What are the aims of the Federal Council and Parliament with the Federal Act on Tax Reform and AHV Financing (TRAF)?
An attractive business location with internationally competitive corporate taxation and reliable retirement provision are two important foundations for Switzerland's prosperity. A competitive tax burden for companies is essential in order for Switzerland to be able to hold its own in the intense competition with other countries. The current rules were successful, but they are outdated and need to be further developed. As a result, companies operating internationally will have to pay slightly higher taxes on the whole in the future. They will have greater legal certainty in return. The overall burden will be lower for SMEs, thanks mainly to the profit tax reductions planned in the cantons. The reform will thus secure jobs and tax receipts for the future. In the interests of social compensation for companies' tax relief, the original tax proposal 17 (TP17) has been supplemented with additional financing in favour of the AHV, which will receive an extra CHF 2 billion per year.
What are the key concerns that the Federal Council and Parliament are pursuing with the AHV and tax proposal?
The AHV and tax proposal benefits the entire population. The proposal will safeguard general prosperity in Switzerland, improve the financing of AHV pensions and provide legal and planning certainty for companies. It will maintain the tax receipts of the Confederation, cantons and communes, and safeguard jobs, competitiveness and the appeal of Switzerland as a business location. The same taxation rules will apply to all companies in future. As a result, the burden for SMEs will be reduced on the whole.
What arguments are the Federal Council and Parliament using to support the proposal?
The proposal has the following points in particular in its favour:
- The need for action is undisputed: with the AHV and tax proposal, Parliament and the Federal Council pursuing two important objectives: firstly, to strengthen Switzerland's competitiveness and secondly, to safeguard jobs and AHV pensions.
- The proposal respects federalism: the cantons decide independently how they want to implement the reform. They will receive around CHF 1 billion more from direct federal tax in return. The proposal will ensure that cities and communes also receive appropriate compensation.
- The AHV and tax proposal will boost Switzerland as an attractive business location: the proposal will promote innovation with measures that are also used by other countries and are recognised by international bodies. Moreover, many cantons are planning to reduce their profit taxes. This will additionally promote investment and jobs.
- The proposal will create legal and planning certainty: tax privileges for companies that operate predominantly internationally that are no longer recognised internationally will be abolished. All companies will thus be taxed in the same way in the future.
- The proposal is balanced and transparent: it takes account of the need for appropriate social equality with the supplementary financing for the AHV. The entire population will benefit from this. Shareholders will be taxed more heavily. The cantons have disclosed their implementation plans, with the result that the effects of the proposal are foreseeable.
- The proposal will provide the AHV with an additional CHF 2 billion per year and thereby make an important contribution to safeguarding pensions. The AHV's financing shortfall will be significantly reduced. Nevertheless, the planned structural reform of the AHV (AHV 21) remains inevitable and urgent in order to stabilise the AHV financially and adapt it to social needs.
Companies want legal and planning certainty: What does this mean?
Legal certainty means that a company knows beforehand in a binding manner which tax repercussions a certain transaction will trigger in the coming years. Planning certainty gives a company the guarantee that the tax regulations will not suddenly change again and, in particular, that no retroactive changes are possible. The two types of certainty are an important foundation for investment decisions that ultimately benefit the entire business location.
How is the AHV and tax proposal better than the rejected CTR III?
The AHV and tax proposal is superior to the rejected CTR III in terms of transparency and balance. The cantons' implementation plans are now known for the tax measures in the proposal, and there is an FTA estimate of the expected dynamic effects of the proposal. The cities and communes were involved in the preparation of the AHV and tax proposal from the start and support it. The increase in dividend taxation and the restriction of the capital contribution principle help to achieve a balanced tax burden. With additional AHV financing of CHF 2 billion per year, the proposal includes considerable social compensation.
Why is it so urgent to amend the tax regulations for companies?
First, international tax competition has picked up considerably in the past two years, primarily as a result of tax reforms in competing locations such as the US, the UK and the Netherlands. Switzerland wants to maintain its competitiveness with swift action and thus secure prosperity and jobs. Second, the tax privileges granted to status companies are no longer in keeping with international standards and Switzerland's political obligations. That is causing legal and planning uncertainties for companies operating on a cross-border basis and damaging Switzerland as a location and its reputation. In order to restore legal and planning certainty, the tax privileges of status companies are to be abolished and new, internationally compliant tax instruments introduced.
