After a failed referendum on the Swiss Corporate Tax Reform III (CTR III) in February 2017, Switzerland is trying to table a revised version of the tax reform, dubbed the Swiss Tax Proposal 17. This proposal has taken into account the opinions of political parties, the business community and the cantons and is likely to circumvent a referendum on the reform.
One goal of the proposal is to align Swiss tax law with internationally accepted standards as set out by the OECD, while at the same time maintaining Switzerland’s competitive position. In an attempt to achieve both, the proposal will abolish special tax regimes, while introducing a mandatory patent box for all cantons, a research and development (R&D) super-deduction and corporate tax rates of between 12% and 14% at the cantonal level. But, while Switzerland is attempting to get rid of its reputation as a tax haven, questions still remain as to how transparent the new initiatives will be.
Research and development hub
The patent box is a new concept for Switzerland, with the exception of the canton of Nidwalden, which already has a patent box in place. The proposed patent box was optional under the CTR III but is now being made mandatory, meaning businesses could get tax relief for qualifying income of up to 90%. This includes outsourced activities but will likely exclude software.
The optional R&D super-deduction allows for deduction at the cantonal level of up to 150% of effective qualifying expenses. The relief restriction is set at 70%, ensuring that at least 30% of profits are taxed, compared with a relief restriction of 80% in the CTR III.
The new patent box is the main pillar of the reform, said Olivier Eichenberger, director at KPMG in Zurich. “[This is a] clear sign of commitment to Switzerland as a location for research and industry. The current rules, i.e. tax privileges, focus on international business activity led out of Switzerland. The patent box, in combination with the modified nexus approach, focuses on specific IP, mainly patents, and the respective R&D activity in Switzerland. Hence, there will be more focus on substance in the future. This is also in line with the BEPS initiative,” Eichenberger said.
The patent box will be based on the OECD modified nexus approach under BEPS Action 5, which only allows a taxpayer to benefit from an IP regime to the extent that it can show that it itself incurred expenditures, such as R&D, which gave rise to the IP income.
Companies generating a lot of turnover and benefits from patents, for example in the pharma industry, would benefit the most from the patent box, provided the research has been done in Switzerland in line with the modified nexus approach, said Boivin Denis, partner at accounting and business advisory firm BDO.
“This approach was drawn up by the OECD in connection with patent boxes. It is meant to ensure that only the revenue attributable to domestic R&D costs benefits from tax privileges within the scope of the patent box. In keeping with the model developed by the OECD, however, additional relief is also possible to a limited degree,” Denis told TP Week.
Achim Pross, head of the OECD’s International Co-operation and Tax Administration Division Centre for Tax Policy and Administration, spoke to TP Week about the nexus approach in October. Pross said he considered the nexus approach to “seek to reconcile each country’s tax sovereignty with the need to limit the proliferation of regimes that result in base erosion and profit shifting”.
“These standards allow countries to engage in tax competition, but they ensure that the competition is fair and focused on encouraging real investment and job creation, and not used for shifting paper profits,” Pross said.
Business friendly
Reactions to the proposals from businesses have largely been positive, advisers have told TP Week.
“We expect inbound activities into Switzerland such as transfers of business operations to Switzerland as a result of the beneficial features of the Tax Proposal 17 together with the significant reductions of effective overall corporate income tax rates in many Swiss cantons,” Beat Baumgartner, partner at Loyens & Loeff, told TP Week.
Rene Zulauf, partner at Deloitte, said he expected a lot of movement within Switzerland where companies with movable businesses may relocate to a canton with a lower tax rate.
Although special tax regimes are being abolished as part of the reform, businesses that have enjoyed these privileges might not see a huge difference with the new proposal.
The companies that benefitted from these special tax regimes, which are sunsetting as part of the reform, will not be hit immediately with extra costs. These schemes, such as the so-called mixed company regimes, generally benefit from a five-year transition mechanism, where companies should be able to keep their tax privileged rates for another five years, Zulauf told TP Week. “Thereafter, their rates will go up relatively marginally, e.g. from 10% to 12% or from 11% to 13.5%, depending on the location and the situation,” he said.
Eichenberger said that the patent box and the R&D super-deduction will not entirely replace the benefits of the current tax privileges that are being abolished. “However, the upcoming corporate tax reform will allow for an effective tax rate as low as 12% without tax planning – a very attractive solution compared to other tax favourable locations,” Eichenberger said.
There is still a possibility that the proposal could change. The Swiss Parliament is expected to vote on the proposal in autumn and if there is no referendum, parts of the proposal could enter into force in 2019.
