Switzerland: Industry lobby groups are calling on lawmakers to bolster business innovation as they debate corporate tax reforms aimed at retaining Switzerland’s status as a location for multinationals. Parliament is currently looking at a government recommendation to replace Switzerland’s current, and controversial, cantonal corporate tax system — that grants favourable rates for profits earned abroad — with patent boxes and tax breaks for innovation activity.

 

The Swiss Business Federation (economiesuisse) has teamed up with the Swiss-American Chamber of Commerce, the SME Association and consultancy firm KPMG to produce a study that highlights the importance of an innovation-friendly environment for companies based in Switzerland.

Nearly three quarters of the 700 Swiss and international firms based in Switzerland that were surveyed said that tax breaks were an important factor in deciding where to set up their research and development facilities.
But only a quarter of these companies have actually built new R&D centres in Switzerland in the last five years. The majority of firms opted to set up such facilities abroad.

The study concludes that a number of factors may have led to this phenomenon. These include the long-running Swiss row with the European Union over corporate tax practices, uncertainty over Switzerland’s new tax regime, business unfriendly referendums, such as an initiative to curb the inflow of foreign workers and the strong franc.

Introducing new tax laws that favour innovative practice could help persuade 95% of the surveyed companies to keep their current R&D facilities in Switzerland.

"Patent boxes"

The government introduced such proposals in June, which included the creation of ‘patent boxes’ that give tax breaks on income derived from intellectual property royalties. The government also recommended giving cantons the power to grant breaks on R&D expenditure.

But the government advice to parliament was to allow companies to enjoy cantonal tax breaks on either patent royalties or research costs – not both together at the same time.

Stefan Kuhn, head of corporate tax at KPMG Switzerland, said this would be a mistake because current international opposition to corporate tax breaks threatens to limit the effectiveness of patent boxes.

“The way that the current regulatory climate is headed, the scope of patent boxes could well end up being restricted,” he told swissinfo.ch. “We recommend that cantons be given the opportunity to offer tax incentives to both patent royalties and R&D expenditure.”

Switzerland’s new corporate tax system is scheduled to be introduced at the start of 2017, but could be delayed if an opposing referendum is launched

The following is information provided by KPMG on the Swiss tax system

KPMG interactive charts on corporate and income taxes

KPMG Clarity on Swiss Taxes report

According to KPMG's "Clarity on Swiss Taxes", the downward trend in top corporate tax rates have continued to level off even further: on average, this figure is just 0.01% lower today than one year ago while the maximum average corporate tax rate for businesses in Switzerland has dropped by a total of 3.34% over the past 9 years. A year-on-year comparison of top tax rates for individuals reveals another slight 0.12% increase in the average income tax rates paid in Swiss cantons.

Business taxes: rankings topped by cantons in Central Switzerland

Like last year, the Canton of Lucerne has once again topped the list in a national comparison of corporate tax rates with a maximum effective pre-tax rate of 12.32%, followed closely by Nidwalden and Obwalden at 12.66% as well as Appenzell Ausserrhoden, which raised its rates by 0.38 percentage points from 12.66% to 13.04%. Corporate tax rates were raised at the cantonal level not only in Appenzell Ausserrhoden but also in Schwyz where the increase amounted to 0.57 percentage points. The biggest reduction was found in Neuchâtel where tax rates were cut by 1.36 percentage points. As in the previous year, the regular corporate tax rates of Western Switzerland, the Mittelland region and the city cantons are considerably lower than those in the cantons of Central and Eastern Switzerland. The highest business taxes are once again being levied on companies in the cantonal capitals of Geneva and Lausanne, namely 24.16% and 22.79%, respectively.

Once again, only the cantons of Central and Eastern Switzerland could compete in a European comparison with lower corporate tax rates found solely in the Channel Islands and some countries of (South-) Eastern Europe. In Western Europe, Ireland still represents the biggest competition in terms of standard tax rates. The Canton of Lucerne is the only canton that can compete with Ireland's regular corporate tax rate of 12.50%. In an international comparison (as of 2014), the strong financial centers of Hong Kong and Singapore were ranked among the top locations with rates of 16.50% and 17.00%, respectively.

As the current situation shows, when it comes to international competition, standard tax rates are not the only contributing factor in companies' choice of location. Political developments of recent years, driven by the EU, OECD and G20, have increased the pressure put on Switzerland and its special tax regulations even further. Over the past 12 months, however, other European countries such as Belgium, Ireland, Luxembourg and the Netherlands have come under pressure for their special tax regimes, as well. Within the scope of the Corporate Tax Reform III, Switzerland now has an opportunity to find a solution that is acceptable in terms of both foreign and domestic policy, which safeguards Switzerland's continued attractiveness as a tax location.

Call for greater transparency among corporations

There is a trend toward transparency in corporate taxation. The already foreseeable statutory and regulatory developments will not bring any turnaround in this respect. On the contrary, the new rules on transparency will increasingly be anchored in laws and international treaties. That is how the agreement with the OECD and the Council of Europe on the subject of administrative assistance on tax matters intends to handle the international exchange of information. Similarly, the OECD's BEPS action plan calls for companies to commit to preparing a country report detailing where they generate their profits, where they pay taxes, and how much taxes they pay. “Long term, we expect this information to become part of a company's public reporting,” says Peter Uebelhart, Head of Tax and a Member of the Executive Committee at KPMG Switzerland.

Individual taxes: slight increase in top tax rates

As in the previous year, the average cantonal tax rate on high incomes rose slightly. Nevertheless, enormous differences still exist between the individual cantons. When it comes to individual taxes, the cantons of Central Switzerland are also ahead: among cantonal capitals, the Canton of Zug still tops the list at a rate of 22.86% followed by the cantons of Obwalden (24.48%), Nidwalden (25.55%) and Uri (25.63%). At 26.96%, the Canton of Schwyz dropped from 2nd place to 6th place compared to the previous year (23.73%).

With a view to European countries, Swiss cantons continue to remain competitive. Only East European countries such as Bulgaria (10%), Lithuania (15%) and Hungary (16%), as well as the Channel Islands of Guernsey and Isle of Man (20%), have lower income tax rates. In an international comparison, the Caribbean offshore domiciles and a few Arab countries top the list due to their zero income tax policies followed by Asian nations such as Hong Kong (15%), Singapore (20%) and Malaysia (26%) (as of 2014). All in all, Switzerland continues to rank in the midfield with an average maximum income tax rate of 33.86%.

Replacing the Double Irish with Knowledge Development / Patent Box - Part 2

Switzerland Innovation and Taxes