Who will benefit the most from the AHV and tax proposal?
The purpose of the tax measures is to maintain Switzerland's competitiveness. The Confederation is investing in the future with the proposal. An FTA study shows that the positive effects of the proposal will predominate in the foreseeable future. According to the estimates in this study, the short-term reduction in receipts will be fully or partially recovered in the future. In the best case scenario, the AHV and tax proposal could even result in higher receipts than at present. However, the overall financial impact of the tax measures on the public sector depends on many factors, particularly cantonal and foreign tax policies and the reactions of companies. The tax measures will thus contribute to healthy public finances and secure attractive jobs. With the AHV supplementary financing, the proposal will make a significant contribution to safeguarding our most important social institution. The AHV financing shortfall will be reduced by more than half by 2030, and the search for a solution to structural issues with AHV 21 will be made easier. All of this will ultimately benefit the entire Swiss population.
Will shareholders and large corporate groups be the only ones to benefit?
No. Large corporate groups will tend to pay more taxes than they do today because the regulations for cantonal status companies will be abolished. However, they will get the necessary legal and planning certainty in return. The increase in dividend taxation and the adjustments to the capital contribution principle will tend to place a higher burden on shareholders (see next question). With the planned profit tax reductions in the cantons, the burden for them should be balanced overall.
How will the tax burden for individuals change as a result of the proposal's tax measures?
The declared aim of the proposal is to maintain the current corporate tax base with the proposed relief measures. To this end, the Confederation will invest in the cantons by increasing their share of direct federal tax from 17% to 21.2%. This will enable the cantons to reduce their profit tax rates without having to increase the tax burden for individuals. There will be a tax increase for shareholders. This will affect particularly shareholders with a stake of at least 10% in a company. In the future, 70% of their dividends will be taxed at federal level (previously 50% if the interests were held as business assets and 60% if they were held as private assets). The cantons must tax at least 50% of these dividends in the future. In return, however, these shareholders and their companies will benefit from the cantonal profit tax reductions.
Won't local SMEs and their owners have to pay the price in the end?
No, the moderate increase in dividend taxation will be offset by the planned profit tax reductions in the cantons. The same taxation rules will generally apply to all companies in the future. SMEs will tend to pay less tax than at present.
How will the proposal's tax measures be financed?
The proposal's tax measures will lead to additional receipts at the federal level, while the increase in the cantons' share of direct federal tax will result in additional expenditure. The overall financial impact of the proposal's tax measures is an estimated CHF -585 million per year. From today's perspective, the Confederation will have enough leeway in the coming years to absorb the financial effects of the tax reform (particularly the increase in the cantons' share of direct federal tax). This expenditure has already been factored into the current 2020-2022 financial plan. In the medium to longer term, the reform will have a positive impact on tax receipts, as shown by the FTA's estimate of the dynamic effects of the reform.
What is the detailed composition of AHV supplementary financing?
(in CHF mn)
Employer and insured person salary contributions
Increase in federal contribution to AHV
Full allocation to AHV compensation fund of 1 percentage point of VAT earmarked for demographic change (levied since 1999)
What will happen without AHV and tax reform?
Switzerland would become less competitive. It can be assumed that companies operating predominantly internationally would partly relocate their activities abroad or move away completely. This would result in the loss of jobs and tax receipts. The FTA's estimates regarding the dynamic effects show that the AHV and tax proposal is superior to not carrying out the reform. In the intermediate scenario, for example, the medium to longer-term receipts from the tax measures are CHF 2.3 billion higher than without the proposal. Moreover, AHV supplementary financing would lapse without the proposal. This would have to be secured within the framework of the forthcoming pension reform.
How predictable are the financial effects of the proposal's tax measures?
Estimating the long-term financial impact of the tax measures is naturally subject to considerable uncertainty. For example, assumptions must be made regarding the behaviour of companies or developments abroad. The FTA has therefore worked with different scenarios. The results show that, in most scenarios, the proposal leads to significantly more tax receipts than would be the case if the proposal were abandoned.
Why is an adjustment to the fiscal equalization system necessary?
