Location nationalism or global solidarity?

Atmospheric picture on the fringes of the Glencore General Assembly in the Theater Casino Zug / Switerland.
Article as analysis
The new edition of Corporate Tax Reform III will be discussed in the committee of the first Chamber in April. The debate will put the global conscience of the Socialist Party, the Greens and the Center parties to the test.

On 12 February 2017, a clear 59.1 per cent of Swiss voters rejected Corporate Tax Reform III (CTR III). It was also a No to a parasitic Swiss location policy that was designed to continue to lure to Switzerland corporate profits generated abroad. By International Monetary Fund (IMF) estimates, such profit shifting costs developing countries 200 billion dollars each year in lost tax revenues. Precisely how much of this enters Switzerland, no one knows. Here, neither the Federal Council nor a parliamentary majority has so far been willing to create at least as much transparency as is possible under the legislative provisions governing corporate taxation in Switzerland. But this country's attractiveness to corporations as a low-tax area and the fields of business of corporations located in Switzerland are strong indicators of the possibility that an appreciable part of the 200 billion does flow into and through Switzerland.

Most Swiss politicians reacted to the decisive rejection of the previous corporate tax policy paradigm as if the No to CTR III had never existed. The new version of the law – euphemistically christened Tax Proposal 17 (TP 17) and published by the Federal Council in late March in its dispatch to the Parliament – matches the now discredited draft submitted three years ago by the Federal Council under the title Corporate Tax Reform III in key development-related aspects. Only the partial taxation of dividends and the cantonal share in direct federal tax were increased somewhat. Raising the cantonal share is tantamount to additional federal subsidization of inter-cantonal tax competition and ultimately signifies not just another drain on the federal coffers but also that of most cantons. For it constitutes an incentive to the cantons to further reduce their regular profit tax rates, thereby giving impetus to the inter-cantonal «race to the bottom».

Tax dumping seasoned with child benefits

The Federal Council will also be proposing a completely extraneous increase in child allowances along the lines of the draft tabled by the Canton of Vaud. This «social policy sweetener» is intended to win over some CTR III opponents. But with TP 17, however, the Federal Council is not attempting to change any aspect of the new special tax regime contemplated in CTR III, the patent box, the deductions for «research & development» and the capital tax reductions. It has only slightly reduced the sum of possible deductions by comparison with CTR III. Hence, the tax shortfalls that must be feared for the Federal Government and the cantons will be of proportions comparable to those of CTR III and will again be in the billions. It is quite likely that the highly controversial interest-adjusted profit tax will again come up for discussion in Parliament.

The aspect of CTR III of which Alliance Sud was critical therefore remains on the table with TP 17: preserving a parasitic business model. Added value generated abroad is to be privatized in Switzerland, with the attendant disastrous consequences for development and the preservation of public services in countries of the South.

In the face of this brazen reissue of a draft law rejected by direct democracy, the winners of the February 2017 vote, especially in the Red/Green parties, were remarkably defensive. Instead of working towards a medium-term paradigm shift in tax haven Switzerland, very shortly after the victory at the polls, they signalled their readiness for compromise on the basis of the old bill. Thus, most of them in principle embraced the continuation of the parasitic strategy in Swiss corporate taxation policy. With a view to the upcoming Parliamentary debate, both the Socialist Party leadership and the Red/Green executive members in cantons and municipalities would seem to want a compromise with the centre-right that would be a perfect reflection of location nationalism. Some wish to remain at the service of global corporations by facilitating tax dumping, thereby siphoning the tax base abroad while ensuring that the proceeds are somewhat more equitably distributed among the home population. This approach is also problematic from the standpoint of democracy. It overrides the clear verdict from the electorate against CTR III by reissuing the rejected draft with some cosmetic social policy changes. It is also short-sighted in economic terms: in the downward spiral in corporate taxes under way for the past 20 years, low-tax pioneers like Switzerland have meanwhile had to accept such low corporate taxes that the location competition will cease to pay off already in the foreseeable future, even for those who have profited from it up to now. The resulting social and societal dislocations will be ever more untenable even for a purely domestically oriented redistribution policy.

Opposition takes shape

Opposition to this policy is coming from two sides in the upcoming debate on Tax Proposal 17 – from the Socialist Party and Green delegates and from the centre-right trade association. At their respective congresses in January and February, the first two passed resolutions by large majorities, reflecting Switzerland's developmental responsibility as a corporate location. For the small, open Swiss economy they are demanding a more forward-looking business model than that of a tax haven. To the trade association, for its part, the higher child allowances and the increase in partial taxation of dividends are anathema. Should the right-wing Swiss People’s Party (SVP) and parts of the Liberals (FDP) make common cause with the trade association in Parliament, it would pave the way for a minimal compromise between parts of the FDP, the centre parties and Red/Green. This would in turn lead to the division of the draft into two parts: in an initial step this year, only the old privileges for letterbox companies would then be eliminated. There is now intense international pressure in this regard as these privileges are not OECD-compliant, and the EU is threatening with sanctions should Switzerland fail to eliminate them by the end of 2018. All else would be negotiated subsequently. From the perspective of an environmentally and socially sustainable world domestic policy, this approach would make sense, as the scope for dangerous profit shifting from countries in the South to Switzerland would be massively reduced through the outright elimination of the old privileges. Any tax shortfalls caused by the departure of hitherto privileged firms could be offset with new revenue from the full taxation of dividends or the elimination of the capital contribution principle (CCP). The latter was first introduced through Corporate Tax Reform II of 2008. According to new figures from the federal tax administration, Swiss companies, aided by the CCP, have been able to amass reserves amounting to 2 billion francs since 2011. Over the coming decades they could gradually pay out these monies as profits to their shareholders – entirely untaxed.