Due to the pressure exerted by the European Union (EU) and the OECD on Switzerland’s advantageous cantonal fiscal regimes as well as the failure of the Corporate Tax Reform III (CTRIII), the Federal Council designed a new package on the matter, first by editing a message on the Tax Proposal 17, and secondly by putting the Proposal into consultation. International pressure also put Switzerland on the OECD report on Base Erosion and Profit Shifting (BEPS) on the matter of damageable fiscal practices. Thus, as an answer to this criticism, the TP17 aims at abolishing cantonal fiscal regimes and replacing them by new measures that are in conformity with international expectations.
The new legislation approved by the Parliament could be subject to a Referendum, which was already announced by some left wing parties. In this case, a popular vote would take place in May 2019. If no referendum is launched, the first measures of the TP17 can enter into force beginning of 2019, the majority of the measures, though, will enter into force as of 2020.
Main characteristics of the Tax Reform 17
Other measures and consequences
Increase of the cantonal share to the Federal Direct Tax
The share of the cantons to the yield of the Federal Direct Tax will increase from 17% to 21.2% in order to minimize the revenue losses for the cantons and thus enable them to have some swing for the reduction of the cantonal tax rate.
Inclusion of cities and municipalities
Within the scope of the increase of the cantonal share to the Federal Direct Tax, emphasize is put on the inclusion of cities and municipalities in the redistribution of the latter.
Social compensation by means of the AHV financing
The reform also sees a social compensation of CHF 2bn through the OASI, especially by means of a joint increase of the social insurance contributions by 0.15% for each the employee and the employer and the Confederation’s participation increase from 19.55% to 20.20% as well as through the VAT’s demographical 1%.
Reduction of cantonal corporate tax rates
As part of the reform, some cantons will have to reduce their tax rate on company profits. Indeed, some of them already announced that they would lower their tax rate. The canton of Vaud for instance expects to reduce the rate to 13.78% (including Direct Federal Tax, Municipal and cantonal taxes) as from January 1st, 2019. The other cantons of the French speaking part, despite showing ambition to remain competitive and thus lower their respective tax rate, have not elaborated a clear proposal yet. (expected tax rate: Fribourg 13.72%, Geneva 13.49%, Jura 17%, Neuchatel 13.4%, Valais 15.61%).
Timeline and recommendations
If no Referendum is initiated, the first measures of the TP17 could enter into force at the start of 2019, while the majority of the measures will enter into force as of 2020. Nevertheless, if a Referendum takes place, the Swiss people will most likely have to vote on the TP17 on May 19th, 2019.
In the meantime, it seems appropriate to analyse existing solutions for companies that benefit from one of the privileged cantonal tax regimes. Insofar as the entry into force of the new law is imminent, it seems adequate to reflect whether or not the abolishing of privileged tax regimes before the entering into force of the TP17 is opportune and to what extent the new tools introduced by the reform can be implemented in everyone’s structure especially the Patent Box or the super deduction on matters of R&D. This evaluation shall enable entities to determine whether they can benefit from one of the above mentioned measures and thus anticipate the challenges that come with the BEPS plan.