Corporate Tax Reform III – by order of the OECD How can the sovereign state of Switzerland deal with it?

Federal referendum of 12 February

by Dr iur Marianne Wüthrich

This year marks the 10th anniversary of the outbreak of the European financial crisis. You remember: The crisis did not come out of the blue. It was imposed on us by the US, which, by means of its unaffordable wars and the virtual dollar trillions it had created on account of these wars, had effected a financial bubble which threatened to burst in 2007/2008. Like in the time of the Vietnam War, the US government transferred its debt to Europe by means of a massive devaluation of the dollar. As a result, the euro, which had been a dubious invention from the start, began to have serious problems, and many euro countries sank into crisis, unemployment and indebtedness, and this has been putting a strain on the EU to this day. Only so much need to be said as a quick reminder.
What has this review got to do with Switzerland? Well, as a state with a relatively well-ordered financial policy, with low unemployment and its own healthy currency, Switzerland has had to defend itself vigorously for these last ten years so as not to be a pawn to EU and OECD appetites and to be sucked dry by them. The war of the Great Powers US and EU against Switzerland as a business location is in full swing, as they hold on to the mistaken hope that taking the cream off Swiss tax revenues and bank accounts and weakening this small but strong competitor would help them to pull through better.
Today, a fierce fight for the big economic enterprises is taking place around the globe. In the globalised world, large-scale conglomerates are often no longer connected to their country of origin, but rather set up their production sites in the cost-efficient world regions; for their headquarters they choose a state with high political stability and legal security as well as little bureaucracy and low taxes.

Federal structure and tax privileges today

On the one hand Switzerland is attractive as a location for foreign companies, since it is characterised by high stability, particularly in politically and economically uncertain times. It is precisely the strong Swiss franc that provides security, but on the other hand this is linked to a high cost of living. To enable the cantons to compete internationally, they have offered a tax package entailing little bureaucratic effort to the 24,000 so-called “principal societies”, which generate their sales largely abroad. These societies include some 11,000 holdings that do not operate in the country, but only hold and manage participating interests in other companies. These companies provide around 150,000 jobs in Switzerland.
The tax-privileged companies pay over CHF 5 billion direct federal tax and approximately CHF1.6 billion cantonal tax on profits. The more than 300,000 non-privileged large, medium-sized and small enterprises, which have to pay full tax on their profits, deliver about CHF 6.3 billion to the cantons (Source: “St. Galler Tagblatt” of 19 January 2017).

EU and OECD have been exerting pressure on Switzerland for years

The OECD is essentially only an office with around 2,500 employees, which produces statistics, derives “policy recommendations” from these, and sets “standards”. (See
These OECD “recommendations” and “standards” are communicated to small states such as Switzerland in an authoritarian manner: either surreptitiously (for example in education and health care), or by way of orders, pressure and the threat of being put onto black and gray lists.  For example, one could read the following in the “Neue Zürcher Zeitung” in September 2015: “Since the outbreak of the financial and debt crisis in 2007/08, the political will to tighten global rules has powerfully risen, notably in the large OECD countries. Smaller countries like Switzerland [...] have their doubts about the OECD, but must bow to the power-political realities.”
After the subjugation of banking secrecy, the same procedure is now going on in corporate taxation. For a long time, EU and OECD have been calling on Switzerland to abolish fiscal privileges. This has already enabled them to keep some companies from settling in Switzerland because they do not know exactly what the legal situation will be in future (legal uncertainty). However, since the abolition of the privileges lies in the competence of the cantons, the Confederation together with the cantonal governments, the political parties, the economic associations and other interested parties have for years now been forced to try and find a solution which will remove the sword of Damocles in the form of black lists from Switzerland and its individual cantons, but which will also be capable of winning a majority with the voters. On 12 February 2017, the sovereign will decide on this matter.

