By Jean-Christophe Catalon
The ‘No’ vote in the Swiss referendum on tax reform was a big defeat for the government. Pressure from trading partners and big businesses will force Bern to come up with a new proposal, and fast.
Swiss voters on Sunday (12 February) massively rejected the government’s proposed third corporate tax reform (RIE III). Of the 26 cantons, just one, Vaud, voted in favour of the reform.
The reform, defended tooth and nail by the federal and canton governments, would have altered the tax system to compensate for the end of Switzerland’s special taxation arrangements with multinational companies. But now they will be forced to find another way to comply with the new requirements of the international community on taxation.
Swiss voters clearly rejected plans to overhaul the corporate tax system yesterday (12 February), sending the government back to the drawing board as it tries to abolish ultra-low tax rates for thousands of multinational companies without triggering a mass exodus.
The Brussels blacklist
Until now, companies based in Switzerland have benefitted from a so-called special tax status. This is a regulatory mechanism allowing holdings, companies and subsidiaries to pay tax at rates lower than the national corporate rate.
But the OECD decided in 2014 to establish global standards on corporate tax, putting an end to such practices, a decision that could put a significant dent in Switzerland’s economy.
European tax authorities currently lose around €1 trillion to these special tax regimes each year.
Switzerland has until 2019 to end its special tax status and conform to the new standards. If it fails to do so, Bern may find itself on the European Union’s tax havens blacklist, which is still being drawn up.
This puts Switzerland in a difficult situation. On the one hand, its trading partners say it will be blacklisted if it does not end its tax advantages for multinational companies. And on the other hand, multinational companies say they will leave if it does.
In an attempt to find a third way, the right-wing dominated Federal Council proposed a tax reform based on four main principles:
- Prioritising research and development spending and creating a “patent box”, or a reduced tax rate on revenue from patents developed in Switzerland.
- Establishing a “step up”, or re-evaluating dormant assets.
- A tax break for profits generated at canton level. In compensation, the confederation would commit to increasing the tax proceeds it allocates to the cantons.
- A notional interest deduction (NID): “To keep financial activities and holdings in Switzerland, the bill proposes to level the playing field for companies financed by their own equity or by foreign capital, by allowing them to deduct notional (or fictitious) interest from the share of equity that exceeds their base capital,” according to the newspaper Le Temps.
Why did the Swiss vote ‘No’?
The last two points – and particularly the NID – are the most controversial. “It is one of the most costly measures in the RIE III,” Le Temps reported. Opposition from the left and the city mayors crystallised around this point. Some even called it “a con”, benefitting shareholders to the detriment of taxpayers.
With the Swiss economy suffering from a crisis of purchasing power, tax-paying voters, worried about rising tax bills, were particularly susceptible to this argument. Using figures from the finance ministry, the Federal Council warned that up to 24,000 companies could move abroad, costing the country 150,000 jobs. But this argument clearly failed to resonate with voters more concerned about their purchasing power.
A new reform for 2021?
The result of the vote does not change Switzerland’s international commitments, nor does it modify Swiss legislation. Voices on both the left and the right have called for a new bill to be proposed as soon as possible. According to RTS, the Federal Council could present its next proposal by the end of this year. But Finance Minister Ueli Maurer doubts any such reform will be in place before 2021.
Can the European Union wait that long? Economic and Financial Affairs Commissioner Pierre Moscovici would not say for sure.
“The rejection of the reform demands that we redouble our efforts on taxation. The Commission plans to consult the member states to decide together what path to take if these commitments are no longer respected,” the Commissioner wrote in the Tribune de Genève.