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UBS Outlook Switzerland: cantonal tax competition revived
The Business Tax Reform III may prompt some cantons to reduce their profit tax rates considerably. International competition for innovative enterprises makes being an attractive research location increasingly important – alongside taxes. The success of the reform is also important for SME.
Zurich/Basel, 08 July 2015 – Following the CHF-appreciation shock, the Swiss economy could very likely be in recession, and structural change has started to take place at a much faster pace. Simple, low-value manufacturing processes have already been relocated. To prevent higher value areas such as research and development from moving away as well, a successful Business Tax Reform III (BTR III) is pivotal. In the latest UBS Outlook Switzerland, UBS economists examine the reform's main thrusts, present potential cantonal tax strategies and address the consequences for small and medium-sized enterprises (SME).
Research location Switzerland must be strengthened
The privileged taxation of so-called status companies (holding, domiciliary and mixed companies) at cantonal level has been criticized internationally and is to be abolished. This could, however, result in an exodus of geographically mobile companies, along with a third of corporate profit taxes. The BTR III thus aims at reinforcing acceptance of the Swiss tax system while preserving the attractiveness of the business location.
The proposed tax reform highlights preferential treatment of innovation by introducing patent boxes and higher deductions for research and development expenses. Increasingly though, only preferential treatment of innovation created in Switzerland is gaining international acceptance. "To prevent an exodus of mobile, innovative companies and to rather encourage their influx into Switzerland, we will need low taxes as well as an attractive research location," says Daniel Kalt, UBS Chief Economist Switzerland. The availability of researchers plays a key role in the attractiveness of the research location. However, access to foreign researchers and international research programs could be restricted in future depending on how the mass immigration initiative is implemented. Intensifying the focus of local educational offerings toward the needs of the economy could boost innovative drive.
Nonetheless, by far not all companies that used to be eligible for privileged taxation will benefit from tax reductions for innovation. Profit tax rate reductions are therefore necessary in various cantons to prevent the loss of geographically mobile companies. The current reform will revive tax competition. According to UBS economists, the tax rates are likely to drop in the regions of Lake Geneva and Basel. However, a drastic cut is not beneficial for all cantons, since lower standard rates usually result in lower income, at least in the short term. Thus, each canton must weigh the pros and cons of lower tax rates.
Simplified VAT system would relieve companies
Since extensive outflows of internationally mobile taxpayers would also require a higher contribution of SME to government financing, the success of the reform is crucial for these firms as well. However, a large portion of SME can benefit from the measures of the reform only to a limited extent. "Every year, roughly half of all companies in Switzerland do not pay any profit taxes, including numerous SME," says Kalt, referring to the statistics. Therefore, relieving SME located in Switzerland – e.g. in view of the strong franc – would also need to address other levies and expenses. Simplifying the VAT, for example, could reduce much of the administrative overhead in companies that the current system generates. A consumption tax with a uniform rate and fewer exemptions would be much more efficient.
Daniel Kalt, Regional CIO Switzerland
Phone +41-44-234 25 60, firstname.lastname@example.org
Sibille Duss, UBS Chief Investment Office WM
Phone +41-44-235 69 54, email@example.com
Dominik Studer, UBS Chief Investment Office WM
Phone +41-44-234 81 74, firstname.lastname@example.org