US tax reform passed by congress: what now?
The implications for Switzerland
The US congress, as expected, passed a comprehensive US tax reform bill on 20 December 2017. The signing of the bill by the US President, which is needed to enact the bill into law, may be considered a mere formality. America has thus put together the most comprehensive tax reform in over 30 years in a matter of a few weeks. The tax reform can be considered very business friendly: beneficiaries of the reform are mainly businesses, large and small. The tax reductions at the level of individual taxpayers are relatively modest in comparison and limited in time.
Under the new legislation, corporations profit from a tax rate reduction from 35% to 21% as from 2018, as well as other provisions such as the immediate expensing for tax purposes of investments in assets for a number of years. These tax reduction measures are partially offset by a partial broadening of the taxable base, in that certain deductions will be eliminated or will be limited (such as the interest deduction), and certain minimum taxation requirements for foreign income will be introduced. However, all in all it can be expected that most US companies will benefit from a substantial tax reduction.
The US tax reform generally will make US companies more competitive internationally and the US more attractive for foreign investment, which will put more competitive pressure on other countries, including Switzerland. In addition, the tax bill includes anti-abuse measures as well as incentives that will make it less attractive from a tax perspective for US companies to shift activities and profits abroad, and which will provide certain incentives to shift activities and profits back to the US. These measures are, for instance, a minimum taxation on certain foreign income and the introduction of a “patent box” for foreign related IP with foreign derived intangible income taxed at 13.125%.
Will there be a repatriation of capital from Switzerland and other countries?
The change to a so-called territorial tax system, which is similar to the Swiss system, where profits of foreign subsidiaries are not taxed and a participation exemption is granted on dividends from such subsidiaries, is expected to lead to a substantial repatriation of capital by US corporations from abroad, including Switzerland.
Under the current US system, profits of foreign subsidiaries of US companies generally are taxed only when repatriated to the US. This has led to today’s situation where US companies reportedly keep profits of up to an estimated USD 3 trillion abroad. As part of the change to a territorial system, these profits kept abroad will now be subject to a transition tax at lower rates, irrespective of whether such profits will be repatriated or not. This is expected to prompt US companies to actually repatriate such profits to a great extent. Based on estimates, approximately half of such profits kept abroad could potentially be repatriated.
The tax rate reduction could lead to a short-term boom for the US economy and provide a further boost to the US stock market and the US dollar. This was the case with the latest major tax rate reduction 30 years ago, which created the so-called “Reagan tax boom.” However, it remains to be seen whether the estimated additional budget deficit of USD 1.5 trillion caused by the tax reform can be offset in the long term with higher tax revenues from increased economic activity in the US.
What are the implications for Swiss domiciled companies with ties to the US?
What are the practical implications for companies in Switzerland with operations and affiliates in the US? US companies of such multinationals will benefit from the corporate tax rate reduction from 35% to 21% and from other tax reduction measures. In turn, the US tax burden for these companies may partially increase as, for example, the allowable interest deduction will be further limited and certain payments to foreign affiliates will in essence no longer be tax deductible.
The implications of the US tax reform can be very different for each company, depending on its actual facts and circumstances. Companies with ties to the US should analyse the potential implications of the reform in a timely and comprehensive fashion to determine whether changes should be made to their supply chains or financing structures. In certain circumstances, such analysis also could lead to a repatriation of activities to the US.
Generally, it can be said that as a result of the US tax reform it will be less attractive from a tax perspective for US multinationals to shift activities and profits abroad or to maintain such activities abroad, because the US tax rate will be much lower and the difference between the US and foreign tax rates also will be lower. This will also affect Switzerland.
US companies directly maintain an estimated 30,000 high qualified jobs in Switzerland, indirectly it may be multiples more. As a market, Switzerland is generally insignificant for US multinationals. US multinationals are here to benefit from the favourable business conditions in Switzerland, such as a flexible labour market, a reliable legal system, good infrastructure, a stable environment and low taxes. The favourable tax conditions are often an important factor.
The implications of the US tax reform can be very different for each company, depending on its actual facts and circumstances. Companies with ties to the US should analyse the potential implications of the reform in a timely and comprehensive fashion.
Will Switzerland be challenged as an international location for multinationals?
Switzerland continues to have very favourable tax conditions in an international comparison. The term favourable tax conditions does not only refer to our internationally very low tax rates, but equally to our very competent tax authorities, with which arm’s length and pragmatic solutions to all sorts of tax questions can be found in a timely fashion. In Switzerland, where the taxpayer is considered an actual business partner by the tax authorities, there is an atmosphere of mutual trust between the tax authorities and the taxpayer, which can be considered as unique in the world. Switzerland needs to take great care to maintain this culture.
To remain competitive in the international battle for multinational companies and their high qualified jobs, Switzerland needs to offer more favourable tax conditions than other countries, as we generally have a much higher cost of doing business, for which we will have to compensate with lower taxes. In this regard, a timely and business friendly implementation of our Swiss corporate tax reform, the Swiss Tax Reform Proposal 17 (STR 17), must be our main priority. With a business friendly implementation of STR 17, Switzerland holds good cards to continue to be well positioned as a key successful player in international tax competition.