Address by President Hans-Rudolf Merz; 17th International Europe Forum Lucerne; KKL Lucerne, 2 November 2009

For the Swiss, tax competition is in their blood. It is an expression of federalism and democracy. The large say on the part of taxpayers regarding the expenditure and revenue of their state not only results in healthy public finances, but also trust between citizens and the State. Switzerland has to retain its leading position in international tax competition. The Federal Council and the finance minister are pushing forward with the necessary reforms.


Ladies and gentlemen,

I am a regular guest in Lucerne and at the KKL. In August I was right here in this very hall at the Lucerne Festival enjoying the sounds of Prokofiev and Mahler. So after having enjoyed the venue’s cultural offerings it is now time for the conference. I would like to warmly thank the Europe Forum Lucerne for this invitation. Even the theme could not have been better chosen.

Tax competition is one of the most frequent themes with which I am confronted as finance minister. Many praise it, others criticise it, but no one doubts its importance. This importance has grown in recent months. I will begin by letting you into the secret as to why Switzerland has always been successful in terms of tax competition. And secondly, I will explain to you why I am committed that it should stay that way.

Firstly, the secret – admittedly a rather open secret: Switzerland has a liberal system of government, the ideal foundation for competitive tax policy, with its federalist structure and direct democracy:

Switzerland's federalism grants the 26 cantons far reaching autonomy in financial and fiscal policy. Each canton is responsible for its own budgetary policy and is also at liberty to set the level of its own taxes. Tax competition is therefore nothing new for Switzerland. Indeed, it is in our blood. Tax competition forces the public sector to be responsible and economical with public funds. Tax competition therefore contributes to healthy public finances. It guarantees citizens a modest-sized State and protects their property from inefficient tax cartels. We should bear that in mind should we come to vote on a tax harmonisation initiative in the not too distant future.

In turn, direct democracy means that the government's tax policy has to enjoy the support of a majority of the people. That applies to the local authorities and cantons, as well as to the federal government, in other words from the communal assembly in the Bären to the federal vote, e.g. the vote at the end of September on the limited increase in VAT to remedy invalidity insurance. Such a grassroots social consensus is not simply guaranteed, but must continually be affirmed and renegotiated. The electorate's final say, even in tax matters, guarantees moderate taxation.

Federalism and democracy not only contribute to healthy public finances. They also have the valuable effect of ensuring trust between the citizen and the State, and that in both directions.

The issue of mutual trust between citizen and the State is particularly important at the present time. In times of financial and economic crisis, all states have to struggle with reduced revenues and increased expenditure. They feel obliged to find means of boosting their revenue. In this connection, a number of states believed to see the root of this evil in the fiscal probity of some of their citizens, and in the insufficient exchange of information with some states. I believe it is a serious mistake for political actors to focus one-sidedly on a minority of tax evaders. Such a policy ignores the vast majority of taxpayers, who diligently and properly contribute their share to public finances.

I am convinced that the closer that these decisions on state revenues and spending are to the people, the greater the acceptance of the taxes imposed. I presume that no one here is particularly keen on paying taxes – to be perfectly honest even as finance minister I am not hugely keen, even though the money goes into my own pocket as it were. But taxes are the price we pay in order to receive a diverse range of public services. The more say we have in these services and taxes, the more likely we are able to identify with our own tax policy. And the greater our level of honesty in paying taxes, because we feel able to trust the State, which is ultimately our State.

It is a poor reflection of the State if it distrusts its own citizens and places them under a blanket of suspicion. Instead, it must always reflect on the legitimacy and trustworthiness of its own tax system. Otherwise there is a risk that citizens for their part will lose their trust in the State. For the State also faces competition to earn the favour and trust of the citizen. And I am proud that Switzerland also occupies a leading position in that competition.

Being in a situation to offer appealing tax conditions is not something that is achieved and forgotten about, it is a constant process. A process that is taking place in a highly dynamic environment. I would like to briefly outline the reforms I have lined up in order to maintain the competitiveness of our tax system.

