Switzerland Renews Push for Tax Reform Following Referendum Vote

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By Bryce Baschuk

Switzerland’s executive branch has launched an ambitious effort to modernize its preferential tax regime by eliminating some of the benefits that undermined the alpine nation’s 2016 corporate tax reform law.

The country’s lawmakers are targeting a key change that omits notional interest deductions—which would have permitted Swiss multinational companies to deduct from their interest-adjusted corporate income tax on above-average equity.

The move comes less than three months after Swiss voters rejected the Corporate Tax Reform III law in a February referendum due to concerns that its various offsetting measures would result in lost tax revenue for national public services.

This month’s debate kicks off a year-long legislative process aimed at providing legal certainty for roughly 24,000 Swiss-based multinational companies like Nestle SA, Novartis AG, ABB Group Holdings Pty Ltd., and Japan Tobacco Inc.

European Sanctions Loom

The original goal of Switzerland’s 2016 Corporate Tax Reform Act III was to curb preferential tax regimes for multinational companies and prevent Switzerland’s 26 cantons from exempting holding companies and management companies from paying corporate taxes.

The measures were aimed at bringing Switzerland in line with a set of global anti-tax-avoidance guidelines established by the Paris-based Organization for Economic Co-Operation and Development.

The European Commission has threatened to blacklist countries that don’t adhere to international tax norms and threatened to impose various countermeasures like deduction limits for European companies that do business with Switzerland.

The 2016 law also sought to provide new benefits to the 24,000 companies that currently have a special tax status in Switzerland, to ensure they didn’t leave Switzerland for more competitive tax jurisdictions.

Three Substantive Changes

On June 1, a steering committee composed of cantonal and federal representatives offered its recommendations on the best way to reinstate the government’s Corporate Tax Reform III law without triggering another referendum.

The steering committee’s recommendations sought three substantive changes:

  •   Omit the notional interest deduction at both the federal and cantonal levels.
  •   Increase partial taxation from 60 percent to 70 percent for individual shareholders holding at least 10 percent in a company.
  •   Reduce from 80 percent to 70 percent the combined tax relief permitted by a patent box and an R&D super deduction.

The recommendations seek to preserve the law’s various other offsetting provisions to encourage multinational businesses to maintain their operations in Switzerland after the current tax exemptions are rolled back.

The untouched provisions include:

  •   authorization for cantons to reduce their headline corporate tax rates;
  •   a step-up measure that offers companies a gradual transition period for the new tax rates; and
  •   new uniform rules for the disclosure of hidden reserves.

The main goals of the reform are to ensure “the attractiveness of Switzerland as a business location, international acceptance of the Swiss corporate tax law and sustainable tax revenues,” said Jackie Hess, a managing partner of tax and legal at Deloitte in Zurich.

Social Democrats Unconvinced

The Swiss Social Democratic party said the recommended changes to Switzerland’s tax regime were insufficient because they would continue to impose a heavy burden on Swiss citizens.

“Too many questions remain open, the increase in the dividend taxation is too little, the social compensatory measures are not enough, and the correction of the errors” of the previous Corporate Tax Reform Law “is completely missing,” the party said in a recent news release.

The Social Democratic party called on lawmakers to further revise the proposal to include the following provisions:

  •  a 100 percent tax on dividends at the federal level;
  •  increase child and educational allowances by $104 per month;
  •  restrict companies from distributing tax-free profits; and
  •  impose a minimum cantonal rate for corporate taxation.

Unless the changes are made, the government “will not be able to convince the population of the need for billions of heavy tax cuts for companies,” the Social Democratic party said.

It’s noteworthy that the Swiss Social Democratic Party spearheaded the February referendum vote and argued that the law’s provision regarding notional interest deductions would help multinational companies circumvent their tax obligations to the detriment of Swiss public services.

‘Ambitious’ Timetable

The Swiss Finance department will prepare a legislative draft before the summer, and Switzerland’s parliament will begin debate in September with the goal of concluding its work before the end of the year.

Barring any significant hurdles, parliamentary adoption of the proposal is scheduled for the 2018 spring legislative session, according to the steering body’s news elease.

If the process proceeds as planned and Swiss voters don’t seek another referendum, the new tax law could enter into force in 2020 or 2021, with transition periods lasting until 2025 or 2026.

“The planned timetable for the tax package 17 is ambitious,” said Stefan Kuhn a partner at KPMG’s international corporate tax division in Switzerland. “The Federal Government’s first response to the rejection of USR III law did not take long, which proves that the confederation is aware of the importance of tax reform.”

To contact the reporter on this story: Bryce Baschuk in Geneva at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj in London at psukhraj@bna.com

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