Corporate Tax Reform harming the poor

Article AS news
The Swiss Parliament is discussing corporate tax reform III. In development policy terms, with this reform Switzerland is going from the frying pan into the fire.

For every US dollar a developing country gains, it loses more than two. A wide range of capital transfers help account for the constant drain of financial resources away from developing countries. According to calculations by Eurodad, the European Network on Debt and Development, developing countries lost US$1,583 billion in this way in 2012. That is more than 10 times the US$120 billion that flowed into developing countries in 2012 in the form of official and private development assistance.
Harming the poorest the most

According to World Bank studies, the poorest countries are the biggest losers in these capital transfers. Capital outflows are hampering the build-up of constitutional structures in the global South and preventing public investment in education, health and infrastructure. The world's 146 poorer developing countries are home to 870 million people with no social security cover whatsoever. The US$1,583 billion exiting these countries every year (compared to inflows of US$1,077 billion) does not even include tax transfers and abusive tax avoidance by globally active companies. In the latest Financial Secrecy Index (FSI), fiscal experts from the Tax Justice Network estimate that currently, US$21 to 32 billion in private assets subject to very low or no taxation are stowed away in tax havens worldwide.
Switzerland as the queen of tax havens

Yet again in October 2015, Switzerland topped the table in the FSI ranking of the world's least transparent financial centres. With the planned elimination of holding company privileges through corporate tax reform III (USR III) and the introduction of automatic information exchange with the (rich) OECD countries as of 2018, the Federal Council and Parliament have reacted to years of foreign pressure on the Swiss tax haven.

Since 2012, the OECD has been leading the way in the multinational fight against harmful tax practices. In early October 2015 it presented the findings of its "Base Erosion and Profit Shifting" project – BEPS for short. The intention is for corporate profits to be taxed in the places where they are generated.

The Swiss holding company privileges that will no longer be tolerated under the BEPS project are of paramount economic importance to the economies of the cantons of Geneva, Vaud and Basle City. Commodity traders and financial intermediaries located on Lake Geneva benefit from these tax concessions. In Basle, it is the pharmaceutical industry that generates 27% of the value created in the city canton. Some 58% of the overall profit tax take comes from fiscally privileged companies in Basle City. By way of comparison, this proportion is only 7% in Zurich, despite the financial centre, in the Valais with its numerous small and medium-sized enterprises, a mere 0.7%.

To allay the economic fears of the cantons concerned, the Federal Council has proposed the introduction, under USR III, of a "patent box" for research and development in the realm of intellectual property (R&D&I): profits from revenues generated by patents and other rights should receive privileged fiscal treatment. But patent boxes are harmful both to the North and the South, as they allow transnational corporations to continue to manage their payment streams and profits through tax havens. From a developmental standpoint therefore, by introducing this facility Switzerland is replacing one harmful tax regime with another. The workings of such profit transfers from the South to the North, including to Switzerland, were illustrated in 2010 through research carried out by the British charity Action Aid into SAB Miller, then the world's largest beer producer. Through a subsidiary, the beer giant at the time controlled 30% of the market in Ghana, where income tax was 25%. Yet the corporation did not pay taxes on its profits in Ghana but in Holland and in Zug. The Netherlands were already offering patent boxes at the time, which also offered tax concessions on trademark rights. SAB Miller placed the trademark rights to its African beer varieties in such a box, at the same time extracting record-high fees from its Ghanaian subsidiary for them. In this way, the brewery shifted its profits from Ghana to Holland. SAB Miller was being advised at the time also by a consulting firm owned by the company and based in the tax haven of Zug, where profit taxes in the services sector are extremely low. Under the consultancy contract, the SAB Miller subsidiary in Zug invoiced its sister brewery in Ghana the amount of CHF 1.5 million per year (all of 4.6% of sales in Ghana). In this way the SAB Miller group also shifted profits from West Africa to Zug.

A similarly very broad patent or licence box based on the Dutch model has existed in the Canton of Nidwalden since 2011. Tax concessions are granted there on patents, trademarks, software, domain names and other things. But as of 2016, Nidwalden will no longer be able to offer this box, as it conflicts with the OECD's "nexus approach", which was approved as part of the BEPS process. Basically, it sets the condition that research and development activities must be carried out in the country that grants tax concessions. It does however allow some room for manoeuvre when it comes to concretely structuring the box. Just how strictly the nexus approach will be interpreted in the Swiss box is not made clear in the draft law being discussed in the current winter session of the Council of States. The Federal Council plans to clarify the exact conditions for the implementation of the Swiss patent box in 2016, by means of a consultation procedure. The patent box solution, which was suggested in 2013 by the Federal Government's steering unit, does not however require that the benefiting R&D&I activity effectively take place in Switzerland. The company concerned would simply have to prove that it owns intellectual property that points to R&D&I. This creates the danger of new loopholes allowing for the continued possibility to shift profits from developing countries to Switzerland. Tax concessions should therefore be granted only on income from patents that can be linked back to research and development activities effectively conducted in Switzerland.

Although USR III envisages international efforts to abolish certain tax avoidance practices, it also simultaneously represents a strong commitment to the catastrophic worldwide tax competition. The latter is compounding global inequality and undermining the financial basis for functional communities: the fact that companies and wealthy individuals can play off countries and cantons against one another is triggering a fiscal race to the bottom, allowing ever more capital to be spirited past tax authorities. Swiss cantons will still be able to play a prominent part in this even after USR III.

The last corporate tax reform cost taxpayers an amount in double-digit billions. Optimistic calculations put the cost of USR III at a minimum of CHF 1.3 billion. No compensation is currently foreseen for USR III tax revenue losses. And there is reason to fear that the next foreseeable round of cost-cutting in the federal budget will mean even further cuts in official development assistance.

Dominik Gross, Alliance Sud