Mounting EU pressure was a key factor in voting on the Federal Act on Tax Reform and AVS Financing (TRAF) that took place on May 19 to replace the tax system. The positive outcome of the referendum protects Switzerland from being 'blacklisted' by the EU and OECD over its uncompetitive and preferential tax regime and calms the worries of many businesses that were concerned about the impact of operating in a potentially blacklisted jurisdiction.
After Swiss Corporate Tax Reform III (CTR III) was rejected by voters in 2017, it has taken the government two years to find a solution that the electorate has accepted. However, less than half (42.7%) of the Swiss population voted on the reforms. Of those who voted, 66.4% decided in favour of the tax reform, according to preliminary official results, while a third rejected the TRAF.
The uncertainty of which way the vote may go, led many businesses to plan for every scenario.
“We analysed the situation and had an action plan for both scenarios,” confirmed a tax head at a biotechnology company based in Switzerland.
“If you are in the shoes of someone in industry then you could spend a lot of time planning for a scenario that may [have been] rejected,” agreed a tax director at a large manufacturing company in Switzerland.
Nevertheless, companies are happy that they can continue doing business with the reassurance that the Swiss tax system will be compliant with international standards following the vote.
“Many [multinational businesses] will start immediate actions to prepare the tax accounting for next year and onwards,” said the tax director from the manufacturing company.
The TRAF, which will enter into force on January 1 2020, keeps a minimised version of competition between the cantons through a mix of optional and mandatory tax measures, which cantons adopt. Some of the new tax measures include a tax neutral step-up system, a cantonal-level patent box regime, research and development (R&D) super deductions, notional interest deductions, capital tax relief options, and revised permanent establishment rules.
The tax measures available to the cantons under the TRAF’s federal framework will create a furious rush to implement various measures to attract and maintain investment without the advantage of past preferential regimes. They will use all they can to maintain a competitive edge.
“The core of the whole Swiss system is competition between the cantons,” said Arthur Pleijsier, group tax director at Affidea and transfer pricing partner at Eurofiscus. “There is heavy competition between cantons, [but] I think it will be minimised because the whole ruling system gave cantonal authorities much more flexibilities than the new system. The new system will abolish rulings, which will give cantons less taxing rights to attract business,” explained Pleijsier.
For example, Zurich is the only canton that is able to meet the requirements to adopt the notional interest deduction because of its high cantonal tax rate. Other cantons will be able to adopt other federal tax measures based on the cantonal tax rate and existing business operations within the canton.
With every canton having the ability to fix its own tax rate, Pleijsier believes that the “canton shopping element” will remain.
“There is some kind of directional leadership from the federal authorities, but overall it is limited and you will still find competition between the cantons. If you are thinking about establishing economic activity there then you are going to talk to the cantonal tax authorities to see what they have to offer,” Pleijsier said.
Businesses apply a cost-benefit analysis to staying in Switzerland
Taxpayers are critically looking at their business setups in Switzerland in relation to the implementation of the BEPS measures and how it impacts their supply chain models across Europe.
Swiss-based advisors told International Tax Review that companies are open to moving out of Switzerland regardless of the outcome of the referendum. While Switzerland continues to be an attractive location, business operating costs are significantly higher than in many other parts of Europe, which can undercut its appeal.
“On a longer-term basis, the effective tax rate across most of Switzerland will be around 12% before potential deductions,” said the tax director at the Swiss manufacturing company. “You may say that is competitive but if you take into account factors such as labour costs then other countries start to look very competitive. Switzerland may lose a little bit on the draw long term to Ireland and the UK’s rate reductions,” they added.
One of the key features that Swiss-based advisors and corporate taxpayers note is the rising cost of retaining employees because there are an increasing number of highly paid technologists and healthcare specialists. The feasibility in continuing operations in Switzerland in order to gain tax advantages is being debated among C-suite executives under the more rigid tax system at the cantonal-level.
“[There is] uncertainty about the way forward and future tax models,” said the head of tax at the biotechnology company. “Multinationals, especially local [Swiss-based] businesses but also some new investors, don’t like that uncertainty.”
In some cantons, the respective cantonal amendments have already passed the legislative process, but other cantons are have yet to approve the amendments, confirmed Denis Berdoz, senior tax counsel at Baker McKenzie.
It is unlikely that Switzerland will attract new businesses to set up substantive operations under the revised tax framework at the same rate it used. However, the federal government can instead aim to keep existing multinational business operations at the cantonal level by working with cantons to incentivise businesses to stay.
