Switzerland’s tax haven reputation runs deep even with reforms

Japan Tobacco International, which has its global headquarters in Geneva, is one of the hundreds of multinational companies that are likely to be affected by the minimum corporate tax rate change. Martial Trezzini/Keystone

Swiss voters will decide in June whether the country implements a global agreement on a minimum corporate tax rate. Proponents argue this should finally put Switzerland’s shady reputation as a tax haven behind it, but critics say there’s more work to do.

It’s been more than 40 years since the so-called Gordon ReportExternal link commissioned by the US Justice, Treasury and Tax offices described Switzerland as “the prototype of the modern tax haven”. Since then, Switzerland has enacted various reforms to end special tax regimes, share tax information with other countries, and close some tax loopholes.

Nevertheless, Switzerland is still regularly named and shamed as one of the worst offenders when it comes to allowing multinational companies to avoid paying their fair share of taxes. The 2021 Corporate Tax Haven IndexExternal link, which assesses how much country laws and policies enable tax abuse, ranked Switzerland fifth just behind the Netherlands and notorious low tax islands like the British Virgin Islands, Cayman Islands and Bermuda.

The country has some of the lowest corporate tax rates in the world especially in canton Zug, home to heavyweight multinationals like Glencore, where the statutory tax rate is around 11%.

This would change if, in June, Swiss voters approve a constitutional amendment to implement a minimum corporate tax rate of 15% under a global deal spearheaded by the Organisation for Economic Cooperation and Development (OECD) and backed by more than 130 countries. If voters agree on the amendment, the higher tax rate would come into force in 2024.

After some initial reluctance, pro-business groups have come out in favour of the deal. Even if multinational companies will pay more taxes, they argue it’s an opportunity to finally change the “perception” of Switzerland as tax haven.

“Switzerland has been trying for years to show the international community that it has rules and that it is transparent and that it is part of the new tax order,” said Karine Uzan Mercié, who heads global tax at the building materials firm Holcim, at a media event hosted by economy lobby groups SwissHoldings and Economiesuisse in March.

“If it doesn’t adopt the minimum tax rate, it would be a step backwards and give a very curious and contradictory message to the international community.”

Too little to be a game-changer

There’s no universally agreed definition of a tax haven, but low to no tax rate rates are generally seen as a key feature. Other definitions also call out financial secrecy and laws and policies that make it easier for global companies to move profits to low tax regions to lower their tax burden, stripping countries, largely in the developing world, of tax revenue.

The global deal agreed in 2021 is an attempt to stem a race to the bottom on corporate taxes that saw the global average rate drop from around 45% to 25% in the last 40 years, and billions shifted to low tax regions.

Definition of a tax haven

There is no global consensus on what constitutes a tax haven. One of the early academic papers on the subject described tax havensExternal link as low-tax jurisdictions that offer businesses and individuals opportunities for tax avoidance. However, more recent definitions take a broader view to include financial secrecy and transparency. The Tax Justice Network defines a tax haven as a country or jurisdiction that “enables multinational corporations and individuals to escape the rule of law in the countries where they operate and live, and to pay less tax than they should in those countries.”

Others distinguish between jurisdictions with real business activity. The OECD used four factors to identify a tax haven in 1998, that included no substantial business activities in a country on top of a low rate and poor exchange of information and transparency. The Tax Foundation uses “tax haven” and “offshore financial centre” synonymously to some extent, to refer to small, well-governed tax jurisdictions that do not have substantial domestic economic activity and impose low or zero tax rates on foreign investors.

The 15% corporate tax rate would force most Swiss cantons, which set their own rates, to tax big multinationals at higher effective rates than they currently are. It would also make obsolete some preferential tax regimes such as lower tax rates on income from patents (so-called “patent box”), which benefit many Swiss industries including pharmaceuticals.

This should help Switzerland improve its standing in the Corporate Tax Haven ranking, but tax justice campaigners still see problems. Mark Bou Mansour, who heads communications at the Tax Justice Network, says that according to the OECD rules the minimum effective rate of 15% only applies to companies with at least €750 million (CHF750 million) in annual turnover.

