Swiss Eye Scrapping Incentives in Revamped Company Tax Plan

(Bloomberg) -- The Swiss government could scrap a controversial measure affecting corporate finance and increase taxation of dividends when it draws up its revised company tax reform plan.

There was no mention of a so-called notional interest deduction in proposals drawn up for the government by a working group and published on Thursday. The government will finalize the plan -- which is being recast after voters rejected an initial bid to reform taxation in a February referendum -- later this month.

Switzerland has committed to scrapping the preferential tax rates it currently gives to thousands of multinationals because they aren't in line with the Organisation for Economic Cooperation and Development's rules. Still, it's keen to remain a base for companies lured by its low taxes and light regulation.

While the absence of the notional interest deduction -- a tax incentive for equity financing of a company -- isn't important for the economy as a whole, it “will affect some companies and certain activities strongly by shifting the incentives,” said Martin Eichler, chief economist of BAK Basel. “Switzerland will be less attractive for corporate finance.”

The measure was criticized by opponents of the original tax proposal and experts predicted it would be cut.

Harmful to the Economy

The plan is a “compromise between the referendum winners and losers, between the cities and municipalities, between the cantons and the federal state,” Swiss Finance Minister Ueli Maurer said at a press conference in Bern. “You have to find the balance.”

Switzerland's initial failure to reform corporate taxation is the latest in a string of developments that have the potential to hurt its economy. One of the world's most affluent countries, it regularly tops the World Economic Forum's global competitiveness index. Following an international crackdown on banking secrecy, stringent limits on executive pay were introduced in 2013 and, the following year, a plebiscite on immigration quotas threatened to undermine ties with its top trading partner -- the European Union.

On the tax front, the U.K. already has lowered its corporate rate and President Donald Trump also is pushing for an overhaul in the U.S.

Multinational companies employ some 150,000 people and account for half the R&D spending in Switzerland. The federal government gets about half of its corporate earnings tax revenue from multinationals; cantons and municipalities get 20 percent.

Peter Uebelhart, head of tax at KPMG Switzerland, said he didn't expect the higher tax on dividends to put off multinationals.

“I don't think it's relevant for the attractiveness of the country as a place to do business,” he said. “It would play a role if the owner of a company would want to live in Switzerland along with his company. ”

Open Questions

Factors such low tax rates and minimal red tape are important to keep the Swiss economy attractive, Swiss National Bank President Thomas Jordan said at the Institut fuer Finanzdienstleistungen Zug on Wednesday.

“We have that in Switzerland but we need to take care that we keep these framework conditions,” Jordan said. “That's the big advantage that we have relative to other countries.”

The committee on also suggested the government introduce so-called patent boxes in line with its initial proposal as well as deductions for research and development expenses. The partial taxation of dividends from qualified participations should be 70 percent at the federal level and at least 70 percent at the cantonal and communal level, the body also said. Additionally, cantons would get a bigger financial contribution from the government in Bern and child allowances would be increased.

Even with the move to scrap the notional deduction on interest, the Social Democrats, who led February's successful campaign against the initial plan by highlighting concerns about cuts to public services, said the new proposal wasn't convincing.

“Too many questions remain open, the increase in the dividend taxation isn't sufficient, there aren't enough compensatory social measures,” the party said in a statement. This “light” version of the failed reform wouldn't be enough to convince the public of the need for “tax cuts worth billions” for companies.

--With assistance from Mara Bernath

To contact the reporter on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss, Dylan Griffiths