What the referendum is to bring about – pro and con

We will here restrict ourselves to the essential points of the Corporate Tax Reform (CTR III), which can be understood by everyone.
The core element is this: the Confederation bows to the Great Powers and forbids the cantons to demand less corporate income tax from the foreign principal societies than from local companies. Instead, all companies, both domestic and foreign, will benefit from generous tax deductions for research and development, and the profits from patents will be taxed at a lower rate (see voting brochure, p. 32). These relief measures for all companies are acceptable according to the OECD standards.
The opponents of this referendum describe the new advantages as “non-transparent tax dodges”, “only understood by a handful of tax consultants and economic attorneys” (voting brochure, p. 35). Anyone who tries to read or even understand the wording of the proposed changes of the law (voting brochure, p. 38-46) must agree with the opponents: there is not a trace of general intelligibility!
The supporters hope that the new tax breaks will ensure that as many domestic and foreign firms as possible will remain in Switzerland and thus preserve or even create jobs.
The opponents of this referendum – this is particularly evident in many readers’ letters – are of the opinion that we could easily do without Google, Apple and Co.
The supporters argue that with the departure of a large proportion of foreign companies there would be a major drain on Swiss tax revenues and a perceptable loss of jobs.

What will most cantons probably change after an approval

In federalist Switzerland, tax sovereignty lies with the cantons. The Confederation may require the cantons to tax all companies according to the same tax rate. But as to how they implement this provision in cantonal law, this is in their hands, which means that they can reduce the regular tax on profits for domestic and foreign companies on their own initiative in order to motivate them to stay. It is agreed on almost all sides that the majority of small and medium-sized enterprises (SMEs) would benefit from such a tax reduction: and of course, their tax rate would also be reduced. The citizens of the individual cantons will vote on the amendments to the cantonal regulations at the ballot box. In order to keep the cantonal tax receipts from declining too drastically in value, the Confederation wants to give the cantons a hand: their share of direct federal income tax would be increased from 17.0 per cent to 21.2 per cent (voting brochure, p. 34). Overall, according to official figures, the Federal grant would amount to some 1.3 billion annually.

Debate about the consequences of an aye or a nay to CTR III

The opponents of this referendum argue that the hole in the federal budget may also be much bigger than the Federal Council would have it today, not to mention the massive losses of cantonal revenues, which cannot be accurately quantified in advance (voting brochure, p. 35).
The Federal Council even confirms this itself: The financial implications of the reform depend on many factors that are not yet known today (voting brochure, p. 31).
The opponents of the referendum therefore warn against future tax increases for the citizens and against the dismantling of state services in case of an aye: a few large companies and their shareholders would win, but the “normal” taxpayers and citizens would be made to pay up (see However, even the opponents embark on the debate with unsubstantiated figures, for example when they catalogue concrete estimated tax increases for the individual communes in the Canton of St. Gallen (in the case of the tax reform being adopted).
The supporters argue that tax losses after an aye to the Corporate Tax Reform III would be only temporary, because new businesses would settle in Switzerland. Moreover, having to pay less tax, domestic firms would be able to invest and produce more domestically. Federal Councillor Ueli Maurer, Head of the Federal Department of Finance, warns: “In contrast to the consequences of a nay, in case of the reform being adopted the losses will be small. […] In the case of a nay, we immediately lose tax potential as well as jobs, there will be fewer investments and eventually the number of new relocations of foreign firms to Switzerland will fall to zero.”

What next?

