Global corporate tax expert Daniel Bunn argues that changing the income and property tax regime, not government subsidies, is a smart way to keep Switzerland attractive to multinationals amid concerns about a global minimum corporate tax rate.
Last year, when more than 130 countries agreed to a global minimum taxExternal link, one question should have been raised, but wasn’t: who does this benefit?
It turns out that the countries best positioned to benefit are those with high corporate tax burdens and very complex tax systems. Governments in the UK and the US want to levy higher taxes on business profits, and it is easier to accomplish that goal when other countries minimise the competition by also agreeing to a minimum tax rate.
Despite the tilt toward higher tax rates, many low-tax jurisdictions like Switzerland have a chance to succeed in this new environment.
The global minimum tax agreement means that even if Swiss tax rules don’t change, business profits in Switzerland will face a tax burden of at least 15%, which is higher than the tax rate in many Swiss cantons where multinationals are located.
The additional revenue could be collected by other countries where Swiss subsidiaries have their headquarters or by countries where the subsidiaries of Swiss-headquartered companies reside. Or the revenue could be raised in Switzerland.
Finance Minister Ueli Maurer has seen through this puzzle and made it clear that “if that 15% has to be collected, then we want it to be collected here in Switzerland”.
So, if additional revenue is to be raised, should the Swiss government pocket the change or adjust the tax mix and reduce taxes in other ways? If it wants to stay competitive, it ought to do the latter.
Corporate tax is not the only tool in the fiscal toolbox when it comes to either revenue or competitiveness.
Although Switzerland has become well-known for low corporate taxes, individual income taxes and property taxes are not that low. Switzerland relies more heavily on personal income tax revenues than other developed countries. It is also one of a small handful of developed nations that operate with wealth taxes. In fact, the multiple levies on property, including real estate transfers and corporate equity, make Switzerland’s property tax system third worst in the developed world according to the Tax Foundation’s International Tax Competitiveness IndexExternal link – just ahead of Spain and Italy.
If Switzerland is to lay claim to additional revenues from businesses without losing out on future investment, improving its income and property tax systems for investors and high earners is a good place to start.
Already, the finance minister has expressed openness to these ideas as they’ve percolated in the cantons. As he said recently, “I could well imagine that some cantons will flatten out tax progression a bit to become more attractive for high-income employees”. Governments across the country should recognise that lower income tax rates can be attractive to mobile workers, and companies with high labor costs can benefit from a tax cut that benefits the workforce.
One path that the cantons and the central government should avoid is taking the higher revenue from corporate taxes and using it for direct subsidies to businesses hit by the new burden. The global minimum tax will not be blind to such subsidies and will tax them as income. If there is an escape from the rules, subsidies do not provide such a route.
The global tax deal does present some opportunities for reforms that are supportive of business investment and hiring. These are what the deal labels “substance-based carveouts.” A share of the value of investments in assets like new factories, research labs, and equipment will be excluded from the minimum tax calculations alongside a share of wages and salaries.
The government should make the most of these carveouts by ensuring that costs for investment are fully deductible through immediate expensing for capital investments. This means that the costs of a new research lab or renewable energy project would be immediately deductible rather than being used to offset profits over many years. An improved tax climate for high earners also meshes with the carveouts.
What the government should avoid is unnecessary complexity. The new global rules will dramatically increase the challenges that companies face when assessing the tax costs of new projects. If Switzerland can adopt rules and guidance that provide clarity and certainty to businesses, then that could set it apart in the new regime.
Though the global tax deal has been shaped by and to the benefit of jurisdictions with high corporate tax burdens and significant complexity, Switzerland has options that will allow it to continue to thrive. This will require significant legislative work, but a shift in the tax policy mix and a keen focus on simplicity provide the most reasonable path forward.
The views expressed in this article are solely those of the author, and do not necessarily reflect the views of swissinfo.ch.