Institute for Research in Economic and Fiscal issues

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Taxation in Switzerland compared to other European tax systems

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Taxation in Europe - Yearbook 2013

Switzerland

Internally, corporate taxes have been lowered further in several cantons. Much uncertainty surrounds the planned corporate tax reform to increase acceptance of the Swiss tax system towards the European Union, which has been criticizing some cantonal corporate tax rules for years and is expecting progress on the part of Switzerland. In the field of international tax compliance of non-resident clients of Swiss banks, agreements have been implemented with Austria and the UK on a withholding tax designed to regularize the situation of potentially untaxed assets, and with the United States on a simplified implementation of its controversial FATCA legislation.

Corporate taxes going down further in the cantons

The trend to lower corporate taxes carried on in Switzerland. For 2013 corporate income tax rates have been lowered slightly in three cantons: Basel-City, Neuchâtel and Zug. In December 2012, however, citizens in the city of Lucerne voted in favour of a tax increase (after adopting record low rates in recent years), and citizens in the canton of Zurich refused a government proposal to cut taxes, signalling that in some cantons a threshold has been reached. In addition, much uncertainty surrounds the contemplated Swiss-wide reform to solve the tax dispute with the European Union over some cantonal tax regimes (see section below). New measures may be needed to increase international acceptance of the Swiss system while maintaining the country’s competitiveness, which calls for a difficult act of balance.

The average tax burden in the cantonal capitals (including direct federal tax) went down from 19% to 18% since 2009 according to an estimate. The effective tax burden is lower than statutory tax rates since taxes can be deducted as business expenses. Differences between cantons, however, remain substantial (Table 1). The most attractive cantons have corporate income tax rates between 11% and 12%, about half as much as in the most expensive canton, Geneva. Yet Geneva, together with Vaud, Basel-City, Zurich and Zug belong to the cantons that would be most impacted by legal modifications to solve the dispute with the EU, and Geneva’s cantonal government has tentatively announced it might choose to reduce its corporate tax rate to 13% for all companies. Otherwise it could face migration of companies to lower-tax cantons, or to overseas locations.

Table 1: Corporate income taxes in 2013 in the Swiss cantons (including 8.5% flat federal tax)
Effective tax rate (%) in cantonal capital cityLowest-tax commune in the canton
Lucerne 12,20 Meggen 11,18
Schwyz 13,95 Wollerau 11,56
Appenzell A.-Rh. 12,66 canton-wide rate
Nidwalden 12,66 canton-wide rate
Obwalden 12,66 canton-wide rate
Appenzell I.-Rh. 14,16 canton-wide rate
Schaffhausen 15,97 Rüdlingen 14,57
Zug 14,80 Baar 14,70
Uri 15,14 misc. 14,79
Thurgau 16,43 Bottighofen 15,12
Glarus 16,46 Mollis 16,41
Fribourg 19,63 Greng 16,61
Graubünden 16,68 canton-wide rate
St. Gallen 17,14 canton-wide rate
Ticino 20,67 Paradiso 18,21
Solothurn 21,80 Däniken 18,30
Zurich 21,17 Rüschlikon 18,71
Basel-Country 20,70 misc. 18,77
Aargau 18,87 canton-wide rate
Bern 21,64 Ittigen 19,88
Jura 21,14 Boncourt 19,99
Neuchâtel 20,94 canton-wide rate
Vaud 23,48 Coinsins 20,95
Valais 21,57 canton-wide rate
Basel-City 22,18 canton-wide rate
Geneva 24,17 Genthod 23,22
Source: Pascal Hinny (ed.), Steuerrecht 2013, Zurich, Schulthess-Verlag, 2013.

Tax dispute with the European Union: the search for a solution goes on

Corporate taxation is an important component of international competition between business locations. However, the attractiveness of Switzerland’s taxation system is also causing its international acceptance to be regularly questioned, often with dubious arguments, such as the European Union’s complaint that some cantonal tax regimes violate the 1972 free-trade agreement between Switzerland and the EU. Although the European Union has been criticizing some Swiss tax practices since 2007, the issue has gained in momentum following the increasing financial and economic difficulties in many European countries as a result of fiscal mismanagement and irresponsible public governance, leading to a desperate quest for more tax revenues.

The Swiss government has stressed that it remains "firmly committed" to Swiss sovereignty and open tax competition. It has also highlighted the special tax regimes applied in the EU as well as the public subsidies to industries and companies that distort competition in many European countries. However, in 2012 it entered into a "dialogue" with the EU, whereby various meetings at the political and technical levels have already taken place. The three objectives of the dialogue, from the Swiss government’s standpoint, are the preservation and further development of Switzerland’s attractiveness as a business location, the promotion of international acceptance of the Swiss tax system, and the safeguarding of "sufficient" tax revenues to finance public activities. Brussels now expects "concrete progress" from the Swiss side by the summer of 2013 as to which solutions could solve the controversy. The issues raised concern mostly the allocation between domestic and foreign profits and their tax treatment, in particular for holding and service companies that carry out various functions of headquarters (such as strategic planning, financing, research and development, etc.) but have no commercial activity in Switzerland.