A significant milestone on that path is the VAT revision adopted by parliament in June. It will cut the administrative burden for businesses by around 10%. And this will rise to 30% if parliament also approves the flat-rate for VAT and the elimination of most special exceptions. It is now a case of fighting for this reform. 

Under the next reform of corporate taxation, the competition reform, the Federal Council intends to relieve companies from unnecessary tax burdens and improve legal certainty. In order to achieve these aims, we want to abolish stamp duty, improve the investment deduction for legal persons and eliminate fiscal barriers to company financing. Furthermore, the rules governing cantonal holding and management companies should also be amended.

To that extent this reform is also broadly related to the tax dispute with the EU. As you well know, the EU is critical of the cantonal arrangements for holding and management companies. The legal justification cited by the EU, that they contravene the free trade agreement of 1972 is, in the Federal Council's view, unfounded. That is why it refused to enter into negotiations from the very beginning. It is however conducting a constructive dialogue with the European Commission. The Federal Council and the cantons are working on the issue intensively. We would like to resolve the dispute as soon as possible. It is vital that we re-establish the legal certainty which is of the utmost importance to businesses. The general fiscal conditions for the companies concerned should also remain attractive. The competition reforms sought by the Federal Council will relieve our firms of around 500 million francs a year.

Part of strengthening Switzerland’s standing as a location for business involves obtaining international recognition of our taxation policy. This includes the extended policy on administrative assistance, as decided by the Federal Council on 13 March this year. In future we will also be able, upon request, to provide international administrative assistance with regard to specific, justified individual cases of tax evasion – but not in response to fishing expeditions. Banking secrecy at home is not affected. Switzerland has thus proven that it supports the intensified international cooperation in tax matters. We are implementing this revision consistently in the form of bilateral double taxation agreements. The Federal Council does not want a multilateral agreement with the EU. Success has proven us right. In a very short space of time we have negotiated over a dozen such double taxation agreements. The international community has already recognised this, and the OECD has removed us from its ominous grey list. At the same time Switzerland has managed to achieve valuable improvements during these negotiations for its industrial centre. I am therefore very confident that parliament, and if necessary the people, will support the new agreement.

The new policy on administrative assistance also has an impact on other dossiers, particularly the existing agreement on the taxation of savings income with the EU. The Federal Council has indicated that Switzerland is open to discussions, if the EU so wishes. The current agreement is known to contain possible loopholes that need to be closed. However during these negotiations, the EU will have to accept that the agreement needs to be adapted to the new situation, i.e. Switzerland’s comprehensive administrative assistance, so that equilibrium can be re-established.

The transition to an automatic exchange of information, as practised in numerous EU member states remains out of the question. This practice is not only questionable in terms of its effectiveness. It is also contrary to our understanding of privacy. Furthermore, Switzerland and the EU have found an equivalent solution accepted by both sides in the form of agreement on the taxation of savings income. Switzerland applies a system of tax retention on interest payments on behalf of the state of residence, which is ultimately of more benefit to the country in question than innumerable reports of taxpayers’ names.

A further interesting project in the international context is the idea of a withholding tax. My Department is currently examining the advantages and disadvantages of such a system in conjunction with the banks that presented the idea.

In closing I would also like to mention two tax reforms that we have just been able to conclude – despite the difficult financial situation: tax relief for families with children and the equalisation of cold progression. Both reforms come into force at the beginning of 2011. Switzerland has thus sent out a strong signal in economically difficult times for a consistent economically and citizen-friendly tax policy, which is designed to leave as much money as possible in taxpayers’ pockets.

Ladies and gentlemen: in closing I can assure you that the Federal Council and I as finance minister will do everything in our power to retain our leading place in terms of tax competition. We are well equipped to do so. That way our tax policy will remain consistent, client-oriented and liberal.

Publisher:

Federal Department of Finance

Internet: http://www.efd.admin.ch