From January 1, 2019, Switzerland will be the only country in Europe where employees’ taxes are not deducted directly from their wages. Despite numerous parliamentary initiatives, Switzerland is not yet ready to introduce withholding tax.
Swiss taxpayers and foreigners who hold a C residence permit (longer-term stay) must submit a tax return every year from which their taxation is calculated. Switzerland’s federal structure means that taxpayers pay a tax at national, cantonal and communal level. The former is a direct federal tax levied by the cantons on behalf of the Confederation.
In general, it is possible to pay cantonal and communal taxes in instalments over one year. The number of instalments varies from canton to canton. Some even provide for a monthly payment or the possibility of paying everything at once. At the end of the tax year, the administration calculates a final tax demand to determine whether these advance payments were sufficient to cover the bill – or not.
The income of foreigners without a C permit is subject to withholding tax. Their employer deducts taxes directly from their monthly salary and pays this amount to the tax authorities.
But there are exceptions. In most cantons where French cross-border workers are employed (Geneva is not one of them), they only have to declare and pay their taxes in their country of residence, so they are not subject to withholding tax. The French state then transfers part of the tax to the Swiss cantons and municipalities in which these commuters work.
Over the last century, the vast majority of industrialised countries have evolved from a so-called declaratory tax system to a withholding tax system. In Europe, Germany was a pioneer in this field and adopted this system as early as 1925.
France and Switzerland are the only countries that have not yet introduced withholding tax. But France will switch to the new system from January 1, 2019, a reform that has been carried out with great difficulty. From that date, Swiss workers will be the only ones on the continent not to have their pay slips reduced by income tax.
In recent years, several parliamentary initiatives have been submitted with the aim of introducing withholding tax in Switzerland - most recently this autumn. But the idea was once again rejected by the government and is therefore unlikely to obtain parliamentary approval.
The Federal Council (Swiss government) says withholding tax would represent an excessive administrative burden for companies, taxpayers and administrators, "especially if the workplace and residence are not in the same canton”.
In a recently published study by collection agency Intrum, the Swiss rank as second worst payers on the European continent, just behind Greece. Tax claims are cited as the main reason for late payments in Switzerland.
Direct and automatic deductions of tax from wages would solve this problem to a large extent, say supporters of this withholding tax system. Taxpayers would know exactly how much money they had at their disposal without having to worry about their tax bills.
Withholding taxes would benefit those taxpayers who fulfil their civic financial obligations and ultimately lead to fewer tax losses for the state, they say.