profit tax.

“The aim of the corporate tax reform is to consolidate international acceptance of Switzerland as a business location and secure the legal framework,” the cabinet announced in a press release.

“Switzerland’s attractive tax environment for companies has made a significant contribution to the country’s prosperity in recent years. Companies based here create jobs, make investments and provide an important source of tax revenue.”

Travail Suisse, a national umbrella group for trade unions, objected to the dropping of the proposed capital gains tax. It fears that citizens would now be forced to pay for the projected company tax shortfalls through increased personal taxes or compromised services through cantonal and the government savings.

The capital gains tax, had it stayed in the plan, would have realized CHF300 million in extra income according to the government statement in September.

“If it waives this measure, the Federal Council will be asking the population to bear the cost of austerity measures,” Travail Suisse said in a statement.

  Referendum Threat

The leftwing Social Democratic party has threatened to call a referendum unless the government finds a way to reduce the deficit in tax revenues created by the reforms. The party noted that the finance ministry had massively underestimated the cost to the public purse of the last set of reforms in 2008.

In general, parties to the left criticized the plans while those in the centre or right gave a broad welcome.  The rightwing People’s Party said the government should have gone further to protect the reputation of Switzerland as a magnet for multinationals.

The Swiss Business Federation (economiesuisse), a broad-based business lobby group, welcomed the scrapping of the proposed capital gains tax. But it criticized the decision to also do away with a interest-adjusted profit tax, saying this was incompatible the goal of boosting innovation and research in Switzerland.

The finance ministry will prepare a dispatch by June 2015; it will form the basis of a bill to be debated by parliament this year.