Switzerland’s economy is able to remain competitive because of attractive tax rates, efficient administration and a unique climate of mutual trust between taxpayers and tax authorities. Global tax competition is under increasing pressure by calls for fairness in international taxation with the OECD working on reforms that would undoubtedly negatively affect Switzerland. On the international stage, the government needs to take action to defend its tax position with a coalition of smaller economies. At home, it must remain fiscally attractive and efficient through pragmatic tax legislation, healthy competition between cantons and business-oriented tax authorities. Companies must crucially maintain a good relationship with tax authorities, both domestic and international, remain transparent and make greater use of digital technologies to boost efficiency of their tax departments.

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Here are what policymakers and businesses need to do to help Switzerland power up its tax position, domestically and abroad, to maintain attractiveness for its citizens, expats and multinationals.

Policymakers

    Promote international tax competition

    Promote international tax competition

    Switzerland cannot entirely sidestep efforts to contain global tax competition. The country recently responded to pressure from the EU and the OECD with a referendum on ending preferential tax regimes for multinationals at canton level. The OECD has now put forward proposals aimed at shifting taxation of company profits away from the countries where goods and services are produced to those where they are sold. This would make small countries, including Switzerland, less attractive as company headquarters, and which would reduce their tax base. According to initial estimates, Switzerland could lose up to CHF 5 billion, so it must make every effort to maintain international tax competition. If small countries join forces, they could dilute the OECD’s plans or even block them entirely. In any case, it is possible that the COVID-19 crisis will now delay the reforms for a while, giving Switzerland more time to forge the necessary alliances.

    Maintain tax competition between Swiss cantons

    Maintain tax competition between Swiss cantons

    The favourable tax environment in Switzerland has made a major contribution to tax competition both between and within cantons by giving municipalities in most cantons the autonomy to set their own local tax rates.,

    Competition is not confined to rates of taxation: it also includes the way in which tax is administered in different cantons. Cantons that have an efficient, business-oriented and pragmatic tax administration as well as attractive tax rates are the most successful. And the practical relationship with taxpayers will become increasingly important, as the majority of cantons with effective rates of corporate taxation (including direct federal tax) of approximately 12-14% have similarly attractive international rates of taxation.

    If Switzerland wants to preserve its advantageous tax environment, retaining healthy competition between cantons is particularly important. Such competition provides canton-level tax authorities with an incentive to keep focusing on the economy as a whole; it also serves as an effective sanction if they do not.

    Cultivate the trust between taxpayers and the tax authorities

    Cultivate the trust between taxpayers and the tax authorities

    Many countries have attractive rates of taxation, in particular corporate taxation, but where Switzerland stands out is the mutual climate of trust between taxpayers and the tax authorities. It is the only country where taxpayers and the tax authorities can meet on such an equal footing, where taxpayers are generally seen as partners rather than opponents and as clients rather than rule-takers. Important tax issues can, for example, be openly discussed with the authorities ahead of decisions being made and the tax implications are noted in a binding prior ruling. The efficiency of Swiss tax administration and the way in which it deals with taxpayers as equals provide a substantial competitive advantage as important, indeed perhaps more important, than advantageous rates of taxation. And – unlike tax cuts – such relationships costs the government nothing.

    Individual taxpayers have the obligation not to jeopardise this unusual relationship of trust and to be fair and transparent in their dealings with the tax authorities.

    Improve the efficiency of the current tax system

    Improve the efficiency of the current tax system

    The tax system and tax environment are evolving all the time and some individual taxes, pieces of fiscal legislation or provisions, no longer make sense or need to be adapted. A few examples are provided below.

    It is time for a review of the legislation on withholding (anticipatory) tax as the current rules make it economically unviable to issue corporate bonds in Switzerland. The proposed reform at federal level to strengthen the Swiss capital market is to be welcomed, but its success will depend on the details of new legislation. As part of this planned reform, legal entities within Switzerland and foreign investors will be exempted from withholding tax on Swiss interest-bearing investments. To protect tax revenues, the plan is to levy withholding tax on all interest-bearing investments by natural persons within Switzerland, including, for the first time, foreigners. As part of the reform, turnover tax will also be levied on bonds. Here, too, short-term falls in tax revenues are likely to be more than offset by higher revenues in the long term.

    There has long been discussion about abolishing all stamp duties, which are unusual internationally but still provide a significant level of revenue that would have to be replaced from other sources. There is also still scope for to improve the way all forms of taxation are administered, including VAT.

    In terms of taxation of natural persons, changes to the individual tax regime could reflect social trends and finally end the current penalisation of married couples under the tax rules.

Business

    Maintain open and transparent relationships with the tax authorities

    Maintain open and transparent relationships with the tax authorities

    An ever-changing global tax environment poses challenges for businesses. Companies continually need to check which countries and regions are most fiscally advantageous, as the higher the rates of taxation in a country or region, the more a company has to earn to pay its tax bill. Companies’ relationships with local tax authorities are also important: they need to cultivate a sound and transparent relationship with the authorities and to highlight the important role they play in the economy of countries where they operate.

    Publish transparency reports

    Publish transparency reports

    Over recent years, the media have focused extensively on the tax optimisation strategies of individual multinational companies. This provided encouragement to politicians wanting to close loopholes, secure greater global coordination and harmonise tax systems and legislation. One such example has been the OECD’s planned tax reforms, which would negatively impact on Switzerland and other countries. Companies should counter this growing public pressure by demonstrating to the public that they pay tax and contribute to financing the state. One way of doing this would be through a transparency report. External corporate communications should also focus much more on these issues.

    Digitalise taxation departments

    Digitalise taxation departments

    Companies wishing to future-proof their operations cannot avoid using digital technologies. The COVID-19 crisis will accelerate digitalisation, including in the area of taxation. New technologies offer considerable opportunities, including in the documentation of tax processes and the scrutiny of tax assessments. A range of technologies can add substantial value to companies by making their tax departments – and their staff – more efficient.

    Big data is one example: it can simplify the use of and access to information and make it easier for tax departments to analyse corporate activities. Robotic process automation (RPA) is another example: data can be collected, tax returns submitted and reports compiled automatically, increasing the speed of such processes and minimising error. Crucially, companies must take a holistic approach. Digitalisation of tax departments must go hand in hand with appropriate adjustments to upstream and downstream processes. Training for managers and their staff is also crucial.

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Contacts

Reto Gerber
Reto Gerber

Managing Partner, Tax & Legal

+41 58 279 6675

Martin Krivinskas
Martin Krivinskas

Partner, International Tax

+41 58 279 7768