Zurich Rarely has the anticipation of a big windfall been so subdued: the introduction of the OECD minimum tax of 15 percent means that the Swiss federal state and cantons can expect additional income of CHF 1 to 2.5 billion a year. Next Sunday, Swiss voters will vote on whether their country should adopt the international minimum tax.
The majority of the parties recommend a “yes” – but some reluctantly. Thomas Aeschi, National Councilor of the right-wing conservative Swiss People’s Party, writes: “Swiss taxpayers’ money will only stay in Switzerland if there is a yes to the OECD minimum tax on June 18.”
In the past, his party had resisted foreign interference in Swiss tax policy. But now you are for it. Because if the OECD minimum tax is rejected, “then foreign countries will benefit,” warns Aeschi.
The reason for this is a clause in the minimum taxation that the 140 OECD countries agreed on in 2021. It allows OECD member countries to tax companies equal to the difference to the 15 percent if they pay less in their home country. If Switzerland does not support the OECD minimum tax, tax money would flow out of Switzerland.
In some cantons, the corporate tax rate has so far been well below 15 percent. In Zug it was a maximum of 11.8 percent, in Lucerne 12.3 percent and in Basel 13 percent. The OECD minimum tax applies to companies with a worldwide turnover of at least 750 million euros. In Switzerland, around 200 to 300 corporations and 2,000 subsidiaries of foreign companies are affected by the new minimum tax.
Switzerland is losing its attractiveness
The clause that other countries can collect the difference to the 15 percent minimum taxation from companies is both a blessing and a curse for Switzerland. On the one hand, it prevents companies from suddenly leaving the country when the OECD tax is introduced. Because the tax burden would be just as high elsewhere.
On the other hand, Switzerland will be weakened in the long term in international location competition, as the federal government concedes: “The minimum taxation makes Switzerland less attractive from a tax point of view. This could prompt companies to relocate or not settle in Switzerland at all.”
The trade association Economiesuisse explains that local disadvantages such as high wages and the strong Swiss franc have so far been offset by the tax advantage. But this advantage will disappear in the future.
In Switzerland, the cut is already often compared to the end of banking secrecy, which forced the financial sector to fundamentally rethink. “For the Confederation, cantons and municipalities, competitiveness, jobs and tax revenue are once again at stake,” the Swiss government warned.
Economiesuisse also assumes that the estimated additional income of CHF 2.5 billion per year can only be realized in the long term if companies continue to invest in the country.
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But that is highly uncertain: Researchers from the Universities of Basel and Lausanne used data from Switzerland to show that a tax increase of one percentage point reduces taxable profit by 0.82 percent. Economiesuisse therefore states: “Changes in the behavior of companies in response to tax adjustments are to be expected.”
This includes new investments flowing into locations with lower labor costs. Therefore, Switzerland must move from tax to location competition.
Tax advantage thanks to “internationally accepted location measures”
The key here is “internationally accepted location measures”, i.e. subsidies or tax advantages that are approved by the OECD. This allows the tax base to be reduced so that the effective rate can fall below 15 percent. One example is tax incentives for research and development (R&D) activities. The Swiss pharmaceutical giants Roche and Novartis, for example, should benefit from this.
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However, the company must have a research department in Switzerland for this. That doesn’t work for every company. A presentation by the Economic Chamber of the Canton of Zug shows which expenses are deductible and which are not. Companies can get credit for conducting experiments, but not for running a canteen for the research team.
Another possibility is the so-called patent box: companies can bring their patents into their own structure – the profits generated with these patents can then be taxed at a lower rate. Since the beginning of the year, companies have also been able to use this option to try to reduce the assessment basis for the tax and thus the tax burden. Swiss tax law provides for such a patent box.
But even that is time-consuming: companies have to break down in detail which part of their profit comes from the individual patents. For a biotech start-up with just a few newly registered patents, this may still be possible. For a group with a large number of older patents, however, the effort can be extremely high, experts warn.
In addition, countries like Germany are trying to prevent corporations from relocating their patents to subsidiaries in low-tax countries. The German tax authorities have introduced a so-called “license barrier” for this.
The struggle for the tax revenues of large corporations is getting tougher. But one historical example can give the country hope: the abolition of banking secrecy has done less damage to the domestic financial industry than initially feared.
More: How Switzerland wants to remain attractive for companies despite minimum taxation