Corporate tax reform III was rejected by popular referendum today, with 59.1 percent of the population voting against the Swiss government proposal. The “yes” won only in four cantons: Nidwalden, Ticino, Vaud, and Zug.
The vote approved the view of the referendum committee, a coalition including the Social Democrat Party, the Greens, trade unions, and church leaders, that argued that the adoption of the new system would drive down tax revenue by CHF 2.7 billion each year, which would be passed on to citizens and risk cuts in public services.
Another factor that weighed on the result was that, late in campaign, former finance minister Eveline Widmer-Schlumpf criticized the reform, even though it was presented to the Parliament when she was minister, stating that the reform was not balanced and gave too many rights to companies.
The reform 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. Overall cantonal tax relief would be restricted to a maximum of 80%.
The aim of the reform was to make the Swiss tax system more acceptable internationally.
Switzerland’s current tax system allows holding companies and multinationals that made most of their revenue abroad to pay little income tax at the cantonal and municipal levels. This system creates strong incentives for foreign companies to relocate their head offices to Switzerland but, at the same, led to a growing number of discontented countries, mostly from the European Union.
In fact, in the past few years, Brussels increased pressure substantially on the Swiss government to abolish its special tax regimes, threatening to re-establish trade tariffs and put the country on the tax haven blacklist.
Therefore, in light of the changing international tax environment with the OECD/G20 base erosion profit shifting (BEPS) project, the Swiss government initiated a process to reform its tax system in line with the latest international standards and with the purpose of strengthening the attractiveness of Switzerland as a business location.
On 17 June 2016, the Swiss parliament approved the corporate tax reform III by 139 votes to 55. The upper house, or Council of States, voted 29 to 10 in favour of the proposition.
After parliament approved the measures, critics gathered the 50,000 signatures needed to trigger the referendum to overturn the parliamentary vote, which was successful today.
Irrespective of the vote, the cantons must abolish their special tax regimes; but, because a new government tax system will not be available, the adjustment will be considerably more expensive.
The only option for the cantons will be to lower taxes on earnings, which will lead to large shortfalls. At the same time, the government’s financial support will be withheld and the cantons, thus local authorities and cities, will be left high and dry.
The proposed reforms took three years to formulate, following consultation with the business community and several rounds of parliamentary debate. It is unclear what will happen now as there is no “Plan B.”
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
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