Switzerland looks good in an international comparison of tax rates. The Corporate Tax Reform triggered yet another decrease in corporate tax rates for Swiss companies last year. These are some of the findings of KPMG’s Swiss Tax Report 2020. Low taxes alone are not enough to remain competitive in the long term, though, because the looming reform of the international corporate tax system is likely to hit Switzerland hard. Other location factors will become even more important if the country is to remain attractive for companies.
KPMG’s Swiss Tax Report 2020 compares corporate and income tax rates in 130 countries as well as all 26 cantons. While regular corporate tax rates have stagnated in nearly every canton across Switzerland during the past few years, last year brought a decline of nearly two percentage points in the average Swiss rate – from 17.1% to 15.1% – as a result of cuts implemented by many cantons as part of the tax reform (TRAF). The Canton of Geneva, in particular, substantially reduced its corporate tax rates from more than 24% to 14% within the scope of the TRAF. When KPMG first began tracking these rates in 2007, the average regular corporate tax rate for companies domiciled in Switzerland was still over 20%.
Relatively low corporate tax rates will continue to be a major location factor given Switzerland’s high wage level. Low corporate tax rates alone will not be enough to preserve the country’s competitiveness, though, particularly in light of the fact that a sharp paradigm shift is emerging on the horizon of the international tax landscape. The OECD/G20 BEPS project could result in major upheavals in the rules on how tax revenue is allocated. According to Stefan Kuhn, Head of Tax and Legal at KPMG: "What we’re observing is that the scope of what originally started out as a project focused on the digital economy is rapidly expanding into an extensive restructuring of international rules for many industries. Switzerland is therefore well advised to actively contribute to discussions within the OECD and other bodies involved and to forge alliances with countries that are also passionate about establishing an attractive environment for business and society."
KPMG expects location competition to become even fiercer over the course of the coronavirus crisis, the reason being that precisely those countries that were already heavily indebted at the start of the crisis have incurred massive amounts of additional debt during the pandemic and will now have to fight even harder to generate the tax revenues they need. Because of this, factors such as access to markets and a qualified workforce, a modern infrastructure and investment and legal certainty are likely to play an increasingly important role in international location competition in the future.
The cantons of Central Switzerland and the Canton of Appenzell-Innerrhoden still have the lowest regular corporate tax rates. The tax rates in those cantons remained largely stable, while Zug and Uri made noticeable cuts. With respect to corporate taxation, the Canton of Zug is now in first place with a corporate tax rate of 11.9%, knocking Lucerne (12.3%) down from first to second spot. One development that stands out is in the Canton of Glarus, which slashed its corporate tax rate substantially enough to move the canton up nine places, where it now ranks among the top three most attractive cantons.
Last year, the largest changes in corporate tax rates were observed in Western Switzerland. Geneva, in particular, reduced its regular corporate tax rate radically by around ten percentage points year on year, from over 24% to 14%, which propelled the canton into the mid-field and left Valais trailing in last place. Fribourg, which was still in the lower middle range last year with a corporate tax rate of nearly 20%, also advanced to the upper half of the chart.
Another (albeit moderate) tax cut can be expected in the next few years, since some cantons have not implemented all tax reductions in 2020 that were provided for within the scope of TRAF. The biggest tax cuts until 2025 are expected to come from Basel-Land (-4.5%), Valais (-4.8%) and Ticino (-3.3%).
Some Swiss cantons also rank quite highly in a comparison of European locations. The cantons of Zug, Lucerne and Glarus took some of the highest rankings as low-tax locations after Guernsey (0%) and a few countries in (South-)Eastern Europe. Appenzell-Innerrhoden and the other cantons of Central Switzerland are also some of the most attractive locations for companies from a tax perspective, ranking after Ireland, Liechtenstein and Cyprus (12.5% each).
Europe’s most unattractive corporate tax rates are found in Malta (35%), Germany (30%) and France (28%), although it should be mentioned that France still lagged behind Germany last year with a rate of 31%. The sharp reduction in Greece (-4%) is striking.
Several cantonal tax cuts have enabled Switzerland to climb up into the top third of the global rankings and overtake both Hong Kong (16.5%) and Singapore (17%). Only various offshore domiciles (outside Europe) and Qatar (10%) have lower corporate tax rates than Switzerland. Globally, corporate tax rates have dropped sharply since 2018, particularly in the Middle East and through the recent US tax reform.
The tax situation for private individuals is similar to that for businesses: The cantons with low corporate tax rates also rank highest in a comparison of top income tax rates. The Canton of Zug applies the lowest income tax rate of around 22.4%, followed by Obwalden (24.1%), Appenzell-Innerrhoden (24.9%) and other cantons of Central Switzerland. High incomes are taxed most heavily in Geneva, namely at a rate of 44.75%. The tax rates for top incomes are also relatively high in Basel-Land (40.2%) and Ticino (41.8%).
Income tax rates have changed relatively little since last year and Switzerland’s average income tax rate has remained steady year on year at 33.8%. The sharpest change was observed in Basel-Stadt, which raised its rate by around three percentage points from 37.4% to 40.3%. Other than that, only Lucerne raised its tax rate for individuals, albeit minimally, from 31.16% to 31.17%. Seven cantons reduced their rates slightly.
A comparison of European countries reveals that Bulgaria (10%), Romania (10%) and Hungary (15%) are the top-ranked locations with the lowest tax rates levied on high incomes. With a rate of 22.4%, the Canton of Zug made it into Europe’s top ten locations. While most cantons are in line with the European average, Geneva’s position as the canton with the highest tax rate for top incomes (44.75%) puts it towards the rear of the field.
The highest income tax rates in Europe are once again found in Sweden (57.2%) and Denmark (55.9%), followed by Austria (55.0%). Other countries with some of the highest rates for high incomes are Finland (53.75%) and Belgium (53.3%).
Globally, the picture is mixed. While several offshore domiciles and a few isolated Middle East countries continue to waive income taxes entirely, the rates levied in countries like Japan (46%), China (45%), Australia (45%), South Africa (45%), the US (37%) and India (35.9%) are relatively high.