A “No” to doping is no longer enough

Mailbox companies have been part of Switzerland's tax business model for eighty years.
Political article
Referendum or no referendum on Tax Proposal 17: the progressive forces in tax policy must develop a sustainable alternative to the doping of profit shifting from abroad.

The NZZ of all papers, corporate location Switzerland’s favourite daily, summed it up best in its discussion of the Alliance Sud study1 on Tax Proposal 17 (TP17): “From the Swiss standpoint, it is essentially about striking a balance between ‘tax justice’ and maximising tax revenues. […] When it comes to tax privileges, there are similarities to doping in cycling. There are some arguments against, but the core arguments in favour (‘the others are doing it too‘, or ‘I could get an advantage‘, often prove irresistible.”

The discussion in progress since 2014 around corporate tax reform since 1998 is a perfect illustration of just how deeply Swiss corporate taxation policy is mired in the doping swamp. Unlike the two preceding reforms of 1998 and 2008, the current one was not originally meant to further erode the full taxation of corporate profit, thereby securing billions in tax giveaways for multinational corporations in Switzerland. Instead, then Finance Minister Widmer Schlumpf wanted, at the behest of the OECD, the EU and G20 countries, to eliminate the existing loopholes and abolish unfair special tax regimes. But in 2016, the Centre-Right parliamentary majority so restructured the reform project called Corporate Tax Reform III (CTR III) that it brazenly torpedoed this goal and turned it on its head: instead of correcting old mistakes from CTR II and CTR I, it was to continue to gift billions to corporations at the expense of public services in Switzerland and the world at large. In February 2017, this project was therefore roundly rejected at the polls. One and a half years on, the Federal Parliament has now approved TP17, which is hardly any different from the CTR III that was rejected at the polls as relates to incentives for profit shifting from developing countries. Alliance Sud illustrated this in its study published in mid-September using two tax dumping vehicles that will outlive the present reform. It remains to be seen whether voters will accept the reform in another referendum vote. From a development policy standpoint we are now in any case roughly back where we were before the referendum campaign against CTR III.

For a genuine tax policy alternative

Irrespective of the question as to whether a new referendum against Tax Proposal 17 makes sense in terms of content and strategy, the tax debate of past years shows that if the advocates of tax justice and global economic responsibility on the part of Switzerland really wish to make some headway, then they must develop a fiscal and economic counter-project to «tax haven Switzerland». It must be designed to show this country a way out of the economic model it has embraced for 80 years under which it manages foreign wealth to its own advantage and derives enormous benefit from taxing in Switzerland corporate profits generated elsewhere.

Such a counter-project is urgent for two reasons: first, because the lower corporation tax, the higher the price to be paid by the tax haven, and corporation tax has been falling globally for the past 40 years. Switzerland’s current business model forces it to be constantly undercutting other locations in the downward spiral. The time will come when this beggar-thy-neighbour policy can only be sustained by means of massive cuts to government spending on public services at home. If Switzerland – and even more so its cantons – insist on clinging to their low corporate taxation policy, this will lead sooner or later to further drastic cutbacks in public spending on health care, schools and universities, energy and traffic infrastructure and on non-commercial cultural programmes. The unequal distribution of wealth in Switzerland will also be exacerbated as the present corporate taxation policy mainly benefits domestic and foreign shareholders of corporations located here.

A world domestic policy alliance of civil society

The question of Switzerland’s future corporate taxation policy is therefore – and this is the second point – very fundamentally also one of development and global policy. Switzerland can no longer rely on a fiscal system that deprives other countries of tax revenues. Instead, it should be setting about reforming its corporate tax policy such that it becomes instrumental in helping to realize the UN Sustainable Development Goals laid out in the 2030 Agenda. The global cost of implementing these goals is US$5000 to US$7000 billion per year. By immediately abolishing and not replacing the old special tax regime and introducing other measures that permanently halt profit shifting from abroad to Switzerland while slowing down tax competition in Switzerland, this country could make a signal contribution to sustainable social and environmental development worldwide. TP17 is not a step in this direction but instead – for having been linked to AHV/AVS funding – at best constitutes medium-term protection for domestic prosperity, at the world’s expense. Given current global trends, however, that is an extremely modest policy ambition: if over the next 15 years the world community proves incapable of coming up with policy paradigm shifts that have popular support to counter the impending climate disaster, the rapidly worsening global inequality of wealth and a new transnational nationalism and racism, we would rather not imagine the kind of world in which our children will have to live by the year 2050. Meeting these global policy challenges also requires public funding, in other words, tax revenue.

Stop the doping, but how?

As a leading global financial and trade hub, Switzerland has powerful economic policy levers in hand in that regard. A commensurately huge responsibility also rests on Switzerland’s progressive, climate-conscious and forward-looking political forces, at least to attempt to move this country towards adopting a financial, trade and fiscal policy that is globally sustainable, including socially and environmentally. The fact that Switzerland’s current tax haven business model has no future, whether from a domestic or foreign policy standpoint, that would serve the public interest, is an indication of the strategic orientation of a conceivable new civil society alliance for a new Swiss financial and fiscal policy. This strategy must be predicated on a world domestic policy perspective aimed at bringing about an environmentally aware and democratic society. The overarching goal must be social equity – in equal measure at the local, regional, national and global levels.

The opening question with which to launch work on a new Swiss corporate taxation policy could therefore be: who is really dependent on doping and how do we manage to give it up without bringing local cycling to a grinding halt?

1 Alliance Sud (ed.): Tax proposal 17: Forward to the past. Berne, 2018.