Global Glance: February 21, 2017
A quick look at intriguing international stories
By John Bostwick, Managing Editor, Radius
Switzerland Voters Deny Corporate Tax Reform In Another Surprise Referendum Result
Popular votes have made headlines recently for their unforeseen results and for reflecting a widespread dissatisfaction with political and economic elites. They’ve all occurred in the last year, but they now read like a familiar rollcall: Brexit … Italy’s “No” vote on constitutional reforms … the US’s election of Donald Trump.
The latest in the string occurred last week in Switzerland, where voters rejected legislation that would have reformed the country’s opaque and controversial corporate tax system. In keeping with another global voting trend, the polls that preceded the Swiss referendum proved misleading. Most articles indicate the polls had predicted a close race, but those opposing the reform won in a virtual landslide, casting nearly 60% of the ballots.
As its government’s website explains, Switzerland is a federalist state comprised of a single confederation, 26 cantons (i.e., states) and, at the lowest level, communes. The cantons and communes wield a considerable amount of political and economic power. Cantons in fact negotiate their own corporate tax rates with multinationals. This quirk mostly accounts for Switzerland’s unique corporate tax regime, which now finds itself at odds with the Organization for Economic Cooperation and Development and other organizations intent on making the global tax landscape more equitable by reducing base erosion and profit shifting.
A Bloomberg article explains that “the rates multinational companies are charged in Switzerland aren’t usually disclosed, but … those corporations pay on average … less than what they’d incur in the US, Japan, France, the UK and Germany.” Reuters says that some foreign companies “pay virtually no tax above an effective federal tax of 7.8 percent.” This corporate tax system has made Switzerland a haven for “24,000 multinationals looking to lower their tax bills.”
As Apple found last year when the European Commission ruled that it must pay Irish tax authorities €13 billion plus interest, the European Union prohibits giving tax breaks to individual corporations. Switzerland, of course, is not part of the EU, but the country is under serious pressure from Brussels and the OECD to reform its corporate tax laws. Reuters notes that Switzerland promised the OECD in 2014 that it would eliminate the special tax treatment it gives multinationals by 2019.
According to The Wall Street Journal, in order to fulfill this promise the Swiss government proposed to replace the country’s “current patchwork system” with “a corporate rate — lower in most cases — that would apply across firms in a particular canton.” Incentives would be extended for “patent-related revenue, research and development, and capital taxes” and the federal government “would give cantons more than one billion francs ($1 billion) to partially offset any drain on revenue.”
The Swiss parliament passed the proposal into law, so it’s natural to assume that the law would take effect. But Switzerland — which is half the size of South Carolina but has four national languages — is not like most countries. Here’s the government website again: After parliament passes a law, “if 50,000 signatures are collected from Swiss voters or eight cantons demand a referendum within 100 days, then a popular vote is held.” In the case of the proposed corporate tax reforms, the required signatures were obtained in time and the referendum took place.
Given that the proposed reforms were intended to reduce Switzerland’s corporate welfare program, the popular rejection of them may come as a surprise. In fact, opposition to the law came largely from the left. The Reuters article explains that the “No” campaign “was led by a coalition including the Social Democrats, Greens, trade unions and churches, who feared the public would bear the brunt of reduced company tax revenue through cuts in public services or higher personal taxes.”
The reasons voters had for rejecting the law may be valid, but Switzerland must now draft and pass another proposal to honor its commitment to the OECD to reform the country’s tax regime by 2019. The Financial Times indicates that Swiss finance minister Ueli Maurer says the 2019 deadline cannot be met in the wake of the referendum. He now fears multinationals will leave Switzerland “or no longer move to the country as a result of the uncertainty.”
Switzerland also faces the possibility of a backlash, including, CNN notes, “the risk of being ‘blacklisted’ by other nations if it doesn't change its tax system by 2019.” Finance Minister Maurer, as quoted by Reuters, feels that “the more immediate danger [is] that individual countries [will] start double taxation of Swiss-based companies.”
Switzerland, then, is in a precarious position. While it has committed to reforming its tax regime, it must do so without losing a significant number of the many multinationals now operating in the country. If those companies do flee, the economic consequences could be dire. Another Bloomberg article indicates that multinationals “generated around 12 percent of economic output and nine percent of employment in [in Switzerland] in 2015.” And Switzerland must seek to continue to attract and retain cutthroat corporate behemoths at a time when the UK and the US are discussing slashing their own corporate tax rates, moves that would further diminish Switzerland’s attractiveness as a tax haven.
Switzerland’s predicament is a measure of how serious politicians are about complying with OECD/G20 tax guidance. There are moreover serious negative consequences for countries perceived as low-tax havens that give special treatment to large multinationals, up to and including possible blacklisting. The pressure on those countries to comply with OECD guidance is growing.