During a referendum held on Sunday, February 12th, Swiss voters rejected the government’s plan for corporate tax reform, putting a severe dent on the country’s plans to fall in line with global standards by 2019 and move away from being labeled a tax haven.
Switzerland originally put together this plan to eliminate special tax breaks enjoyed by a myriad of foreign multinational companies (MNCs) set up in the country, while providing them with enough incentives to stay put.
Part of this incentive plan consisted of discounts for partaking in research and development in the country and tax breaks linked to profits accrued from locally created patents, as well as deductions on excess company equity.
More specifically, as explained by Davide Anghileri for MNE Tax, this proposal “would have replaced Switzerland’s preferential tax rates with a lower universal tax rate applicable to all companies and introduce a patent box regime, an R&D super deduction, a notional interest deduction on surplus equity, and tax-neutral treatment of built-in gains upon the relocation of a company to Switzerland with a corresponding step-up in tax basis.”
As reported by Matthew Allen for Swissinfo.ch, “the likes of Vaud and Geneva [cantons] planned to slash levies practically in half to ensure that foreign firms, which currently enjoy preferential treatment, would not face too steep a hike in their tax bills.”
This governmental attempt, however, met plenty of resistance with close to 60 percent of the voters opting to scrap the government’s corporate tax reform and defy both the OECD and European Union.
The opposition—led by the Social Democrats, the Green Party, trade unions and the clergy—campaigned on the notion that further tax breaks and deductions would lead to higher income taxes and cuts in public spending to make up for the drop in total revenue.
According to the opposition’s estimate, close to CHF 2.7 billion would be lost each year via the implementation of this corporate tax reform.
Vania Alleva, president of trade union Unia, said, “We’ve succeeded in showing citizens what negative effects this reform would’ve had – we calculated that it would have generated an additional tax burden of 1,000 francs per households and cuts to public services, such as schools.”
Following this loss, Finance Minister Ueli Maurer said, “It will not be possible to find a solution overnight," also asserting, as reported by Reuters, “it could take a year to come up with a new plan and years more to implement it.”
This obviously puts in jeopardy the country’s plan to reform its corporate tax system by 2019, as for the time being there is no Plan B.
Switzerland Risks Being Blacklisted?
One of the main issues to arise from Sunday’s vote is the possibility of Switzerland finding itself on the OECD’s blacklist, which in turn could lead to an exodus of foreign companies based in the country.
As expressed by Andreas Staubli, managing partner at PricewaterhouseCoopers AG in Zurich, “Lots of uncertainty about the future has arisen, and there’s concern about reactions by the OECD and the EU, because there’s the risk of a blacklisting of the current regime – this will force international companies to think about alternatives.”
“What will happen first is that new investment decisions will be made in favor of a place other than Switzerland,” Staubli added.
Furthermore, Peter Uebelhart, head of tax of KPMG Switzerland, said that, with this rejection of the corporate tax reform, companies now “do not know what [tax] measures will be available...That is not a very solid basis for making investment decisions."
Pascal Saint Amans, tax boss at OECD, told Les Temps on Monday that Switzerland is facing some pressure to “dismantle its schemes within two years.”
According to Saint Amans, what’s at play “is the credibility of Switzerland, which is committed to dismantling its regimes. She has to do it. If she does not, it will not go unnoticed.”
Additionally, the EU expressed its disappointment with the result.
Pierre Moscovici, EU commissioner for economic affairs, said, “The [European] Commission is very disappointed by the results of the referendum in Switzerland…The rejection of the reform and referendum means we need to redouble our efforts when it comes to taxation.”
In the past, Brussels had also threatened Switzerland with reintroducing trade tariffs.