Since September 2012, the central government and the cantons have been working together closely on drawing up a series of corporate tax measures. The project would reform the corporate tax system in a way that ensures competitiveness and international acceptance, but it is still unclear in which direction it will go. A steering body working on this is composed of four equal representations from the Confederation and the cantons, and is chaired by the Head of the Federal Department of Finance. Needless to say, the stakes are very high for Switzerland as one of the world’s most competitive economies. It is suspected that the EU is simply pursuing its usual "raising rivals’ costs" strategy to increase its relative attractiveness, instead of carrying out competitive reforms itself. The Swiss government is well aware of that dimension, which is not only harmful for Switzerland, but for the whole of Europe, as it raises the costs of doing business.

Withholding tax for Austrian and UK depositors in Swiss-based banks

In order to maintain the confidentiality of international depositors and regularize potentially untaxed funds in Swiss-based banks, two largely identical bilateral agreements with Austria and the United Kingdom came into force on 1 January 2013. A similar agreement with Germany was turned down by the German parliament, so that the provisions only apply to Austria and the UK at the present time. Other countries in Southern Europe, most notably Greece, have signalled an interest in such an agreement, yet no tangible progress has been made at this stage. Under the agreements depositors have two options to regularize untaxed assets held in Switzerland: They can either pay a flat rate one-off sum anonymously, or voluntarily disclose untaxed assets to their national tax authorities (or otherwise close their banking relationship in Switzerland).

For the future and in case the clients do not declare their assets to their national tax authorities, the Swiss-based banks deduct a tax amount annually on an anonymous basis from any income incurred. Alternatively, clients have the option to authorize their bank to report their income to the national tax authorities through the Swiss Federal Tax Administration in order to disclose it in their tax return. The agreements allow Austrian and UK resident clients with bank accounts in Switzerland to be fully tax-compliant for the past and the future while maintaining their privacy as an option at the same time. They also aim at decriminalizing banks, bank employees and bank clients as regards the past.

Based on the agreement with the UK, Swiss banks already made an upfront payment of CHF 500 million to the UK government through the Swiss Federal Tax Administration. This is meant as minimum tax revenues from anonymous retrospective taxation. The reimbursement of this upfront payment to Swiss banks will start as soon as CHF 800 million from retrospective taxation has been transferred to the UK tax authorities. Once the system of regularization of the past has generated CHF 1.3 billion in additional tax revenues for the UK government, then the upfront payment to Swiss banks will be fully reimbursed. (The withholding tax agreement with Austria made no similar provision for an upfront payment.)

These withholding tax agreements have come under fire, especially in France and Germany, by opponents of banking confidentiality for preserving the account holders’ anonymity (who often stored assets in Switzerland not to escape tax but as a way to protect themselves from inflation, confiscatory taxation or government mismanagement). For the protection of wealth in Europe and the diversity of legal systems, however, the agreements are also bad news and mean a further erosion of individual property rights in Europe.

FATCA agreement with the United States

In view of the entry into force as of 2014 of the controversial U.S. Foreign Account Tax Compliance Act (FATCA), which targets the assets of U.S. taxpayers abroad, the Swiss and U.S. governments signed an agreement designed to simplify implementation, as have done several other countries. FATCA legislation provides that all income from accounts held abroad by persons liable to pay taxes in the U.S. be disclosed for U.S. taxation purposes. It requires foreign financial institutions to conclude an arrangement with the U.S. tax authorities which obligates them to report identified U.S. accounts under the threat of a 30% withholding tax on all transfers from the U.S. and eventually the exclusion from U.S. financial markets.

FATCA is still fought against in the U.S. on grounds that it undermines the competitiveness of U.S. financial markets and creates administrative difficulties for U.S. citizens abroad. In Switzerland, the legislation was criticized for violating national sovereignty, although it is clear that without an agreement Swiss financial markets and creates administrative difficulties for U.S. citizens abroad. In Switzerland, the legislation was criticized for violating national sovereignty, although it is clear that without an agreement Swiss financial institutions would be at a competitive disadvantage given the international influence of the U.S. government arising from the size of the U.S. economy.

The simplifications agreed with Switzerland apply in particular to public and private retirement funds and casualty and property insurances, which are exempt from FATCA, as well as to the due diligence requirements of financial institutions. Collective investment vehicles as well as financial institutions with a predominantly (98%) local clientele (including clients who are European Union citizens) are deemed to be FATCA-compliant and are subject only to a registration obligation. The due diligence obligations on the identification of U.S. clients, to which the rest of the Swiss financial institutions are liable, are set in such a way that the administrative burden can be tolerable.

Under the Swiss-U.S. agreement, accounts held by U.S. persons at Swiss financial institutions are reported either with the consent of the account holder or by administrative assistance channels through group requests. If consent is not given, the information will not be exchanged automatically, but only on the basis of the administrative assistance provision in the Swiss-U.S. double tax treaty. This is a small relief for the persons concerned by FATCA. The agreement is subject to the approval of the Swiss Parliament and to an optional treaty referendum. It is expected that it will approved reluctantly, but nevertheless approved given the need for Swiss financial services firms to be active in the U.S: markets.

This is part of :

Taxation in Europe - Yearbook 2013
The yearly report on the evolution of European tax systems

A short presentation of IREF ’Yearbook on Taxation in Europe’ Series
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