BERNE (Reuters) - Switzerland is considering corporate tax incentives as offered by countries like Belgium, Britain and the Netherlands as it bows to European Union pressure to scrap its own controversial tax breaks.
“We compete for the same companies as Amsterdam, Brussels or London, so we should have similar solutions,” finance department director Serge Gaillard told Reuters in an interview in his Berne office.
Switzerland has been under fire from the EU since 2005 for allowing its cantons, or states, to compete to attract multinationals’ business by taxing foreign profits at a lower rate than domestic earnings, a practice known as “ring fencing”.
Brussels has given the Swiss a June 21 deadline to come up with alternatives if it wants to avoid sanctions, which could include blacklists and damage Switzerland’s relationship with its most important trading partner.
Gaillard said Switzerland’s priority was to come up with alternative models that would be accepted by the EU, even if these may come under pressure from the OECD later on.
“If we adopt new tax regimes that already exist in other European countries for the mobile income of companies, we can’t rule out that we will have to adapt our corporate tax system again in 10 years’ time, but so will other European countries.”
Revelations that high-profile corporations like Amazon.com Inc, Google Inc and Apple Inc shifted profits around the world to cut their tax bills have increased public anger over tax avoidance schemes offered by countries.
The Organisation for Economic Cooperation and Development (OECD) is due to deliver recommendations on how to tackle problems like double-taxation agreements, transfer pricing and the exchange of information between tax jurisdictions at a meeting in July of the Group of 20 (G20) leading economies.
Michael Ambuehl, state secretary for international financial matters, met with EU representatives in Brussels on Wednesday to put forward Switzerland’s suggestions to solve the dispute.
One proposal is to introduce “license boxes” allowing income from intellectual property to be taxed at lower rates, already used in EU members such as Luxembourg, Belgium, Cyprus and Britain.
While license boxes would be suitable for cantons like Basel, home to drug makers Roche Holding AG and Novartis AG, the model may be less practical for cantons like Geneva, base for many trading companies with little income from intellectual property.
Gaillard said Switzerland would look closely at the design of other license boxes used in the EU and was considering a broad model that would include income from items such as brands.
Swiss cantons could also lower standard tax rates. Geneva has proposed a corporate tax rate of 13 percent for both foreign and domestic income, compared with a current rate of around 24 percent for firms not qualifying for special rates.
But lowering rates would greatly reduce cantons’ income from corporate tax and could prompt a domino effect, as neighboring cantons are forced to follow suit to remain attractive.
“If Geneva lowers its tax rate to 13 percent, then some of the other French-speaking cantons would probably have to follow, at least partly,” Gaillard said.
According to various scenarios calculated by his department, the reforms could cost the confederation, cantons and communes between 1 billion Swiss francs ($1 billion) and 3 billion in lost corporate tax revenue.
But with the reform not expected to take effect until 2018, Gaillard said the government had time to make savings to plug the shortfall. “It’s affordable. We should be able to save 500 million to 1 billion on the expenditure side.” ($1 = 0.9624 Swiss francs)
Editing by David Holmes