Corporate Tax Reform III: Vaud and Geneva Come Up from Behind
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Corporate Tax Reform III: Vaud and Geneva Come Up from Behind

Corporate Tax Reform III inhibits the ability of the cantons to attract companies with tax privileges. In future, competition will be based more heavily on standard tax rates instead. With higher taxes, the cantons of Geneva and Vaud are under particular pressure. Credit Suisse's new regional study examines the potential implications of this comprehensive overhaul of corporate taxation.

Major changes are in store for the Swiss tax system under Corporate Tax Reform III. The lower tax rates on foreign corporate profits are to be abolished under pressure from the OECD and the G20. The Geneva Basin region is particularly affected by this as the location of numerous international groups with tax privileges. The cantons of Vaud and Geneva are therefore planning on retaining their tax appeal for companies by significantly reducing their standard taxes on profits: Corporate tax rates are due to fall from 24 percent to 13 percent in Geneva, and from 22 percent to 13.79 percent in Vaud (both include direct federal tax).

Large Gaps between Standard Tax Rates and Privileged Tax Rates

Large Gaps between Standard Tax Rates and Privileged Tax Rates

Effective tax rates on profits for companies taxed at standard and privileged rates, as well as the average for all legal entities, 2009-2011 (planned standard rate under CTR III according to cantonal authorities)

Source: Swiss Federal Tax Administration, Cantons, Credit Suisse

Geneva and Vaud: Banking on Tax Privileges

In Switzerland, companies with profits primarily generated abroad enjoyed tax benefits for many years. The cantons provided lower income tax rates for these "special-status companies" than for typical companies. The average total tax rate on profits (at the federal, cantonal, and municipal level) was roughly 4 percent in Vaud and 11 percent in the Canton of Geneva (average values for 2009–2011) – well below the standard 22 percent and 24 percent tax rates on profits, respectively. The Canton of Vaud, in particular, was among the most attractive locations for such companies in Switzerland and elsewhere. Many companies have relocated to the region, and tax revenues on profits have gone up.

Rise in Tax on Profits in Vaud

Rise in Tax on Profits in Vaud

Tax revenue on profits, indexed, 100 = 2000; adjusted figures (FFA) up to 2013, post-2004 figures from cantons

Source: Federal Finance Administration, Cantons, Credit Suisse

With the planned uniform tax rates, the tax burden could fall significantly for companies taxed at standard rates. However, this would result in a significant increase for current special-status companies in Geneva and especially in the Canton of Vaud (from roughly 11 percent to 13 percent in Geneva, and 4 percent to 13.8 percent in the Canton of Vaud). What financial implications will this have for the cantons? Based on our estimates, increased taxation of special-status companies cannot offset the lost revenue from companies taxed at a standard rate. This will mean lost revenues of roughly CHF 170 million in the Canton of Vaud and CHF 330 million in Geneva. These figures do not account for any responses to the new tax rates on profits by these companies. Since the tax increase for special-status companies is far greater in the Canton of Vaud than in Geneva, there is a higher risk that companies with tax privileges will leave Vaud. Depending on the international tax environment, the lower tax rate in the cantons of Geneva and Vaud could attract new companies and a tax base over the long term, however.

Tax Cuts Significantly Increase Locational Quality in Geneva and Vaud

The broad availability of highly qualified staff and the proximity to Geneva Airport are part of the appeal for companies. However, our Locational Quality Indicator shows that the cantons of Geneva and Vaud are today not among the frontrunners in other aspects of locational quality. This is primarily attributable to the tax burdens they impose on companies that do not enjoy tax privileges.

We have recalculated the Locational Quality Indicator based on the changes already announced for cantonal taxes on profits. If the tax rate on profits were reduced to 13 percent, the Canton of Geneva would now rank third – a leap of no less than 13 places. In one fell swoop, this would make Geneva among the strongest competitors for location among the cantons, including for companies taxed at standard rates. If the Canton of Vaud's tax rate on profits is lowered to 13.8 percent, it could move up six places to rank 13th – roughly the average for Switzerland. These tax cuts represent an investment in locational quality, which could pay off in the long run. First of all, the Geneva Basin would remain attractive for existing special-status companies in international comparison. Secondly, the region would enhance its appeal in the intercantonal location competition thanks to the introduction of lower uniform tax rates. They are thus improving the prospects for companies to move to the region as well as growth and larger investments in companies located there.

Locational Quality for Swiss Cantons in 2015 and Based on Planned Tax Adjustments under CTR III

Locational Quality for Swiss Cantons in 2015 and Based on Planned Tax Adjustments under CTR III

Locational quality indicator (LQI), synthetic index, CH = 0, 2015 and based on the recalculation of the sub-indicator for the tax burden on legal entities

Source: Credit Suisse