Switzerland

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  • Date: 5/28/2013

“Companies are under great pressure” 

Interview with: Peter Uebelhart, Head of Tax at KPMG Switzerland

The current Swiss Tax Report shows that the majority of tax rates in Switzerland are either constant or on the rise. Is the era of tax cuts over?

Peter Uebelhart: It almost looks that way. The downward trend has slowed down considerably for companies. On the whole, many cantons and cities may have once again reduced maximum corporate tax rates slightly for companies, yet a few cantons such as Schwyz and St. Gallen have already made the first tax increases. In fact, we can even talk about a trend reversal when it comes to individual taxation: For the first time since 2008, there was a very slight increase in the top tax rates for individuals.

What do you think about this trend reversal?

Peter Uebelhart: Some cantons that had cut taxes in the past – in some cases radically – have realized that the tax income lost as a result cannot be made up in the medium term. This development is also in line with an international trend. That is overshadowed by an extremely political debate about what constitutes a ‘fair’ tax burden for individuals and companies. Many countries in Europe as well as the USA currently depend on additional revenue and are doing everything in their power to meet their needs through fiscal policy.

What risks could this pose to Switzerland?

Peter Uebelhart: Tax privileges for companies in Switzerland are already under quite a lot of pressure. So much, in fact, that the finance minister, with support from the cantonal departments of finance, has announced to the EU that the country will abandon the current system. In the past, Switzerland had succeeded in building an extremely attractive tax system and numerous international companies, corporate headquarters and even high-income and wealthy individuals have settled here as a result. This has positively impacted Switzerland’s economic growth and labor market while also making a substantial contribution toward the tax base of the federal government, cantons and municipalities. International groups generate around half of the country’s GDP and the top ten percent of the population in terms of income contribute more than three quarters of income tax revenue. We are currently in danger of losing quite a bit of our attractiveness.

Are other countries in a better position?

Peter Uebelhart: From a tax perspective, absolutely. If we compare the top tax rates of the cantonal capitals against those of other countries, Ireland and even the financial centers of Singapore and Hong Kong are extremely well positioned. When it comes to individual taxation, the tax rates and models in place in countries such as Bulgaria, Lithuania and Hungary make life for high-income individuals considerably less expensive there than in Switzerland. Yet people don’t move to countries like those for tax reasons alone. What counts in the end is a blend of hard and soft location factors and the tax rates represent an important aspect of this. What we have noticed, though, is that other countries are very actively trying to attract companies and highly-qualified staff and have extremely competitive offers at the ready.

How do you think Switzerland’s tax situation will evolve?

Peter Uebelhart: It’s incredibly important that politicians draw up pragmatic, strategically sensible solutions soon. The current interim report issued by the Swiss Federal Department of Finance is an important step in this direction. But we should also bear in mind that settling the ‘tax dispute’ with the EU won’t by any means resolve all of the problems. What Switzerland needs is a long-term tax strategy that sustainably strengthens the country as a business center and place to work while also securing the tax base and jobs of companies which had previously enjoyed tax privileges. This kind of strategy shouldn’t just be a reactionary patchwork, instead it needs to anticipate future developments and open up new prospects. Any solutions should be able to generate the income needed for the future, as well, and, above all, they should boost the attractiveness and ‘health’ of the Swiss economy. One of the top priorities in all of this is to give companies greater planning certainty with regard to how their tax positions will develop in the future.

What could some potential approaches be?

Peter Uebelhart: A sustainable solution to the tax dispute will begin with qualitative measures. First of all, those include license boxes to promote research and development. That benefits cantons with highly innovative industries, although it’s not just Basel-Stadt I’m thinking about, rather growing technological hotspots in Eastern and Western Switzerland, too. Second, one focus is currently on introducing a tax privilege for inner-group interest income. That would compensate for the loss of the interest income exemption holding companies have enjoyed in the past. I consider making the principle of correlation either much more flexible or abolishing it altogether to be a third possible measure. That would help the cantons of Geneva and Zug, for example, hold on to trading companies that have become pivotal from a regional perspective. The goal must be to offer an acceptable and attractive tax environment for companies and individuals, alike. Both are essential to the future of Switzerland.
Interview: Michael Frei, Marketing & Communications
 

Peter Uebelhart

Peter Uebelhart

 

Head of Tax at KPMG Switzerland