Tax Break

John Fisher, international tax consultant

Archive for the tag “Swiss tax”

Votes for taxpayers!

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Some suffering is not pointless

I was sorry to hear that former US president and Nobel Peace  laureate Jimmy Carterhad  broken his hip last month.  I was not sorry to hear that the incident had ruined his planned turkey hunt in his home state of Georgia. I – like the lion’s share of the western world – have a visceral dislike of the pointless suffering of wildlife.

The Americans continue to do things their way, while the rest of us are becoming more and more constrained by multinational consensus. The latest example came last month when a Swiss referendum ensured the application of a new corporate tax regime, as well as restrictive gun laws. On the face of it, this was an example of absolutely raw democracy in action. In Switzerland, all it takes is 50,000 signatures on a petition to guarantee a national referendum on parliamentary laws. And that was the case here.

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What choice do sovereign states have anymore?

But, beneath the surface, the reality was different. Both proposals had, broadly, been up for national vote previously, and both had failed. This time, the people knew that Switzerland’s much-loved-by-foreigners tax friendly principal companies, finance branches and private tax rulings were dead in the water, thanks to BEPS and related international agreements  pushing for a level playing field for domestic and foreign businesses alike. Meanwhile, persistence with the country’s liberal gun laws would mean exclusion from the EU’s much-prized border control free Schengen Area.

Companies of all stripes will now be subject to the same rate of tax, deductions being given for EU friendly R&Dcosts, patent box and the write-off of hidden reserves. To help cover the expected shortfall in tax revenue, and  pacify the lefter leaning elements of society,  there is to be an increase in social security related taxes. At the same time, residents of Switzerland will have to get used to less freedom to bear arms.

The message to the Swiss from the international community was loud and clear – you can vote any way you like, as long as it’s ‘yes’. Two thirds of voters duly obliged in both referenda; the rest are helping police with their enquiries (that bit isn’t true).

Careful thought about the Swiss situation  raises the long-standing question of the importance of nations and, with it, the importance of citizenship. Before the ascendancy of the nation state, the 17th century poet John Donne meditated that, ‘No man is an island, entire of itself; every man is a piece of the Continent, a part of the Main’. Napoleon, Bolshevism, two World Wars, Apple and Amazon later, and nations have limited control of their own destinies, while hundreds of millions of their citizens live beyond their borders. Despite the passing centuries, we are evidently not done with Donne. And, despite a declaration of the League of Nations scarcely 90 years ago that: ‘Every person should have a nationality and should have one nationality only’, growing numbers of people collect citizenships like their grandparents once collected cigarette cards. 

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This bloke was a US citizen until recently. What was that quote of Baldwin?

The time has surely come to reassess the State/Individual connection. In  a world where -with a few prominent exceptions – compulsory conscription to defend the nation is no longer necessary, too many people fit Stanley Baldwin’s assessment of: ‘Power without responsibility – the prerogative of the harlot throughout the ages’.  An excellent candidate for consideration to, at least partly, replace citizenship in assessing an individual’s rights and responsibilities vis a vis the State, would be long-term tax residency.

Who knows? Monaco might one day be a permanent member of the United Nations Security Council.

Watch this space

The Fast Show Special

The Rolls Royce (alright, Bentley) of tax havens

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.

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Anything you need..

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.

quote-in-italy-for-thirty-years-under-the-borgias-they-had-warfare-terror-murder-and-bloodshed-they-orson-welles-277430So 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.

 

Maintaining The Berne Rate

Swiss Chocolate Soldiers

Swiss Chocolate Soldiers

Sorry, sorrowful Switzerland. This pious country, which has been supplying the Vatican with its psychedelic army for the last five centuries, has been forced to take heed of the words of Handel’s Messiah (with apologies to Isaiah): ‘Every valley shall be exalted, and every mountain and hill shall be laid low.’ After hundreds of years  where, thanks to the impossible terrain, the Swiss have ‘made watches not war’, the Western World’s  tectonic shift from bang-bang war to economic war (other than dealing with the primitives of the Middle East), has seen Switzerland flattened.

Their woes started with an attack on their banking secrecy laws, progressed to the nuking of their financial institutions for dirty dealings, and now, knowing that the game is up, they are undergoing a complete ‘voluntary’ overhaul of their corporate tax system.

Switzerland has been a tax haven for as long as the term has had meaning. The first ever international tax treaty, in 1872, was between Great Britain and the Swiss Canton of Vaud. And it has been all downhill since then.

According to draft legislation published last month by the Swiss Federal Government, all those fun, ring-fenced, foreign-owned companies – mixed, domiciliary, holding, principal, Swiss finance branch – would be phased out by 2029. (Twenty-twenty-nine! There could be another World War by then; in fact, maybe  that is what the Swiss are banking on.)

The Swiss tax situation is precarious

The Swiss tax situation is precarious

Having said that, Switzerland is not about to hike its tax take. That would be tantamount to abseiling down Mont Blanc without a rope. The draft legislation is a potpourri of give-aways marketed by  other – slightly less in-your-face – jurisdictions.

There is going to be a patent box, a notional interest deduction, a step-up on corporate migration, a step-up on transition from one of the old regimes (in 2029), a reduction in Cantonal tax rates,  cancellation of the reviled 1% capital tax (that has a habit of becoming 2%), a participation exemption, unlimited loss carryforward, a modified UK style group relief,  and reduction of net wealth tax.

It is tempting to conclude that the Swiss are following the age-old custom of chucking as much as possible against the wall and then seeing what sticks. It is almost inevitable, in the era of BEPS, that there will be a chiseling away at many of these benefits worldwide. Whatever happens, by going for broke, the Swiss should continue to be one step ahead of  the market.

These are better times for the Swiss watch industry

These are better times for the Swiss watch industry

On the other hand, it is definitely time for Switzerland to expand its non-financial sector. Despite the ubiquitousness of the cheap quartz watch over the last 40 years, the Swiss have reinvented the market for the quality precision piece. Time may be on their side after all.

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