Councilor Peter Hegglin, Finance Minister of the Canton of Zug, and tax experts Bruno Gurtner, formerly Chairman of the Tax Justice Network, and Peter Uebelhart, Head of Tax of KPMG, talk about Switzerland in the context of national and international tax competition. René Lüchinger, Editor-in-chief of Blick, is moderating the panel talk.
Peter Hegglin (PH): You can't judge tax competition in isolation, you need to look at it in terms of a nation's, canton's or municipality's fiscal policy. It's also about being able to manage any costs that arise and keeping the budget balanced – without drifting off into a debt-driven economy. If tax revenue is too low, then you have to take corrective measures.
Bruno Gurtner (BG): If you look at competition from an international perspective, the negative repercussions become very apparent. I am extremely skeptical about uncontrolled tax competition. There's the question of how intense it should and can be. Today's tax regulations are set up in such a way that preference is given to mobile capital and the wealthy. That leads to enormous inequality on a global scale while simultaneously distorting competition between international and local enterprises.
Peter Uebelhart (PU): I'm convinced that Switzerland's comparatively moderate tax rates are a result of this competition. Every canton needs to rethink how it wants to position itself on a regular basis. Excessively high government spending is also curbed in the process. That mechanism is a positive one. If you look at tax rates abroad, you'll see that this mechanism frequently isn't as effective.
BG: If you ask me, what's more important than tax competition is the fact that the influence of the Swiss electorate is huge – particularly compared to foreign countries. That affects how high taxes are and how public revenue should be used. I therefore advocate the principle of “no tax without representation”. One huge advantage of our system is the possibility of federal influence at the national, cantonal and municipal levels.
PH: Tax sovereignty isn't just inherent, after all, it comes with duties and responsibilities. If you approve of federalism, then it's the right system. It doesn't make much sense, for example, to use the same approach in Geneva as in the municipality where I live. That's why the three-level system is still up-to-date and a success model. It's entirely possible that not all municipal structures are efficient and equally well equipped for the future, but that's another matter.
PU: One downside of the dual system – and there I'm referring to the national/cantonal levels – is the degree of complexity it involves, particularly if you want to understand issues like Corporate Tax Reform III (CTR III) and its multifaceted impacts. If you want to add national fiscal equalization (NFE), too, those are extremely complex issues where other countries benefit from "simpler" structures or processes.
PH: That's tied in to the common belief that these functions cost less if they're steered centrally. Reality shows, however, that this frequently just isn't the case. If you were to change the federalist system, this would make it necessary for municipal representatives to engage themselves politically at the cantonal level, or for cantonal representatives to become active at the national level to influence how funds are used. That would lead to intense lobbying at several levels. Personally, I find this quite distasteful.
PU: When working together with customers, you sense just how important geographic proximity to a tax authority is. The proximity to businesses and citizens that many cantonal tax administrations maintain is another location advantage. International customers, in particular, are always very impressed by this.
BG: In my eyes, the federal system definitely has a future. A few adjustments can always be made here and there to fine tune the various elements. My biggest wish would be to prevent outliers, and here I'm talking about minimum tax rates. That also holds true for CTR III. When all is said and done, the regulations should apply internationally and not just between the cantons.
BG: In Switzerland that would be the Parliament at the national level and the political parties who submit initiatives. We have those tools at our disposal and this is a debate that should be conducted.
PH: I don't agree with that. The cantons need a relatively large degree of flexibility to be able to perform the duties assigned to them. That's why I reject minimum tax rates. If you look at the international level, there will be fewer and fewer special treatments and competition is increasingly having an effect in terms of ordinary tax rates. As a country, we'll probably be able to afford attractive tax rates. That's only possible because our financial situation is extremely healthy. Yet because of this financial system, we are also victims of our success – take the euro crisis, for example. That's why we need this leeway, so we can continue making use of the location advantage of attractive tax rates.
BG: The ability to compete depends on various factors and tax rates are only one of those, and not even the most important one, at that. I'm all for promoting Switzerland's other positive qualities.
PU: Competitiveness depends on a variety of factors, there's no doubt about that. Yet our customers and I have come to the realization that not many decisions have been made at the political level over the past five years, which would have had a positive impact on Switzerland's attractiveness as a business location. From the perspective of international businesses, it's becoming foreseeably more expensive, more complicated and more difficult. Switzerland was reliable and more predictable in this respect for many years – particularly with regard to long-term investments and establishing large businesses in new locations.
PH: When it comes to establishing businesses, Switzerland doesn't actually have the most favorable conditions. Luxembourg, the Netherlands or even Ireland are at least among the frontrunners. Apparently these countries have equally attractive tax regulations. You can't just point your finger at Switzerland and say that the others are at a disadvantage. The rules have to apply to everybody – you can't criticize others and look out for your own advantages at the same time.
PU: When it comes to so-called mobile activities, Switzerland is typically in competition with about the same five to six countries. In fact, Switzerland has actually been losing ground over the past five to ten years. I don't see any international standardization, however. What's most noticeable at the moment, however, is BEPS – the OECD's program against base erosion and profit shifting. This covers 15 measures which were fleshed out very quickly. A few countries are already rushing ahead to implement some of them, one of which being country-by-country reporting. That will have an impact on the international tax landscape. Apart from that, I'm also doubtful as to whether it's really possible to implement the EU's concept of one common consolidated tax base in 28 countries. These countries remain sovereign states with their own budgets and we can see in the EU that not everybody has equally “healthy” finances.
