Sweeteners proposed for revised corporate tax reform

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The country needs to reform corporation tax while mitigating economic fallout.

The government will consider a package of voter-friendly sweeteners, including extra child benefits, as it strives to breathe new life into controversial company tax reforms.

The new proposals come less than four months after Swiss voters rejected a major overhaul of the corporation tax landscape. At the time, in February, voters felt that the proposals were too generous towards companies at the expense of ordinary taxpayers.

The rejection of such a vital project – Switzerland has come under pressure internationally to bring its rules into line with international standards – forced a scrambled response by the government. On Thursday, a ‘steering group’ expert panel recommended the scrapping of some tax relief perks and the watering down of others.

Repackaged and renamed as the “Fiscal Project 17”, the revisions remove some of the more contentious elements that voters saw as veiled sops to companies. The government will mull over the suggestions before presenting its new plan in June for consultation.

Social component

The major change is the inclusion of a social component: under the scheme, minimum family allowances would rise CHF30 per month for each child in full-time education. The bill for this would be met by extra charges on businesses, say the recommendations.

The contentious issue of nominal interest on surplus equity, seen by voters as a shady tax loophole for businesses, would be scrapped from the original reform package. In addition, a contentious tax relief on company dividends would be made less generous, if the government, parliament and voters agree.

This would bring in at least CHF300 million more to Swiss regions and CHF100 million to the national government, the steering group calculates. This would help plug tax shortfalls, which were estimated at up to CHF3 billion under the previous plan.

A nod is also made to cities and local authorities, worried about the loss of income and jobs that would result from a blanket raise in corporation tax. Under the new plan, these would also draw on the compensatory funds that the government had initially said would be allocated to cantons to make up shortfalls.

Innovation incentives

Otherwise, the major principle of the plan remains the same: facing international pressure, the country needs to level tax rates for domestic and international firms, and aims to plug the resulting shortfalls by providing added incentives for multinationals to remain in Switzerland.

At least 6,500 companies such as Google, Unilever, Vitol and IBM have operations in various cantons, contributing CHF5 billion ($5 billion) in taxes every year and employing around 150,000 workers.

The central plank of achieving this balancing act remains tax relief on research and development (R&D). This would come in the shape of a patent box – which would offer deductions on profits made on patented products – and relief on R&D expenses (which is tightened up under the new proposals).

As before, regional authorities will remain flexible in setting taxation rates on domestic companies, in order to come to a solution with minimal disruption. Swiss cantons vary widely in the amount and nature of multinational companies that they host. The central government also plans to compensate the regions for some of their tax revenue losses by paying approximately CHF1 billion.

It is envisaged that parliament will debate the proposed corporate tax reforms by early next year. To avoid confusion about the concrete implementation of the reforms, the cantons will also be asked to produce implementation plans before the project is finalized.