Special tax regimes in Switzerland’s cantons should be abolished. But the corporate tax reform before voters on February 12 is an overloaded vehicle that will lead to new tax loopholes and deplete Switzerland’s public services, argues Prisca Birrer-Heimo.
For decades, Switzerland has allowed international companies to reduce their tax burdens if they set up headquarters here. So-called status companies (holding companies, “mixed” companies and domiciliary companies) have enjoyed tax privileges and Switzerland has become a low-tax destination internationally. The special tax regimes served solely to allow taxes on profits earned in other countries to vanish. The money is therefore not available for public use in the countries concerned – for schools, health or social services.
The Social Democratic Party has long criticised these practices and demanded that Switzerland should end this international “tax dumping”. The conservative parties and the federal government refused to address this for a long time.
It was only when international pressure became too great and the mounting risk of landing on blacklists threatened Switzerland’s vital export business that the government agreed to eliminate these tax privileges for “status companies”.
The problem is that both the federal government and individual cantons such as Geneva, Vaud, Zug and Basel City have become so dependent on these companies that a substitute had to be created for these privileges. Therefore, cutting existing tax privileges would be countered with new privileges and enormous tax gifts. On the one hand, taxes for all companies – even those which have paid reasonable taxes until now – will be drastically reduced. On the other hand, new tax loopholes will be created.
The government had proposed counter measures to limit the tax shortfalls. But parliament, which shifted to the right after the elections in 2015, scrapped these compensating measures and completely overloaded the government’s original draft.
Instead of taking the majority it had won among shareholders and companies with the new tax gifts, even more loopholes were added. These included, for example, new tax-saving instruments, such as interest-adjusted tax on revenue – which means that companies can deduct fictional interest costs on the part of equity not even paid, or deduct 150% for research and development, which is more than the actual costs.
The precise financial effects are as yet unknown. Many city finance directors fear that these instruments, together with the reduction in the tax rate, will lead to enormous shortfalls. The government admits to shortfalls of at least CHF3 billion for the central government, cantons, cities and local authorities, but hopes that this will be compensated by an increased number of companies moving to Switzerland.
That will lead to a renewed reduction in the tax base elsewhere. Alliance Sud is among the development organisations to issue a warning: “From the development policy perspective, it is above all the various new special tax regimes that the government and parliament want to introduce with Corporate Tax Reform III that are problematic.”
What purpose does the interest-adjusted tax on revenue now serve other than to allow more ways to avoid tax on profit?
It is clear that Corporate Tax Reform III will lead to increased tax competition in the cantons, a “race to the bottom”. On top of the reductions in tax on revenue already announced – in some cases massive cuts – there will be new tax loopholes.
The budget gap of billions that Corporate Tax Reform III will cause to public coffers must be bridged. This can only happen with a decrease in public services; for example, in education, in supplementary income benefits and health insurance subsidies, and in higher taxes and fees. That affects small and medium-sized companies, families and pensioners.
A “no” to Corporate Tax Reform III will pave the way for a fair, more balanced reform that will be financed by businesses.
Translated from German by Catherine Hickley