With an abolition of cantonal tax statuses, domestic and foreign revenue would be factored into the calculation of resource potential with a full weighting. Without adjustment measures, this would result in massive upheaval. The resource potential of cantons with many status companies would rise sharply without the economic power of the cantons changing significantly in real terms. Fiscal equalization will thus be adapted to the new tax policy conditions. Consequently, the profits of all legal entities will be given a lower weighting than other receipts. This will also significantly improve the incentive for the cantons to attract new companies. In order to mitigate the effects of the fiscal equalization adjustments, the financially weakest cantons will receive a total of CHF 180 million per year from the Confederation for seven years.
How will the increase in the cantons' share of direct federal tax affect the cantons?
The cantons' share of direct federal tax is to be increased from 17% to 21.2%. Overall, the cantons will receive CHF 990 million more from direct federal tax receipts. Converted for the cantons, this will have the following financial effects:
Expected distributive effect for the cantons in the introduction year 2020 (in CHF mn) (PDF, 182 kB, 12.10.2018)
What is the post-referendum timetable?
If the proposal is adopted, the first tax reform measures could come into force immediately after the referendum and most of them could come into force on 1 January 2020.
What measures could come into force as early as 2019?
The special rate solution is in the foreground here. The cantons should have the option of applying this regulation this year. This is important especially for those cantons that have many status companies that want to give up their tax status already in 2019. If it is established that the AHV and tax proposal was adopted in the referendum, the corresponding article in the Tax Harmonization Act should enter into force on the following day.
How great is the risk that multinational companies will move away despite the tax reform?
Companies operating internationally make permanent location decisions with respect to their various activities. Various factors play a role here, including non-tax factors. Consequently, there will always be companies arriving and leaving. However, the tax reform will create legal and planning certainty as well as the conditions for companies to continue to find competitive tax conditions in Switzerland in the future.
To what extent is there pressure from abroad?
International pressure lies mainly in the fact that key competing locations have lowered their profit tax rates. International tax competition has become tougher and the tax base battle and the fight for companies and jobs have become more intense. Furthermore, Switzerland is required to abolish regulations that are no longer in line with international standards. Several years ago, it thus gave a political commitment to the EU and OECD to abolish special tax regimes for status companies.
Why is Switzerland on an EU grey list despite the tax reform?
On 5 December 2017, the Council of the European Union adopted conclusions on a list of non-cooperative countries in taxation matters. Switzerland was not on this list in Annex I to the conclusions (black list). However, as Switzerland has not yet implemented the tax reform, it is part of a group of countries listed in Annex II which the Council of the European Union describes as cooperative, subject to compliance with its obligations to adapt its tax rules to international standards (grey list).
What will happen if the tax reform is rejected?
Switzerland's special arrangements for status companies are among the harmful tax practices of third countries against which the EU intends to take action. Switzerland has been on the EU's grey list since 5 December 2017 and risks being put on the black list of countries that are described as "uncooperative" without the timely abolition of the special arrangements which are no longer accepted internationally. If this were to happen, the Swiss economy would be faced with considerable additional legal uncertainty, which would jeopardise jobs. Furthermore, Swiss companies would have to face countermeasures from the EU or individual EU member states.
What would be the consequences if Switzerland were blacklisted?
Discussions about possible countermeasures are still ongoing within the EU. These are likely to be of a tax nature in particular and to harm corporate groups that operate both in Switzerland and in the EU. Moreover, it can be assumed that the legal uncertainty for local companies would increase further. That would jeopardise jobs and tax receipts.
If the AHV and tax reform were to fail, the arrangements for cantonal status companies which are no longer accepted internationally would still have to be abolished. What would be the consequences of such an approach?
Status companies are governed by federal law. As long as this remains unchanged, the regulations continue to apply and a company which meets the requirements has the right to be taxed in accordance with these regulations. If the proposal were to fail, it would be expected that the cantons would take autonomous measures in order to counteract the exodus of their tax base. This would result in tougher intercantonal tax competition and upheaval in fiscal equalization.
Will the middle classes have to foot the bill for the AHV and tax proposal?
No. The tax reform secures added value, jobs and tax receipts for the Confederation, cantons, cities and communes. Ultimately, it will therefore benefit the entire population. Existing cantonal status companies will have to pay higher taxes. The increase in dividend taxation should be offset by the intended reduction in cantonal profit tax rates. By the Confederation making a higher proportion of the direct federal tax revenue available to the cantons, it can be ensured that the cantons will be able to reduce their profit taxes without having to increase taxes for natural persons.
Which rights qualify for the patent box?
