The Canton of Bern has remained one of the nation’s lowest-ranked cantons for years in intercantonal comparisons of the tax situation for individuals and legal entities. In light of the planned Federal Act on Tax Reform and AHV Financing as well as the revision of cantonal tax law, the canton now has an opportunity to strengthen its competitive edge in intercantonal tax competition.
KPMG and the Trade and Industry Association of the Canton of Bern (HIV) have taken another close look at the taxation of individuals and legal entities in the Canton of Bern in their annual publication, the Bern Tax Monitor. The situation for individuals has remained unchanged over last year and the Government Council is only planning to lighten the tax burden for individuals starting in 2023.
In the case of legal entities, however, there are plans to gradually reduce the corporate tax burden and switch from a three-bracket to a two-bracket progressive tax rate in the future, regardless of the outcome of the Federal Act on Tax Reform and AHV Financing (TRAF). The necessary amendment to cantonal tax law will be put to the vote on 25 November 2018. The Government Council will reassess the situation in 2021 and adjust the regular capital tax rate as needed.
There have not been any major changes made with respect to individual taxes since last year. “At 41.3%, Bern is still one of the Swiss cantons with the highest top income tax rates. The canton can only score points on its wealth tax rate, where it ranks in the midfield compared to the other cantons,” explained Hans Jürg Steiner, Head of the Bern-Mittelland Market Region at KPMG.
The fact that the Canton of Bern ranks fairly high in an international comparison of individual taxes is hardly helpful since the race to attract good taxpayers is mainly taking place within the country itself. The canton’s 2019 tax law revision does not provide for any changes for individuals and, according to a proposal by Bern’s Government Council, individual taxation will only be a priority of the tax law revision of 2023 at the earliest. In this context, deductions for expenses related to third-party caregivers will also be reassessed in 2021.
In the Canton of Bern, action is most urgently needed with respect to how legal entities are taxed. “While numerous cantons have continuously reduced their top regular corporate tax rates over the past ten years, Bern has kept its rates at a steadily high level – leaving the canton unable to compete with the tax rates found in other cantons,” Hans Jürg Steiner went on to explain.
A few initial steps toward a reduction in the corporate tax rate to 18.71% in 2019 and 2020 are planned for the 2019 cantonal tax law revision. The rest of the measures, including other steps related both to cuts in the corporate tax rate (planned at 16.37%) and a reduction in the capital tax rate, will be addressed within the scope of a subsequent tax law revision in 2021.
The Federal Tax Harmonization Law requires the cantons to levy a capital tax. Despite the fact that the Canton of Bern’s capital tax remains appealing, particularly since it can be claimed as a tax credit on the corporate tax, the canton’s original fiscal strategy had foreseen a change in the regular rate from 0.3‰ (current) to 0.1‰ beginning in 2019. For the time being, however, this change has been foregone in the 2019 tax law, even though the reduction is a vital step toward improving location attractiveness given that previously tax-privileged companies would have to pay significantly higher capital taxes were this tax status to be eliminated.
The cantons of Basel-Stadt, Geneva, Solothurn and others have already announced significant cuts to their corporate tax rates and a new rate of 13.79% will apply in Vaud from 2019 on. That means the competitive situation is intensifying and doing so at the expense of the Canton of Bern.
Two trends stand out for the planned cuts to regular corporate tax rates: Some cantons, on the one hand, might be aiming for an extremely low regular tax rate of between 12% and 15% but are only making very limited use of the possible advantages opened up through the application of additional fiscal measures from the TRAF. On the other hand, cantons like Bern and Zurich, among others, have their sights set on a higher regular tax rate of between 15% and 20% but are interested in additional tax deductions provided for within the scope of TRAF (i.e. patent box, R&D, interest-adjusted corporate tax rate).
“The Bern Tax Monitor 2018 illustrates in a well-founded, objective manner that the tax situation not only represents a considerable location disadvantage in the Canton of Bern, but that this situation has actually deteriorated recently,” explained Kurt Rohrbach, Chairman of the HIV, and added: “This holds true for both businesses and individuals alike. Given the high cost of labor and the persistent overvaluation of the Swiss franc, the fiscal disadvantages to the economy are particularly severe.”
Viewing this as a first step toward reducing corporate tax rates, the HIV welcomes the 2019 tax law revision of the Canton of Bern. It is urgently needed, regardless of federal proposals. A four-year reduction to 16.37% beginning in 2022 will not be enough to shift the Canton of Bern to the Swiss midfield and both prevent it from losing any more companies to tax competition and help it attract new ones. According to Adrian Haas, Director of the HIV, “The 2021 tax law revision offers the opportunity of a more resolute approach, not least thanks to the planned increase in the share of direct federal taxes transferred to the cantons under TRAF. The Canton of Bern will receive CHF 43 million per year through this arrangement.”
The HIF also welcomes the TRAF as a practicable compromise. Adrian Haas explained: “Companies that had previously benefited from having a privileged tax status need an internationally recognized tax system and the legal certainty this brings, and they need these as quickly as possible. Only then will they continue to invest in Switzerland as a business location.”
The Bern Tax Monitor is a systematic, intercantonal comparison of the tax competitiveness of the Canton of Bern in relation to neighboring cantons. It analyzes the canton’s attractiveness in terms of corporate taxation and its revenue structure. The Bern Tax Monitor is the result of a joint effort between KPMG and the Trade and Industry Association (HIV) and has been published every autumn since 2012.
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