Tax Proposal 17: Cantons plan to cut corporate tax

Cantons want to cut corporate tax. A look at the "Tax Reform and AHV Financing (TRAF)." 

The Swiss electorate will decide on the Tax Reform and AHV Financing (TRAF) on May 19, 2019. If the reform is accepted, the cantons plan to cut corporate tax. The cantons differ significantly in this regard. 

TRAF aims to overhaul Switzerland's tax system 

The Corporate Tax Reform III from 2017, which was clearly rejected by the electorate, is now being replaced by a modified reform package: The Swiss people will vote on the Federal Act on Tax Reform and AHV Financing (TRAF) on May 19, 2019. The new version of the original "Tax Proposal 17" is made up of two parts:

  • Reform of corporate tax
  • Compensatory additional funding for the AHV

With the proposal, the Confederation aims to deliver a competitive tax system that complies with international regulations. It is meant to uphold Switzerland's attractiveness as a business location. With the current tax system, holding and trust companies located in Switzerland who generate their sales revenue and costs abroad benefit from reduced tax rates or even tax exemption. This is set to change with the new proposal. The Tax Reform and AHV Financing (TRAF) aims to abolish the privileged taxation of such special-status companies. A balance is to be reached between the special-status companies and the local SMEs. 

Special-status companies will pay more taxes in Switzerland after the reform 

Specifically, this means that special-status companies will pay higher taxes after the proposal is implemented. Regularly taxed companies, on the other hand, would pay lower taxes. However, it is worth remembering that the special-status companies are of central importance for Switzerland. With a contribution of around 3.6 billion per year, special-status companies currently account for around half the Confederation's corporate income tax receipts. At cantonal and municipal level, their share of tax receipts is also high. Special-status companies also shape the research and development sector, as they account for almost half of private company spending. 

Tax reform in Switzerland: Special-status companies are important to the economy

Special-status companies are important for the Swiss economy 

Relevance of special-status companies with privileged taxation, measured by their share of corporate income tax receipts 2012-2014, ordinary corporate income tax rate 2018 

* Cantonal and municipal level, including share of direct Federal tax 

Source: Federal Tax Administration, KPMG, Credit Suisse 

Cantons want to cut corporate tax 

If the Tax Reform and AHV Financing is accepted, all legal entities, whether special-status companies or SMEs, will be subject to the same tax regulations in future. However, new privileges at cantonal level promise some room for maneuver: They allow for innovative activities to be promoted in Switzerland, and aim to uphold Switzerland's attractiveness as a business location.

For example, the cantons offer the companies tax relief options through obligatory patent boxes. Profits from patents must therefore be taxed at a privileged rate. Optional deductions for expenses in the area of research and development are possible. On the other hand, the reform limits the options for reducing the tax assessment basis. That is why numerous cantons plan to reduce corporate tax to counteract this. The extent of this reduction varies significantly from canton to canton. 

Ordinary tax rates to be reduced on a broad front, existing status companies to pay somewhat more tax in future

Ordinary tax rates to be reduced on a broad front, existing status companies to pay somewhat more tax in future

Effective profit tax rates for companies subject to ordinary and privileged taxation and average tax rate for all legal entities, planned ordinary tax rate after tax reform and area of relief restriction according to cantonal authorities

Source: Federal Tax Administration, KPMG, cantons, Credit Suisse

Corporate taxes influence the appeal of cantonal locations 

The cantonal adjustments to corporate taxes would significantly shift the ranking of the cantons according to locational quality. This is because the reduction of corporate taxes could make individual cantons more attractive as a location. Cantons that currently have high rates of corporate income tax and many special-status companies are under particular pressure. Without a significant reduction in the ordinary rate of corporate income tax, there is a risk that these companies will leave.

"Tax Proposal 17" will lead to new ranking by locational quality indicator

Corporate tax reduction will shake up the locational quality ranking 

Locational quality indicator (LQI), synthetic index, CH = 0, 2018 and for recalculation of the sub-indicators of attainability and the tax burden for legal entities (as of March 13, 2019)

Source: Credit Suisse 

Tax Reform has economic policy consequences 

If the proposal for "Tax Reform and AHV Financing" is rejected by the electorate, the cantons will have significantly less scope to reduce corporate taxes. Switzerland also risks losing its appeal as a location for international companies, given the current planning uncertainty. From an economic perspective, a clear "No" would have far-reaching consequences for Switzerland. Due to the privileged taxation of special-status companies, Switzerland is already under observation by the EU and the Organization for Economic Cooperation and Development (OECD). If the proposal is rejected, Switzerland runs the risk of being added to the blacklist or now gray list of Ecofin (Economic and Financial Affairs Council) of the organization.

On the other hand, if the tax reform is accepted, initial measures can start being implemented immediately after the popular ballot. The main measures would be likely to be implemented in January 2020, and all other requirements by 2025.