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Switzerland's Federal Department of Finance (FDF) on Wednesday laid the foundation for major corporate tax reform, with proposals to simplify the federal and cantonal tax system in a bid to improve the country's international tax competitiveness.
Among the more significant proposals announced by the finance department are plans to modify cantonal tax laws governing holding companies and management companies, unify the treatment of domestic and foreign revenues, and the elimination of fiscal barriers to company financing.
The proposed reforms follow on from a referendum in February 2008 when voters narrowly backed a package of government-proposed tax measures easing the tax burden on dividend-paying companies. However, following this vote, the government admitted that "not all problems relating to corporate taxation were resolved".
"Switzerland is facing increasingly intense tax competition. Over the last few years a number of countries have taken steps to considerably improve the fiscal framework for companies. Against the backdrop of globalized flows of trade and services, corporate taxation must at the same time be better safeguarded internationally. The Federal Council is also thereby taking into account various requests for fiscal measures on behalf of companies in Switzerland, some of which have already been referred by parliament," the finance department stated.
At Federal Councillor Hans-Rudolf Merz's request, a working group consisting of representatives from the Confederation and the cantons has, as a result of these concerns, drafted detailed objectives for further company taxation reforms. The Federal Council has now instructed the finance department to draw up a draft consultation paper on the proposed corporate tax overhaul.
The main elements of the reforms involve the abolition of issue tax on equity and debt capital and the elimination of fiscal barriers to company financing.
"Issue tax on equity has a disincentive effect on investment," the finance department stated, adding:
"In international comparison it is increasingly proving to be a locational disadvantage for Switzerland. For its part, issue tax on debt capital constrains financing activities, particularly those of international companies. If transactions within the group are exempted from stamp duty and withholding tax, groups operating internationally will be more inclined to locate their financing activities in Switzerland. That in turn will increase tax revenues and support the creation of highly qualified employment.
"At the cantonal level, it should be made possible for the cantons to waive capital tax. In addition, the Federal Council has instructed the FDF to examine further measures that would strengthen Switzerland's competitiveness as a business location. These include adjustments to the system of investment deductions for corporate bodies."
It is estimated that the short-term revenue loss for the central government will equal about CHF500m. However, the cantons are predicted to experience revenue shortfalls only if they opt to waive capital tax.
The working group appointed by the FDF also closely examined the cantonal tax issues relating to holding companies and management companies and explored the idea of a shift to a uniform system of tax on profits, although this proposal was rejected.
"The in-depth analyses showed that in terms of growth, the existing system proved best placed to produce the desired results. Moreover, a shift to a uniform system of tax on profits would not be feasible in terms of financial policy and would have a serious impact on the cantons and on the reorganisation of financial equalisation and division of tasks between the Confederation and the cantons. The proposal of a shift to a uniform system of tax on profits was consequently rejected by the cantons consulted," the finance department explained.
However, the report concluded that Switzerland's position in terms of taxation could be further strengthened by modifying the cantonal tax structures.
"Targeted measures could ensure that domestic and foreign revenues from all these companies are handled equitably, which would reinforce their international standing. As possible measures the focus is on a general ban on the business activities of holding companies and modifications in the provisions governing 'joint enterprises' and the abolition of the status of 'foreign-based companies'. The latter should occur in line with the strategy of the Federal Council whereby the focus is on fiscally attractive frameworks specifically for companies which invest and create jobs in Switzerland," the department stated.
The Swiss government is "convinced" that these measures will strengthen Switzerland's position in international tax competition while nullifying long-standing concerns raised by the European Union into the compatibility of the Swiss cantonal tax system with the 1972 Free Trade Agreement.
"[The Federal Council] continues to categorically reject negotiations with the EU on fiscal matters," the statement said.
The Swiss government intends to "push for the swift implementation" of this package of reforms.
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