In his recent address at the International Europe Forum in Lucerne, Switzerland, President Hans-Rudolf Merz emphasized the need for Switzerland to retain its leading position with regard to international tax competition, and outlined future tax reform initiatives, specifically designed to enable the country to achieve this goal.
According to the Swiss President and Finance Minister, the secret to Switzerland’s success is its liberal system of government, with its federalist structure and direct democracy, the ideal foundation for competitive tax policy.
“Switzerland's federalism grants the 26 cantons far reaching autonomy in financial and fiscal policy. Each canton is responsible for its own budgetary policy and is also at liberty to set the level of its own taxes. Tax competition is therefore nothing new for Switzerland. Indeed, it is in our blood. Tax competition forces the public sector to be responsible and economical with public funds. Tax competition therefore contributes to healthy public finances.”
Firm in the belief that direct democracy means that the government's tax policy has to enjoy the support of a majority of the people, Merz underlined the fact that social consensus is not simply guaranteed, but must be continually affirmed and renegotiated.
Given that the issue of mutual trust between citizen and State is particularly important at the present time, in view of the ongoing financial and economic crisis, President Merz warned that it is a serious mistake for politicians to focus one-sidedly on a minority of tax evaders, since such a policy ignores the vast majority of taxpayers, who diligently and properly contribute their share to public finances.
“It is a poor reflection of the State if it distrusts its own citizens and places them under a blanket of suspicion. Instead, it must always reflect on the legitimacy and trustworthiness of its own tax system. Otherwise there is a risk that citizens for their part will lose their trust in the State. For the State also faces competition to earn the favour and trust of the citizen. And I am proud that Switzerland also occupies a leading position in that competition”, he stated.
Reminding those present that creating appealing tax conditions is a constant process, which takes place in a highly dynamic environment, President Merz outlined proposed future reforms designed to maintain the competitiveness of the Swiss tax system, and to retain the country's leading edge in terms of tax competition. These included:
According to Merz, the competition reforms sought by the Federal Council will relieve Swiss businesses of around CHF500m a year.
Acknowledging that part of strengthening Switzerland's standing as a location for business involves obtaining international recognition of its taxation policy, Merz referred to the Federal Council’s decision earlier this year to include the extended policy on administrative assistance, which means that in future Switzerland will also be able, upon request, to provide international administrative assistance with regard to specific, justified individual cases of tax evasion.
Emphasizing that Switzerland’s traditional system of banking secrecy at home will remain unaffected by the decision, Merz nevertheless reiterated Switzerland’s support for intensified international cooperation in tax matters.
“We are implementing this revision consistently in the form of bilateral double taxation agreements. The Federal Council does not want a multilateral agreement with the EU. Success has proven us right. In a very short space of time we have negotiated over a dozen such double taxation agreements. The international community has already recognised this, and the OECD has removed us from its ominous grey list. At the same time Switzerland has managed to achieve valuable improvements during these negotiations for its industrial centre. I am therefore very confident that parliament, and if necessary the people, will support the new agreement.”
He continued “The new policy on administrative assistance also has an impact on other dossiers, particularly the existing agreement on the taxation of savings income with the EU. The Federal Council has indicated that Switzerland is open to discussions, if the EU so wishes. The current agreement is known to contain possible loopholes that need to be closed. However during these negotiations, the EU will have to accept that the agreement needs to be adapted to the new situation, i.e. Switzerland's comprehensive administrative assistance, so that equilibrium can be re-established.”
President Merz ruled out, however, a transition to an automatic exchange of information, stating that the practice is not only questionable in terms of its effectiveness, but that it is also contrary to the country’s understanding of privacy.
He added that Switzerland and the EU have found an equivalent solution accepted by both sides in the form of agreement on the taxation of savings income, applying a system of tax retention on interest payments on behalf of the state of residence.
Alluding to a recent proposal put forward by the Swiss banks, Merz revealed that Switzerland is currently examining the idea of a withholding tax.
In his closing statement, Merz referred to two recent tax reforms which have just been concluded, and which are due to come into force in 2011: tax relief for families with children and the equalisation of cold progression (or 'bracket creep', which occurs when tax governments fail to adjust tax rate thresholds in line with inflation).
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