This is about 200 companies with headquarters in the country and a couple thousand subsidiaries of foreign companies. This means that approximately 99% of companies in Switzerland are not directly affected by the changes. It would have been better if “Switzerland legally mandated a federal aggregate minimum floor of 15%,” said Mansour.

Dominik Gross, who leads tax policy at the Swiss NGO Alliance Sud, also argues that 15% is still too low. A coalition of civil society groups including Alliance Sud along with the US had called for a rate closer to the global average tax rate of 25%, which they say would discourage companies from moving profits around in search of the lowest rate.

“The incentive to shift production locations won’t happen at the 15% rate. As long as there is still a big difference in the amount of tax or the tax rate a company pays in different locations, there will always be profit shifting,” said Gross.  

The implementation guidanceExternal link called the GloBE rules, published this February, also don’t do away with some special regimes in Switzerland that benefit holding companies including tax relief on divideds and capital gains income. Some sectors like commodity trading and shipping also have some reprieve, especially if Switzerland goes ahead with plans for a tonnage tax that would tax companies based on loading capacity rather than profits.

There’s also room for improvement on transparency, said Mansour. Switzerland has signed treaties with some 90 countries for the automatic exchange of tax information but there are still high levels of secrecy in the financial sector and beneficial ownership. There is also no requirement for companies to make public their country-by-country tax reports. This makes it difficult to know how much tax avoidance is happening.

New tax perks

Critics also take aim at new provisions in the GloBE rules to appease low-tax countries like Switzerland, Ireland and the Netherlands that see a higher rate as a threat to their attractiveness with multinationals.

The rules include a substance carve-out that allows companies to deduct a certain amount of income from assets and payroll expenses from their tax base. This lowers the tax burden as long as the companies have real business activity on their soil.

To achieve the effective 15% rate, the OECD also allows a top-up tax or what the Swiss government refers to as a supplementary tax levied on excess profits when the tax rate is below the minimum rate. A company that has been paying a 11% rate in Zug will therefore have to pay a supplement of 4% on its profits.

There are no restrictions on how revenue from the supplementary tax is used. Some cantons have already indicated that they plan to use the money to channel subsidies back into multinational companies to compensate for any loss in attractiveness due to the lower tax rate.

This is one of the factors that brought economic lobby groups on board with the deal. But tax justice campaigners argue this defeats the stated aim of the minimum tax rate, which is to level the playing field.  

“This turns the minimum corporate tax rate into a tax haven rewards programme,” writes Gross from Alliance Sud in a recent blogExternal link suggesting the revenue be used for social projects. “The biggest problem of this reform is that countries like Switzerland, who until now were the ones accelerating the race to the bottom by providing the strongest incentives for profit shifting, are the ones who get practically all the additional revenues from the minimum tax.”

Other low-tax jurisdictions such as Bermuda have also been toying with the ideaExternal link of using the tax revenue to boost country competitiveness such as through lower payroll taxes or customs duties.

Different kind of haven?

Whether Switzerland can still be called a tax haven is in the eye of the beholder. Experts say that under the deal, Switzerland will remain a low-tax country but in contrast to decades ago, it is increasingly playing by international rules, some of which it is involved in shaping through processes like the OECD.

These rules steer Switzerland towards a tax policy that favours real business activity on its soil as opposed to letterbox companies that are just looking for a low tax rate and few questions from authorities.

This is progress, says Kurt Schmidheiny an expert in tax competition at the University of Basel.  The deal will reduce “Switzerland’s attractiveness for footloose foreign capital and profits and hence reduce base erosion in high-tax countries.”

The country’s biggest taxpayers are already multinational enterprises with substantial research and development, administration and production in the country, such as Nestlé, Novartis, Holcim and Roche.

“Tax competition is not a bad thing. The global minimum tax does not actually stop it, though it does curb it in some ways,” said Daniel Bunn, CEO and President of the Tax Foundation, a US-based thinktank. But people “hoping for a higher rate and fewer levers to compete for investment will continue to be disappointed with Swiss reforms”.