Domestic and foreign patents and similar rights should qualify for the Swiss patent box. The term "similar rights" includes, in particular, supplementary protection certificates, protected research results and the corresponding foreign rights. Software which is part of an invention can also be patented in Switzerland ("computer-implemented invention"). This is the case when it serves a technical application, e.g. when it controls industrial processes as part of a device, technologically improves data transfer or data storage, increases a computer system's security or makes a computer system easier to use (human-machine interface). These patents likewise qualify for the patent box.
Which instruments are affected by the relief restriction?
The reduced taxation in the patent box, the additional research and development deductions and the deduction for self-financing are included in the relief restriction. Furthermore, amortisation based on earlier taxation as a status company is also subject to the relief restriction. The relief restriction is set at 70%. The cantons can also make it more restrictive. This means that at least 30% of corporate profit must always be taxed.
What are the effects of the adjustments to the capital contribution principle?
In the future, companies listed on Swiss stock exchanges will also have to pay a one-franc taxable dividend for every franc distributed from the capital contribution reserves. In the future, if such companies buy back their own shares, they will have to destroy capital contribution reserves in at least the same amount as the retained earnings destroyed. This will result in additional receipts for the Confederation, cantons and communes. In Parliament, these additional receipts were estimated at CHF 150 million.
What impact will the exceptions to the restriction of the capital contribution principle have?
The exception for moves to Switzerland is based on an economic policy objective. Statically, it will lead to lower receipts. From a dynamic viewpoint, it will boost the appeal as a business location. The exception for group relationships is likely to have only a minor impact in practice.
What is transference?
Private capital gains are generally tax-free under Swiss tax law. So-called transference is an exception to this principle. This occurs when an individual sells participation rights to a company in which he or she holds a stake of at least 50% ("sale to oneself"). Any profit from this sale is subject to income tax. However, the current statutory regulations provide for a "de minimis limit" within which the profit from the sale to oneself remains tax-free. This "de minimis limit" has proved to be a tax loophole in practice. This limit should thus be abolished with the proposal, with the result that a "sale to oneself" always leads to taxation.
How did the link between the original tax proposal 17 and AHV supplementary financing come about?
After the rejection of CTR III, it was largely undisputed that the new tax reform should be brought into balance with social equality. The Federal Council originally intended to achieve this by increasing family allowances. Since this measure would not have benefited the entire population by any stretch, Parliament decided in favour of AHV supplementary financing. This is a political compromise in the interests of the proposal gaining a majority.
Doesn't the tax reform/AHV financing link violate the principle of cohesion of subject matter?
The cohesion of subject matter is preserved with the Federal Act on Tax Reform and AHV Financing. A report by the Federal Office of Justice has demonstrated this. In the search for solutions capable of winning a majority, the Federal Council and Parliament have to make compromises and be able to integrate various issues into a single proposal. In the case of the AHV and tax proposal, Parliament started with the basic idea that the relief the reform should provide for Switzerland as a business location should be politically offset with supplementary financing for the AHV. In the case of both corporate taxes and the AHV, there is no dispute about the need for action and reform across the party landscape: Parliament has therefore decided to overcome these reform blockades by linking various policy areas.
Will the actual pension reform be delayed by this link?
The Federal Council is currently preparing a comprehensive reform of the AHV with AHV 21. This aims to ensure the financial equilibrium of the AHV and maintain the level of AHV pensions. If the Federal Act on Tax Reform and AHV Financing is adopted on 19 May 2019, the Federal Council will adjust the AHV 21 reform accordingly. However, as only some of the AHV's funding requirements would be covered with the federal act, the AHV 21 reform will remain necessary even if the federal act is accepted. The Federal Council plans to submit the AHV 21 proposal to Parliament in 2019.
Why does the AHV need additional funds?
The AHV's financial situation is increasingly deteriorating. It has had a so-called pay-as-you-go deficit since 2014. This means that it has no longer been possible to cover benefits from the contributions of insured persons and the public sector since 2014. This is primarily due to demographic developments. Firstly, the baby boomer generation will reach retirement age over the next 20 years or so. This is adversely affecting the AHV. The number of pensioners is rising faster than the number of people paying AHV contributions. AHV expenditure is growing faster than receipts. Secondly, the life expectancy of people of retirement age is increasing, meaning that the AHV has to pay out pensions for longer. For these reasons, the AHV compensation fund would be empty by around 2030 in the absence of countermeasures.