PU: In terms of a wide range of tax-related matters or banking secrecy, in particular, it's important to face up to reality. We are part of a close-knit international network – particularly in the financial sector – and large nations like the USA have effective means of exerting pressure which they can and do make use of. Apart from that, we are operating in a world that is much more transparent than it was just five years ago. Even two years ago, no tax expert would have considered the latest developments regarding the spontaneous exchange of information between Switzerland and other countries possible. These developments affect not just Switzerland, but many other countries, as well.
BG: Developments such as these are attributable in part to demands made by the Tax Justice Network. We're interested in reducing or eliminating loopholes. Transparency is a necessary means for achieving this goal. I'm happy that the EU and OECD are exerting pressure. You have to keep in mind, however, that around 44 countries are involved in drawing up these regulations. Plus, there are a large number of poorer emerging nations who are being passed over by these developments. Companies with international operations should be taxed as one entity with their profits attributed to the countries where value was added. The individual countries can apply their own tax rates.
PU: These topics are discussed more frequently now than in the past and the media, in particular, has become increasingly knowledgeable on the subject. Sometimes I'm quite amazed by the level of detail included in reports on these structures and how complex issues are explained. Taxes were still a “secret science” of some sort just 10 years ago which was understood by just a small circle of experts. Yet despite the recent critical discussions of the tax structures in place at Apple or Starbucks, there's still no decrease in the number of iPhones sold or cups of coffee ordered. That means that the general public is certainly more aware of and interested in tax-related topics. But it doesn't lead to any boycotts.
PH: The EU's criticism of Swiss tax law, which began in 2005, undoubtedly played a role. Switzerland is now trying to respond to that criticism with CTR III. On the other hand, NFE and the knowledge of who can generate which financial resources has probably also contributed to the discussion. The issue of tax equity – with regard to lump-sum taxation, for instance – has contributed to the broad public discussion, as well. Those are good debates that need to happen so that our system can be fine-tuned through referendums.
BG: If you ask me, I think the international scandals surrounding companies who massively reduce their tax burdens are one reason why people are outraged and want to know why these situations are even possible. Plus, the financial crisis helped put questions like these on the table. Finally, it's NGOs like the Tax Justice Network that actively address topics such as these.
PH: A company's tax burden certainly used to be the deciding factor when considering whether or not to settle in Switzerland. Nowadays there are many factors involved in determining an optimal location, so you need both. Plus there is practically no other country that has double tax treaties with as many states as Switzerland. That means we're already cooperating well with a great many countries. And to do so, we are working within the scope of the OECD's guidelines. In fact, that's what companies want, too – legal certainty is just as important today as attractive taxes. In the end, it's the overall package that has to be appealing.
PU: With regard to the referendum mentioned, we should be able to see quite soon which direction the country wants to take. CTR III, or a possible referendum on the reform, will be a touchstone for how Switzerland wants to position itself in the future. This is also the context in which the immigration initiative should be viewed. On issues such as these, in the end you simply have to keep in mind what consequences these fundamental decisions will bring. Yet we also shouldn't forget that the taxes of international companies, in particular, make a significant contribution toward both national and cantonal financial resources.
BG: I agree that each situation has to be assessed carefully on an individual basis and that we need to be aware of what their consequences are. Yet attracting every company to Switzerland no matter what the cost just isn't necessary. Growth must be sustainable and socially responsible.
PH: People frequently presume that there's no inheritance tax today, however it already exists at the cantonal level – with the exception of Schwyz. There's a risk here that cantons could be deprived of a vital instrument which, by the way, had originally been defined by the electorates of the respective cantons. CTR III is a complex undertaking and we need to provide electors with objective, transparent information. We need a suitable set of regulations that provides legal certainty and works during times of economic difficulty. When all is said and done, we also have to prevent individuals from having to pay the “price” of CTR III.
BG: Inheritance tax is essentially a liberal tax that works on the principle of “equal opportunities for everybody”. On this topic, the issue of a location's attractiveness is probably negligible. How a law might be drafted to do justice to succession situations at SMEs is certainly much more decisive. One aspect of CTR III that I welcome is the elimination of special tax policies. It might well be that somewhat higher taxes will have to be paid in certain cantons – even without additional compensation. After all, in the past, some people and companies have benefited more than others, too. Like I said, I'm in favor of a minimum tax rate at the cantonal level.
PU: The inheritance tax issue is a classical yes/no question that doesn't leave much room for interpretation. It would be another tax at the national level that cannot be adjusted at the cantonal level. The consequences of such a tax should also be kept in mind, particularly when it comes to succession situations within businesses. Generally, assets are invested in the companies and not laying around as cash on the owners' accounts.
In terms of CTR III, I consider the big challenge to be the complexity of the matter. The special treatment of abstract legal entities isn't easy to understand and the issue of a location's attractiveness, which we just discussed, also plays a role. We talked about mobile capital and the less attractive we make Switzerland as a business location, the more likely it is that Switzerland's economy will suffer the negative consequences of these decisions.
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