Efforts to introduce a global minimum tax rate for corporations are limiting Switzerland’s room to maneuver in international locational competition. Depending on which form the new rules take, they have the potential to severely impact Switzerland as a business location. This makes carefully cultivating the country’s other location factors all the more important if it is to remain attractive. An international comparison shows that Switzerland is still well positioned from a tax perspective. The new year brought yet another slight decline in corporate tax rates – with income tax rates remaining nearly unchanged. These are some of the conclusions reached in KPMG’s Swiss Tax Report 2021.
A restructuring of the international corporate tax system is on the horizon and these changes have the potential to hit Switzerland where it hurts. The international tax debate is currently focused on the idea of imposing an international minimum tax rate for corporations. Recent statements made by Janet Yellen, US Secretary of the Treasury, have put even more pressure on low-tax countries like Switzerland since Yellen’s proposed minimum tax rate of 21% is much higher than Switzerland’s current average ordinary corporate tax rate of 14.9%. Those are some of the findings presented in KPMG’s Swiss Tax Report 2021, which compares corporate and income tax rates from 130 countries and all 26 Swiss cantons.
Proposals put forth by the OECD/G20 and the US Treasury Department regarding a planned minimum tax would substantially restrict international tax competition. This could potentially have a major impact on Switzerland as a business location as restrictions imposed on international tax competition would hobble the country’s efforts to implement a competitive tax regime as a way of positioning itself as an attractive location. Given the country’s high cost level, Switzerland, in particular, could become less attractive since it would lose some of its ability to clearly set itself apart from rival locations with higher tax burdens.
“Ultimately, though, the severity of how these new rules impact Switzerland hinges on precisely which minimum tax rate is chosen. The higher the rate, the less room Switzerland has to maneuver,” explains Stefan Kuhn, Head of Tax and Legal at KPMG. Other questions also remain unanswered, including which companies would be affected by the new tax regime and how quickly these rules could be introduced by which countries.
The other location factors need to be cultivated to prevent the tax base from eroding and shifting to other countries. “The actual corporate tax rate will increasingly take a back seat. Even if the tax burden remains a key decision-making criterion, other factors such as access to talent, flexible conditions on the labor market, political stability and legal certainty will become increasingly important,” says Kuhn. Access to international markets, a modern infrastructure and the presence of industry clusters will also take on greater significance. Being a small country, Switzerland has very little influence on international tax developments, but it cannot remove itself from the scope of those developments, either. That being the case, it is important for Switzerland to play an active role within the OECD and other relevant bodies while also seeking out alliances with other states. The country’s location advantages also need to be cultivated against the backdrop of the current coronavirus pandemic, which has caused national debt to skyrocket over the past 12 months and will have many countries stepping up their efforts to drum up additional tax revenue as a result.
While the previous year brought hefty declines in corporate tax rates in the wake of the Corporate Tax Reform TRAF, the reductions made from 2020 to 2021 were noticeably lower. Overall, eleven cantons made cuts to their corporate tax rates, albeit only slightly. The largest were made by those cantons with the highest rates, namely the Canton of Valais (around -1.6 percentage points), Zurich (around -1.5 percentage points) and Bern (around -0.6 percentage points). Even the low-tax Canton of Nidwalden reduced its corporate tax rate relatively substantially by -0.7 percentage points. The average corporate tax rate for Switzerland as a whole is at around 14.9% at present, following 15.1% in the previous year. When KPMG first began tracking these rates in 2007, the average ordinary corporate tax rate for companies domiciled in Switzerland was over 20%.
Switzerland’s standing is good in an international comparison. A ranking of locations with low tax rates reveals that the cantons with the lowest corporate tax rates are among the leaders and that these come in just behind the traditional offshore domiciles, Guernsey, Qatar and a few countries in (South-)Eastern Europe.
A year-on-year comparison reveals nearly no shifts in the ranking of cantons with the most attractive corporate tax rates. The cantons of Central Switzerland as well as the cantons of Glarus and Appenzell-Innerrhoden still have the lowest ordinary corporate tax rates. The Canton of Zug, for instance, has the lowest corporate tax rate at 11.9%, followed by the Canton of Nidwalden, which reduced its rate slightly by -0.7 percentage points to just under 12%, thus passing the Canton of Lucerne (12.3%). The Canton of Bern brings up the rear with a corporate tax rate of 21% – even despite having reduced its rate by -0.6 percentage points.
KPMG expects to see another, albeit moderate, tax cut in the next few years since some cantons have not yet implemented all the tax reductions that were provided for within the scope of the Corporate Tax Reform TRAF. They are spreading the reductions out gradually over the space of up to five years, meaning that corporate tax rates can be expected to fall to around 14.3% by 2025. The largest cuts can be expected in Basel-Landschaft (-4.5%), Ticino (-3.3%) and the Canton of Jura (-2.0%).
Individual taxes, unlike corporate taxes, have changed very little in recent years. The average top income tax rate in Switzerland has hardly moved since KPMG issued the first edition of its Swiss Tax Report. It was at 34.9% in 2007, for example, which is practically on a par with the 2021 level of 33.7% (and 33.8% in the previous year).
The biggest changes were seen in the cantons of Glarus, Schaffhausen, Jura and Fribourg, which each cut their average income tax rates by around -0.3 percentage points in 2021. Bern and Thurgau also reduced their rates by around -0.2 percentage points each. While Obwalden was the only canton to raise its income tax rate by +0.2 percentage points, a rate of 24.3% still puts it among the top three most attractive cantons.
Generally speaking, the cantons with low corporate taxes also do well in comparisons of top income tax rates. The Canton of Zug applies the lowest income tax rate at around 22.4%, followed by Appenzell-Innerrhoden (24.1%), Obwalden (24.3%) and other cantons of Central Switzerland. High incomes are taxed most heavily in Geneva (44.8%). The tax rates for high incomes are also relatively high in the cantons of Basel-Landschaft (42.2%), Vaud (41.5%) and Bern (41.0%).
The highest income tax rates in Europe are once again found in Sweden (57.3%) and Denmark (56.5%), which are now also joined by Austria (55.0%). A global comparison outside of Europe reveals that the highest rates are in place in Japan, China, Australia and South Africa, which each have a top tax rate of 45%. Several offshore domiciles and a few isolated Middle East countries continue to waive income taxes entirely.