Global minimum tax: why Switzerland has to be careful

US Treasury Secretary Janet Yellen and her German counterpart Olaf Scholz at the G7 meeting in London. Image: keystone

Analysis

If Switzerland “tricks” with the minimum tax, things get even worse

Swiss politicians are reacting calmly to the global minimum tax for companies. There are already considerations as to how the additional workload can be compensated. That shot could backfire.

There was no shortage of big words. The agreement by the G7 finance ministers on a global minimum tax of 15 percent on corporate profits was described as an “earthquake” or “tax revolution”. Saturday’s decision was “bad news for tax havens all over the world,” said German Finance Minister Olaf Scholz.

Switzerland is probably meant by this, after all, US President Joe Biden explicitly referred to it as such in his first speech to the Congress. The reactions in Swiss politics nevertheless fluctuate between fatalism and serenity. There is no question of a veto at the OECD, which ultimately has to implement the decision.

The minimum tax will hit Switzerland hard. No fewer than 18 cantons have a profit taxation of less than 15 percent. The lowest rate can be found in the “eternal” tax haven of Zug, where it is just below the 12 percent previously regarded as the “pain threshold”. Nevertheless, Finance Director Heinz Tännler (SVP) is calm.

No controversial practices

“It has been in the making for years, I was expecting it,” he said in an interview with the Tamedia newspapers. He emphasized that Switzerland stands out from tax havens such as the US state of Delaware or Bermuda and that it adheres to international standards. In fact, Switzerland refrains from particularly controversial practices.

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This includes, for example, the “Double Irish With a Dutch Sandwich”, which is used by tech giants such as Amazon, Apple, Facebook and Google. They shift their profits back and forth between Irish and Dutch subsidiaries until they almost no longer have to pay taxes.

Search for compensations

Switzerland, on the other hand, has abolished some controversial tax privileges. Now the next hammer follows, and not all react as cautiously as politicians. A “level playing field” limits Switzerland’s options, said Stefan Kuhn, Head of Taxes at the consulting firm KPMG, at the presentation of the Swiss Tax Report 2021.

The Zug finance director Heinz Tännler (SVP) is calm. Image: keystone

“Switzerland needs compensatory measures to justify the high wages. We will no longer be able to play with taxes as we did in the past, ”said Kuhn. Economiesuisse is also calling for the tax increase to be compensated. The Zug finance director Heinz Tännler has already given concrete thought to this.

Reminder of the interest tax

“The possibilities range from subsidies for research and development to patent boxes and tax relief for employees to a reduction in environmental taxes and ancillary wage costs,” he said in an interview with Tamedia. It is not about new loopholes, the compensations are “internationally accepted”, emphasized Tännler.

That may be, but what happens if the G7’s hoped for additional revenue does not materialize? Switzerland could actually sing a song about it, it had unpleasant experiences in its ultimately unsuccessful “defensive battle” to rescue banking secrecy. Or does anyone still remember the taxation of savings income?

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With this instrument, Switzerland was able to block EU pressure for the time being from 2004, together with Luxembourg and Austria, who also defended their banking secrecy. The income for the EU countries remained manageable because the banks developed investment vehicles for their tax-evasive clients with which they could avoid the interest tax.

Not the end of the flagpole

Finally, Switzerland offered a final withholding tax and promised countries like Germany significantly higher payments than with the savings tax. In the end, all of this was of no use, Switzerland had to disclose banking secrecy and accept the automatic exchange of information. The financial center has not recovered from this to this day.

Large corporations like Amazon are supposed to pay taxes where they generate income. Image: keystone

Something similar could flourish for Switzerland as a company location, because it is difficult to imagine that the 15 percent will be the last word. US Treasury Secretary Janet Yellen had targeted a rate of 21 percent. And then there is the second part of the reform: large corporations should pay part of their taxes where they generate their profits.

A lot is open on this point, because big economic powers like Germany or the USA would be both profiteers and sufferers (see the German auto industry). In general, there are still many question marks. However, Switzerland should be prepared for the fact that its business model as a low-tax location is being phased out.

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