Switzerland has been forced to reconsider its corporate tax regime, after proposed reductions to simply the system and reduce the rate encountered unexpectedly strong resistance.
The federal law that would have paved the way for corporate tax unification was adopted by Switzerland’s national council last June “with a view to enhancing the competitiveness of Swiss business”, before being presented to the electorate.
In last weekend’s referendum, the reform package was rejected 59% to 41% by voters, who suspected that if adopted it would result in reduced funding for public services and an increased tax burden on individuals. Not for the first time, the result belied the polls that had suggested that the Swiss public was divided on the issue, with the Social Democrats, the Greens, trade unions and the clergy among the strongest opponents of change.
Switzerland has made a commitment that by the end of 2018 it will fall in line with international standards by removing the tax breaks that have attracted many multinational corporations (MNCs) to set up operations in the country. This is in response to pressure from other members of the G20 group of major world economies and the Organisation for Economic Cooperation and Development (OECD) and the threat of being “blacklisted” by other countries if the system isn’t reformed within two years.
Conscious of the likelihood that scrapping the tax advantages would diminish the country’s attraction as a location for MNCs – and also Ireland’s ability to maintain a corporate tax rate of only 12.5% – the Swiss government proposed offsetting this by reducing the tax rate applicable to all corporates. The new regime, had it been accepted would also have increased allowable deductions for research and development (D&D) to encourage innovation, and introduced a so-called ‘patent box’ regime for drug manufacturers and other businesses earning revenue from patents to allow lower taxation of income from intellectual property.
The scale of the rejection, despite government warnings that a ‘no’ vote would drive foreign business away, possibly reflected the fact that Swiss voters didn’t appreciate the complexities of the planned reform, according to Martin Naville, chief executive officer (CEO) of business body the Swiss-American Chamber of Commerce. “I think it’s a very bad day for Switzerland, clearly, the uncertainty and the credibility in the Swiss system has taken a massive hit,” he commented.
Hinting at the possibility that both the Trump administration in the US and Theresa May’s government in the UK will slash their respective countries’ corporate tax rates and luring business away, he added: “All stakeholders now have to take responsibility to develop an acceptable competitive tax system, and to regain credibility regarding the famed political stability which gave Switzerland such an advantageous position.”
The country consists of 26 cantons, or federal states-several of which, such as Geneva, Vaud and Basel have been advocating sharp reductions to their corporate tax rate. Geneva was proposing to almost halve its corporate tax rate from 24.2% to 13.49% and rely on federal funds to make good some of the resulting 440m Swiss francs (CHF) revenue shortfall.
A feisty franc
In addition to the corporate tax headache, over the past two years Switzerland has periodically acted to keep its currency from appreciating too rapidly. In January 2015, the CHF’s value against the euro rose by nearly 30% when the Swiss National Bank (SNB) removed its peg against the single currency.
The SNB’s chairman, Thomas Jordan, was dubbed possibly the most hated man in Switzerland at that time, having previously indicated that the cap would be defended with the “utmost determination”. He has since consistently described the CHF as “significantly overvalued”, while the SNB has maintained a negative interest rate policy and indicated that this policy is unlikely to change soon.
Recently-released data suggested that the SNB spent the equivalent of around 9% of Switzerland’s gross domestic product (GDP) in 2016, selling CHF as part of its efforts to prevent the franc gaining further ground against other major currencies. The bank’s activity was particularly evident following the UK’s vote for ‘Brexit’ in late June and the surprise victory of Donald Trump in the US presidential election in November.
This prompted Deutsche Bank FX strategist Robin Winkler to comment: “The Trump administration has spoken out against alleged currency manipulation from China, Japan and Germany. Yet the country most at risk of meeting the [US] Treasury’s official criteria of currency manipulation is probably Switzerland.” This has possibly been mitigated by the fact that in contrast to its strength against most currencies, the CHF has only recently been gaining ground against the greenback after moving lower for most of 2015 and 2016
Winkler added that the possibility of the US penalising Switzerland for being a currency manipulator – which could even involve a 20% tariff being imposed on Swiss imports – could dissuade the SNB from continuing to intervene in the currency markets.
Nonetheless, since the start of this month, reports have suggested that the central bank has again been moving to apply gentle downward pressure on the CHF – which is currently near parity with the dollar – and protect Switzerland’s exporters.
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