Brussels is demanding concrete proposals from Bern for scrapping the generous tax incentives offered to international companies. Yet the pressure from the EU could end up boosting Switzerland’s attractiveness in the long run.This content was published on February 4, 2013 - 11:00
By mid-2013, the Swiss government needs to propose solutions for “rapidly dismantling the systems for taxing corporations used by some cantons”. This ultimatum, issued by the EU Council of Ministers in December, was repeated a few days ago by the European commissioner for taxation Algirdas Semeta.
The 27-nation bloc is going after the special tax status granted by Swiss cantons to corporations – holding companies, mixed companies and management companies – which operate outside the country and do only administrative work in Switzerland. The profits earned by these companies abroad are exempt from cantonal tax or are taxed by the cantons at a much lower rate than profits made in Switzerland.
For Brussels these tax breaks are comparable to “state subsidies”, which “distort free competition between Switzerland and the EU”. Without substantial progress in the next six months, Switzerland risks finding itself on a blacklist and exposed to retaliatory measures by the Europeans, as Semeta made clear.
Companies with their headquarters or economic activity in Switzerland are taxed by the federal government, by cantons and by communes.
The federal government imposes a tax of 7.83% on the profits of all companies.
Taxes levied by the cantons (and municipalities) lie between 4.6% and 17.7%.
About 25,000 companies – holding companies, mixed companies and management companies – get special tax breaks from the cantons: they are either exempt from tax or subject to lower tax rates for the activities they engage in outside the country.
Generally these are companies that have just moved their headquarters to Switzerland, where they confine themselves to activities like managing licences and administering the companies they own in other countries.
According to the EU, these special deals amount to state subsidies and affect free competition in the taxation realm. As such, they may even violate the free trade agreement concluded in 1972 between Switzerland and the EU.End of insertion
For Switzerland, the stakes are high. These corporate tax breaks have definitely contributed to making the country an attractive business location. In the last decade thousands of international companies have set up headquarters in Switzerland, at a time when international competition on tax rates has been increasing.
“For the past 10–15 years, both in Europe and internationally, there has been a general tendency towards reduction of taxation on corporations,” notes Martin Eichler, a specialist in tax affairs at the BAK institute of economic research in Basel. This tendency is confirmed in a study by the accounting firm KPMG: between 2001 and 2011, the average figure for corporate tax within the EU declined from 30.4 to 22.9 %.
Despite this trend, Switzerland is still well in the game. With a corporate tax rate of 21.2% in 2011 it came in well below Britain (28%), Germany (29.4%), Italy (31.4%) and France (33.3%), but well above Ireland (12.5%), which for more than a decade has opted for rock-bottom tax rates.
“For some years Switzerland has been facing more and more competition from new Eastern European members of the EU, which are making great efforts in the taxation area to attract foreign companies. At the international level we should also mention Singapore and China, which offer tax breaks for foreign companies,” notes Eichler.
The taxation rates being set by some newer members of the EU are particularly low. According to the study by KPMG, Bulgaria has a rate of 10%, Latvia and Lithuania 15%, and Romania 16%. Then come the Czech Republic, Slovakia, Poland and Hungary with rates at 19%.
“Tax rates are not the only important factor in making a country competitive, though. Several other things count, like the level of skills in the workforce, productivity, political and economic stability, the rule of law and the efficiency of infrastructures. In all these areas Switzerland is very well placed,” Eichler emphasises.
Tax rates compared
Europe’s lowest taxes on corporate profits are to be found in these jurisdictions:
Cantons Appenzell (Outer), Obwalden, Nidwalden 12.66%
Canton Schwyz 13.95%
Canton Appenzell (Inner) 14.16%
Latvia and Lithuania 15,0%
Canton Uri 15.12%
Canton Zug 15.38%
Cantons Lucerne and Schaffhausen 15.97%
Canton Glarus 16.46%
Canton Thurgau 16.51%
Canton Graubünden (Grisons) 16.68%
Canton St Gallen 16.88%
Canton Argau 18.87%
Poland, Slovakia, Czech Republic and Hungary 19%
The tax rates for the cantons include the tax levied by the federal government.
(Source: KPMG)End of insertion
In spite of these advantages, Switzerland risks losing many of the 25,000 companies with special tax status if it has to give up on the preferential treatment granted by the cantons. Faced with the pressure from the EU, Bern has been playing for time but now has its back to the wall.
“The decision clearly rests with the politicians, but I think that the EU has very good arguments in its favour,” says Marius Brülhart, who teaches economics at the University of Lausanne. “So it wouldn’t be very clever on our part just to insist on our national sovereignty and say we can do what we like. That way, sooner or later, we would be likely to end up as losers. It looks like the right time to reform our corporate tax system and make it ‘Eurocompatible’”.
This seems to be the conclusion reached by the Swiss government too, with the reform of corporate tax legislation due to be aired soon. The government wants to eliminate the distinction between profits made in Switzerland and abroad. The cantons are to be asked to give up their preferential rates and find other solutions.
Solutions are already beginning to emerge. In the last few months alone, three large cantons – Geneva, Zurich and Basel – have mooted the idea of lowering their corporate tax across the board to 13–16% for all companies, if they have to abolish the special tax status. These rates would trigger a round of corporate tax cuts in Switzerland – some of the smaller cantons have already been reducing their own rates almost to Irish levels in the past few years.
“The pressure exerted by the EU will end up making Switzerland more competitive at the international level”, believes Marco Bernasconi, who teaches tax law at the University of Lucerne. “At the same time, however, we find ourselves facing tax competition between the cantons themselves that is getting more and more dangerous.”
“Already in some cantons companies are paying in a single year what they would pay over three years in others. This kind of tax war is likely to have serious consequences for the financial health of many cantons”, says Bernasconi.
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