Finally, we will attempt to give a synopsis and show up some possible solutions.
Synopsis: Practically everyone agrees that Switzerland will have to abolish the preferential taxation of foreign companies, according to the dictates of the OECD. The intention of taxing all economic enterprises under the same tariff in the future and granting all the same tax deductions is not contrary to fiscal justice. It is also agreed that a “yes” to the tax reform will, at least temporarily, lead to fewer tax revenues in the accounts of the Confederation and the cantons. There is, however, a disagreement about how these losses and also the planned support payments by the Confederation are to be countered. Should corporate taxes be reduced at the expense of “normal” taxpayers? All sense of justice rises up against this measure.
The opponents of this referendum, however, usually do not express their ideas of a more socially compatible solution, like for example chairwoman Anita Fetz (SP Basel City): Under the title “Without alternative? Come off it!” we look in vain for a real alternative: “In politics, we fortunately have the option of returning the parcel to the sender – with the commission to improve it.” But how?
An internal approach to a solution: We voters might take advantage of the opportunity to reduce our excessive administrative bubbles and public spending ratios in the federation, the canton and the cities. So for example, the federal education and research expenditures have risen from CHF 4.3 billion to over CHF 7 billion between 2005 and 2015, which is 62 per cent more! A considerable part of this money flows into EU research projects, which we could get more cheaply under our own steam. There is also one billion CHF going to the Swiss National Science Foundation – which is more than the total federal contribution to Swiss vocational training (see “Switzerland as a research and training centre and the EU bureaucracy”, Current Concerns 26/27 of 5 December)!
The situation is similar in many cantons and cities. In the city of Zurich, for example, the voters almost always accept completely out-of-the-way construction projects with a high majority; so on 9 June 2013, with 73.4 per cent of votes in favour for a primary school for 90 million francs which was to be compatible with the new Curriculum 21 (boasting a triple-gym and “flexibly usable” schoolrooms allowing “modern instruction practices”!)!
If we citizens as well as our parliaments were to comb through our various administrative divisions and to agree only to economical and reasonable projects, a lot of public money would become available.
As a small state, what shall we do? Find allies! “As an individual, you can not fight back without catastrophic results. That is why we must find partners: states that think as we do.” said Federal Councillor Ueli Maurer. Maurer used his stay at the WEF in Davos to establish and cultivate contacts, European ones “in a kind of small G-4 group with the Netherlands, Belgium and Sweden”, as well as some outside the EU with Great Britain, Australia and Singapore. Together, such an alliance could make a good defense, for example against new OECD standards.
Maintaining the strengths of Switzerland: The fact that Switzerland is still doing well in comparison with other countries is due not to tax cuts and large multinational corporations but to the strengths of our state structure, our small-scale economy and our many active and responsible citizens.

  • Federalism and direct democracy: Work is done in the most careful and economical way in the small communes, because the citizens do a lot of voluntary community work, in the municipal councils they decide directly on the municipal budget and they control the administration. We must also increase this control in the cities, the cantons and the Confederation, or to demand it from our parliamentarians, which would be possible thanks to our direct democratic rights.
  • Strong SMEs, a dual vocational education and training system and a good primary and secondary school education: Switzerland has by far the lowest unemployment rates and, above all, the lowest rates of youth unemployment in Europe, because its small and medium - sized enterprises (SMEs), but also many large domestic corporations as well as our state enterprises provide for, maintain and supervise our dual vocational education and training system. 80 per cent of young people in Switzerland (including the foreign youths living here) complete a vocational apprenticeship and so contribute to the preservation of our well-organised state and economic order. It is, however, alarming that because of the increasing deterioration of our school education, more and more school leavers are simply not capable of pursuing and successfully completing a professional apprenticeship – and partly they do not even wish to do so (!). If for this reason alone, the harmful Curriculum 21 must be prevented.

Switzerland has a unique citizen-orientated state structure, a relatively low level of public debt and a comparatively healthy economy, as well as a population that is – still! – on the whole enthusiastic and efficient. So we will surely be able to deal with a Corporate Tax Reform, even if this could lead to temporary losses.     •

EU threatens “non-cooperative tax areas” with blacklist

At the end of January, Switzerland – in addition to 90 other countries – will receive a communication from the EU, according to which by the end of 2017, the EU aims to have examined whether these individual states allow tax privileges for companies that are “harmful” according to the EU Code  (“Neue Zürcher Zeitung”, 27 January 2017). Needless to say this announcement comes at the right moment for the supporters of the Swiss Corporate Tax Reform III, the vote on which is scheduled to take place on 12 February. Because this is intended to ban the privileges practiced in many cantons for foreign principal societies. This is a catch-22 situation for the opponents of the tax reform, because they are mostly to be found in circles which regularly speak out for an “opening up” of Switzerland towards the EU. In order not to stand up against the EU, they want to draft an alternative proposal to the CTR III if this is rejected, according to their wishes. However, given the fact that there is no agreement among the opponents about the concrete content of such a new draft, it is very unlikely that this will be on the table, let alone be ready for a referendum, in any useful period of time.