Switzerland Politics February 2017

Switzerland

Switzerland: Corporate tax reform set to be approved in February referendum, expected to reap rewards for the economy

January 30, 2017

On 12 February, citizens will decide on the future of Switzerland’s current tax haven status in a crucial vote. On the voting slip is the Corporate Tax Reform III (CTR III), which is aimed at scrapping the preferential tax regimes for multinational companies in order to comply with international standards and thereby avoid retaliatory measures by international organizations such as the EU and the OECD. Simultaneously, CRT III envisages new measures to safeguard the competitiveness of Switzerland’s tax regime, which will, in essence, put international and domestic firms on a par by keeping rates low for both. According to a recent poll carried out by the leading GfS Bern research institute, 50% of the citizens will accept the reform, 35% will reject it and 15% are still undecided, though another poll by Swiss media company Tamedia foresees a somewhat closer vote. If approved, as expected, the reform will come into force on 1 January 2019, though the cantons will likely start reducing corporation tax rates beforehand in anticipation.

CTR III includes an equal corporate tax rate for national and foreign firms of 12%—20%. In order to offset the nationwide tax increase for multinational companies stemming from the elimination of their special status, the cantons are expected, in turn, to reduce corporate income tax rates for all firms, both domestic and international. Other incentives will include the introduction of a “patent box” with a tax reduction of up to 90% for income stemming from intellectual property rights, and a massive deduction on research and development expenses, among others. In consequence, the average of all cantonal corporate tax rates is expected to decrease slightly, though the outcome will vary somewhat by canton.

Economists expect CTR III, given its compliance with international legislation and at the same time still favorable tax conditions for companies, to assure a steady or higher number of companies choosing Switzerland as a location, which will create jobs and generate earnings. The reform gives firms foresight on the tax system and complies better with international tax standards, allowing companies to plan strategically and reduce their bureaucratic load. This will enhance the political and economic stability that has always been one of Switzerland’s main sources of attraction for businesses.

One of the most debated points of the reform has been its consequences for fiscal revenues at cantonal level, which are expected to decline following the introduction of CTR III since the cantons will have to reduce taxes on corporations overall in order to stay attractive for multinational firms. This will lead to a shortfall in revenue, estimated at between CHF 3 and 4 billion and representing 3.5%–4.5% of the sum of cantonal revenues for one year. Therefore, opponents claim that households will have to pay for the reform as they foresee an increase in personal income tax or the implementation of austerity measures in order to plug the expected fiscal gap. At the same time, since the corporate tax for multinational firms resulting from the reform will be higher than in some other traditional tax havens such as Ireland, Switzerland may lose some multinationals to its competitors, notwithstanding the afore-mentioned new competitive advantages.

Perspectives from our panel of analysts

Overall, our panel of analysts sees CTR III reaping positive rewards for the Swiss economy. Though public revenues, especially at cantonal level, will decrease in the short term, the medium- and long-term effects of the reform are projected to more than compensate for the imminent shortfalls.

Nikolay Markov, economist at Pictet Asset Management, draws the attention to the different channels through which the reform should benefit growth, foreseeing a “positive impact on business investment, hiring decisions and firms' competitiveness”, but a “negative short-term impact on public finances which should be compensated by an increase in the number of firms coming to Switzerland in the medium to long-term.”

Martin Eichler, chief economist at BAKBASEL highlights the different areas of the economic system which will benefit from the reform:

“Thanks to CTR III, fiscal competitiveness can be maintained and the departure of the majority of the companies which currently enjoy special tax status can be averted. This safeguards added value and employment, benefiting not only the population but also the social insurance system in the form of contributions and the public sector in the form of further tax revenue. Hence CTR III is not only compensating special status companies for their loss of special taxation but is also associated with macroeconomic benefits.”

Janwillem Acket, chief economist at Julius Baer Group, underlined the expected effects on the private sector: “Business climate, R&D spending and competitiveness will profit medium to longer term. In the end this will show up in a firm labor market and a robust GDP growth trend.”

Should the reform get rejected at the polls on 12 February, analysts paint a rather bleak picture of the economy.

Cornelia Luchsinger Jaggi, senior economist at Zürcher Kantonalbank, sees regulatory uncertainty as the main risk:

“Uncertainty is the biggest risk, at least short-term. My personal belief is that, if the reform does not pass, this will affect competitiveness and investment negatively.”

Janwillem Acket, from Julius Baer Group, foresees Switzerland losing its attractiveness for multinationals without the reform:

“Corporations will leave the country and foreign corporations shun away from Switzerland, due to competitive disadvantages.”

Martin Eichler, chief economist at BAKBASEL expects a new reform agenda to be required in this scenario:

“Loss of attractiveness and an extended period of absence of reliable planning and legal conditions, consequently less investments and jobs. But it is clearly accepted that an alternative reform is needed quickly to avoid international isolation. We do expect an alternative reform, therefore international punitive measures are not a likely outcome if the reform doesn’t pass.”

Nikolay Markov, from Pictet Asset Management, adds that:

“There are no strong downside risks for the Swiss economy if the reform does not pass. However, against the backdrop of a strong domestic currency which is already weighing on corporate profitability, if the reform does not pass it would undermine the medium to long-term competitiveness of Swiss corporations. In that respect, it would represent a missed opportunity.”

Switzerland’s economic outlook is broadly stable, given that panelists expect CTR III to pass. FocusEconomics panelists for Switzerland see GDP growing 1.5 in 2017, which is unchanged from last month’s forecast. For 2018, they see growth at 1.6%


Author: Marlène Rump, Senior Data Analyst

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