The proud boast of the John Lewis Partnership Department Store chain, ‘Never knowingly undersold since 1925’, is less than impressive when compared with Switzerland’s record on international tax. It has never been knowlingly undersold since at least 1872 when one of its cantons signed the world’s first every double taxation treaty. I thought of Switzerland when enquiring about a new car last week. As the model that interests me is sold in two local showrooms, I tried both. One was highly professional and even told me the ‘real’ statistics for fuel consumption, as well as which model would best suit my needs. The other went through the usual car salesman’s pitch and, before signing off, blatantly declared they would undercut anything the other guys were offering. The search goes on.
Throughout my career, Switzerland has been enormously useful. Holding companies, domicile companies, principal companies, mixed companies and finance branches have provided solutions for international groups looking to park some of their profits offshore without the need for sailing out to some God-forsaken island in the Atlantic of Pacific where, once upon a time, the local representative might have been cooked for lunch. However, as international competition for corporate tax tourism picked up in recent decades, the Swiss had to up their game. There were even international visits from respectable firms of Swiss tax advisors offering private rulings involving somersaults of tax logic. Nothing particularly strange about that. It was the fact that they were accompanied by representatives of their local cantons’ tax authorities, smiling benignly.
And then came the world’s Damascene Conversion to fairness and transparency in the international tax sphere. For Switzerland it was more a case of the Spanish Inquisition. With nowhere to turn, where would they would they go from here?
Well, the response has been sometime in coming, and thanks to 50,000 troublemakers forcing a referendum on the issue a couple of weeks back, it will still be coming until at least May. But, the proposal approved by the legislature late last year does away with all those different types of special company and says goodbye to private tax rulings. In their place come ‘reduced’ combined federal and cantonal tax rates centred around 13% to 14% and a string of other provisions.
It is the string of other provisions that has left me checking the internet for booby-trapped timing devices. Switzerland just has to stay ahead of the pack. Call it Swiss DNA. In the modern world 13% to 14% just ain’t going to swing it. (They couldn’t go any lower – as a nation that doesn’t sport beaches and not much else, they do have to worry about funding their welfare schemes. As it is, employee/employer taxes have had to be upped to cover the loss of corporate revenue). There is provision for step-up of assets for companies migrating to Switzerland (some nice planning available there) and the write-off of hidden reserves for companies coming out of the old regimes. But, the latter only lasts five years and Switzerland presumably hopes to live a bit longer than that. Notional Interest Deductions on capital are thought to only apply to one canton. Beyond that, patent box and R&D treatment are pretty standard.
So what are they going to do long-term? Switzerland, of course, is not just a pretty rock-face. Three of the largest fifty companies in the world are headquartered there (and I don’t just mean tax headquartered). The tourist industry is massive. And there is, of course, its impressive watch industry. However, 75% of the economy comes from services. Banking secrecy has been permanently compromised, and tax tourism seems to be following suit.
The Gnomes of Zürich must have something under their hats, surely? If there is one thing the Swiss are not, it is cuckoo.