Federal referendum of 19 May
With its tax proposal on 19 May, the federal government intends to adapt Switzerland’s tax system to international standards. Tax privileges for predominantly internationally active companies would be abolished. Many cantons would be affected, as special regulations for foreign companies would no longer be permitted. The Confederation wants to help the cantons to reduce corporate taxes in general, so that differences to domestic companies will no longer exist. This is the short version of the voting booklet. – On the face of it, one could agree with it. We all want the economy to flourish and no jobs to be lost. However, those of us taking the trouble to explore the historical background begin to doubt.
In 1961, 17 Western European industrialised countries, together with the USA and Canada, founded the OECD (Organisation for Economic Cooperation and Development) as the successor to the OEEC. Other countries joined later. Today, the OECD has 36 members, who are committed to the market economy. Today, the OECD employs about 2,500 people. Its headquarters are at Muette Castle in Paris. The Council, to which each member state delegates its minister of economics, acts as executive board. The principle of unanimity applies, so that every country has the right of veto. Switzerland was there from the very beginning and today has a permanent delegation in Paris with its own house.
Only months after its foundation, the OECD Council adopted the OECD Code of Liberalisation of Capital Movements. Capital movements are deemed:
Why is this Code so important? In the post-war years, initially the economist J.M. Keynes critical assessment the free movement of capital pertained: “The free movement of capital is an essential part of the old laisser-faire system […]. Controls of capital movement [by the nation states] are necessary accompanying measures.” The 1961 Code, however, set the course for globalisation as we know it today. The OECD took on the role of a thought leader and acted as a pace setter. But the OECD is more than just a think tank whose committees deal with agricultural and regional policy, education issues, development cooperation, fiscal and financial policy and many other issues, as well as draft reports on these topics and define standards. Its work is always related to practical policy. Its standards are incorporated into bilateral and international treaties. The OECD participated in the GATT and later WTO negotiations and prepared the G 8, G 9 and G 20 meetings.
The OECD Code has facilitated the movement of capital for the benefit of transnational corporations. The Internet revolution created further undreamed of possibilities – for example, making it possible to transform the fundamentally sound Swiss Bank Corporation into the unstable global corporation named UBS. The Code also laid the foundations for the numerous financial and economic crises of recent decades. The list is long. In the 1990s, George Soros had “successfully” attacked the English currency; then followed the Asian, Russian and Argentine crises. The collapse of the hedge fund LTCM should be mentioned, as should the crisis in US securitised mortgage bonds, the collapse of Lehman Brothers, and the debt and euro crises of recent years. This also includes the new policy of the central banks to continue expanding the money supply many times over, of which nobody knows the outcome.
It was clear in the OECD from the outset that it would not be enough just to open national borders to the movement of capital. It is equally important to harmonise national legal and tax systems. This purpose is served by the numerous standards defined by OECD committees over the decades, and incorporated into laws and agreements.
Pivotal for Switzerland was the year 2000, when an OECD committee conducted an inquiry into “potentially harmful tax regimes in OECD member states” and asked the Council to adopt the automatic exchange of information as a binding OECD standard.
Switzerland, Austria and Luxembourg (in all of which the principle of bank client confidentiality was effective) resisted, but relented when they were assured that instead of the exchange of information, a withholding tax on capital gains would suffice. However, this turned out to be not enough. The attacks went on – and came mainly from countries with high taxes such as Germany, France and the USA. Switzerland soon found itself on grey or, alternatively, on black lists, and this fact served as justification for shaping politics with the help of illegal or stolen material. So, for example, martial expressions were used in a hearing in the German “Bundestag”: “The cavalry should march up to form a scenario of intimidation”. Or “…the Swiss must be shown the tools of torture.” The media headlines were no better. In 2009, the Federal Council gave in and declared its willingness to adopt the AIA, i.e. the automatic exchange of information, as standard – and the USA finally did not participate in this at all. However, a popular initiative ensured that in Switzerland, bank client confidentiality was maintained domestically as a protection of privacy.
Many believed that black and grey lists would now finally be off the table! But the relief of 2009 was premature. After the OECD, also the EU introduced black and grey lists. In 2017, the EU published a list of 29 countries worldwide that did not meet its standards. With it comes a further list of countries monitored by the EU Commission. (EU member states are controlled separetely and do not belong to this list.) Today there are 15 countries on the black list, and 34, that have promised improvements, on a grey list. Switzerland is once again one of them. It is noticeable that almost exclusively small and very heterogeneous countries can be found on these lists. There are, for example, very rich countries such as the United Arab Emirates (which charge almost no taxes) and some poor African countries. These include many small countries from the British Commonwealth.
Switzerland is being watched by Brussels – especially on 19 May, when a federal bill aimed at implementing the EU Commission’s standard will be put to the vote.
Having its own tax system is part of the sovereignty of every country. This can vary from country to country and in Switzerland from canton to canton, resulting in a competition that helps to dampen tax pressure. Especially high-tax countries such as France and Germany are striving for harmonisation, because they want to prevent companies and private individuals from looking around for tax alternatives. At first glance, such a policy seems obvious, for example when one reads about well-earning sports stars relocating their tax domicile to Monaco. For internationally active corporations, however, taxes are not the only criterion for settling in a particular location. The Zurich region, for example, is not known for low taxes. Nevertheless, many international corporations have their headquarters here, because the pulsating economic life, well-trained workers and specialists, political stability and a trustworthy currency form the basis for legal security and economic prosperity. They also have an international airport right on their doorstep. Economically weaker cantons in Switzerland cannot compete with such an offer. However, they profit from the fact that they have a more favourable tax system, and within the framework of their cantonal tax sovereignty they can offer special regulations for a few years, if a domestic or foreign company comes to settle there. This is not unusual. Many smaller countries all over the world are in a similar situation. – Who would want to hold it against them? But, according to the standards of the EU Commission, such special regulations are now to be eliminated.
How to vote on 19 May? Professor Christoph A. Schaltegger, Professor of Political Economics at the University of Lucerne, points out the disadvantages of the federal proposal, which are hardly ever discussed. It disrupts the financial equalisation between the cantons and creates false incentives that weaken the federal tax system. Schaltegger sees no danger of losing jobs: “There is no reason for us to lose our heads. Even without a federal legal basis, the majority of the cantons have already begun to offer an internationally accepted transitional solution to companies that are currently subject to privileged taxation. With a so-called step-up, the companies in question will be introduced to the new tax world during a transitional period. If the tax deal [i.e. the proposal of 19 May] fails, one could go further along this path and take the appropriate time for a coherent tax reform” “Finanz und Wirtschaft” (Finance and Economy) from 22 November 2018).
The current policy of the EU is to define “international standards” in step with the OECD and to pillory countries that “are wired” differently. This cannot please a liberal-minded citizen. Such processes must be included in the assessment of the planned framework agreement with which the EU wants to even more involve Switzerland politically. The current example shows that the strongly federal tax system, supported directly by the population (in which “anything and everything” is voted on), in no way corresponds to a centralist world view that wants to enforce its standards transnationally and globally. Switzerland must live with these differences and remain steadfast – even if repeatedly rubs opponents up the wrong way with its well-ordered house. •
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