Corporate Tax Reform III - Consultation process now opened: Basel-Stadt strives for targeted measures
As a result of international developments, notably in the OECD, it has become ever more apparent that in a few years’ time, the special rules currently applicable in the area of corporate taxation (the so-called cantonal tax status) will no longer be in line with international standards. The intention behind the Corporate Tax Reform III is to consolidate the international acceptance of Switzerland as a business location. This will ensure a central framework for companies. The key elements of the reform include:
Investment security thanks to Step Up
The restructuring of the taxation system is a prerequisite of the reform. The expected timeframe and the proposed transitional rules ensure that both the business and the political and public sector will have enough time to prepare for the changes. The reform is expected to come into force between 2018 and 2020. The Governing Council of the Canton Basel-Stadt places great importance on long-term planning security. Therefore, companies that will lose a privileged tax status as a result of the reform will be able to disclose hidden reserves („Step Up") and thus retain their tax burden at the current state in a transitional phase from 5 to 10 years after the reform - irrespective of the other measures. The Step Up is already practice in the Canton of Basel-Stadt.
Licence box: Effective for innovative companies
In the course of the reform, the Federal Council proposes introducing a licence box in Switzerland as a compensation measure based on the model used in other European countries. With the licence box, any new income from intellectual property will come under a privileged tax bracket. Innovative companies will benefit from this measure, regardless of their size. Switzerland needs to operate under the same conditions as its competing sites in Europe. That is why the Governing Council supports the introduction of the licence box. The licence box should be attractive in its configuration as compared with international standards. It must simultaneously comply with the international standards, which are currently being developed in the OECD.
Tax on income and capital gains: Depending on the effectiveness of the alternative measures
The Federal Government is working on the basis that cantons which currently have rather high taxes on income, need to introduce tax cuts in order to prevent companies that are not covered by the licence box from relocating. To what extent, when and in what order these cuts should be made depends on the effectiveness of the alternative measures. It will also be necessary to introduce adjustments to the taxes on capital gains, which are now considerably reduced in domiciled or mixed companies that form the so-called status companies with their holdings. The Federal Government proposes alternative measures on both income and capital gains tax, which will relieve the affected companies in a targeted way when compared to the ordinary system of taxation. The Canton of Basel-Stadt is currently in the process of assessing the eventual impact of these measures.
The Governing Council of the Canton of Basel-Stadt is working to ensure that the tax burden for the companies affected by the reform will still be an attractive overall package by international standards after the restructuring of the taxation system and that the tax burden will roughly equate to what it is today. These measures will secure competitiveness and income.
Countervailing measures by the Federal Government
Cuts on income tax are associated with high losses of revenue for the cantons as a result of the deadweight loss from companies that are properly taxed today. The Federal Government proposes countervailing measures intended to compensate for the shortfalls the cantons would otherwise endure. This would be achieved by increasing the cantonal share of the federal tax from 17% to 20.5%. The Canton of Basel-Stadt could expect compensation amounting to CHF 50 million per year. The Governing Council of the Canton of Basel-Stadt welcomes the countervailing measures of the Federal Government for the cantons. However, it demands a greater increase from the Federal Government in the cantonal share of federal taxes for legal entities, from 17% to at least 25%.
Adjustment of the national fiscal equalisation (NFE)
The NFE is already in need of reform. Although the extent to which a company’s earnings can be fully taxed only amounts to 70% of that of the income of natural persons, today both elements will be applied at 1:1 for the calculation of the NFE payments. The NFE thus drives business locations such as Basel-Stadt to payments that are not justified at this level. The Federal Government therefore proposes, with entry into force of the reform, to only take the corporate earnings into account in the NFE when they are actually utilised. The Governing Council of the Canton of Basel-Stadt supports this reduction in the weighting of corporate earnings in the NFE and the additional reduction in earnings achieved in the framework of a licence box. In addition, the socio-demographic equalisation of burden (SLA), which is significantly underfunded, must be increased.
Counter financing by shareholders
The Corporate Tax Reform III is linked to a net loss of revenue for the public sector. In its proposals for counter financing, the Federal Government is putting forward for discussion the introduction of a capital gains tax on profits from securities. By introducing this measure, the Federal Government wants to firstly close a tax loophole and secondly, mitigate the shortfall in revenue of the capital contribution principle (Corporate Tax Reform II). Furthermore, the Federal Government would like to adjust the partial taxation of dividends.
As corporate taxes decrease, the value of the company increases. That is why the Governing Council of the Canton of Basel-Stadt supports a counter financing of the reform through the shareholders. But, the greater the deadweight losses of the reform become, the further these measures must go.
Governing Council calls for the purging of the reform
The consultation paper contains numerous other reform elements, namely, the Federal Government proposes adjusting the interest on income tax, which would lead to a deduction of interest on equity capital. Likewise, the government also wants to adjust the system of the taxation law with a set of measures including the abolition of stamp duty on equity capital, adjustments in the Beteiligungsabzug (a mechanism that reduces the extent of double taxation of earnings from shareholdings in other companies) and in the offsetting of losses.
According to the Governing Council, these elements complicate the reform unnecessarily and are connected to further losses of revenue for the public sector. They also limit the financial flexibility of the cantons in implementing the extremely important Corporate Tax Reform III. Likewise, they do not have any apparent connection with the core mandate of the reform.
The Governing Council therefore calls on the Federal Government to refrain from all non-targeted measures. The reform should be limited to the core elements that are absolutely necessary.
The draft consultation papers can be found here.