Does the US tax reform endanger Switzerland?
US President Donald Trump has enforced the tax reform he had already announced during the electoral campaign. On 22 December 2017, he signed the bill called "Tax Cuts and Jobs Act", which was pushed through the Senate and the House of Representatives within a very short time. And thus the largest US tax reform since 1986 came into effect on 1 January 2018.
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But what does the 500-page bill actually contain? Probably not even the politicians who voted in favour of the bill can answer this question conclusively. Therefore, the main points of the US tax reform with a focus on corporate taxation are explained below and the question of what these changes could mean for Switzerland is examined.
This corporate tax will be reduced from 35% to 21%. At 35%, the US was one of the countries with the highest corporate tax rate. This reduction will therefore also strengthen the US's competitiveness and attractiveness compared to well-known low-tax countries such as Switzerland and Ireland.
With the «Tax Cuts and Jobs Act», the US has switched from the world income principle to a territorial corporate tax regime, and a one-off transition tax of 8% or 15.5% is supposed to persuade the large American companies to return the trillions of US dollars they hold abroad to the US. However, critics are sceptical. It would be a great effort for such companies to move the entire apparatus they have built up in a country abroad back to the US. In addition, disputes with global tax authorities are pre-programmed in such manoeuvres, for example, when the disclosure of its tax structure brings to light how the company has taken advantage of the system over the years to pay lower taxes. Another important location factor for a company is political stability. With Trump, however, political stability is anything but certain.
The main aim of the new corporate taxationone is to prevent abusive business structures and the erosion of the US tax base. It therefore follows, in principle, the Philosophy of the OECD BEPS project. The provisions on withholding tax (CFC rules) and on Subpart F (provisions allowing the immediate inclusion of certain types of foreign income in the US tax base ) have been maintained with some modifications. In addition, a tax for abusive erosion of the tax base ("Base Erosion Anti-Abuse Tax") for "harmful" payments was introduced. This could have consequences for banks and insurance companies in particular, as the USA is levying a tax on intra-group services and interest and royalty payments. The tax is intended to give companies the incentive to avoid corresponding payments by relocating their activities to the USA immediately.
The WEKA article of 18 April 2018 highlights further tax-relieving and tax-increasing measures of the US tax reform and clearly shows for which group structures these are relevant.
Conclusion
As the above points show, the US tax reform means new competition for Switzerland. In any case, these measures have good potential to make the US appear more attractive and innovative to large multinational companies. That way, the US could soon supersede Switzerland as the most innovative country, having ranked sixth in 2018.
In recent years, many American companies have settled in Switzerland. Does the US tax reform endanger Switzerland or will American companies succumb to the lures of Trumps government and move their headquarters back to the USA?
US companies are considered to be very tax-affine and the US economic market naturally offers dimensions and a potential that Europe and especially Switzerland can hardly keep up with can. On the other hand, the new law is still associated with many uncertainties. In the last days and hours before adoption, numerous text passages were added, so that it is unlikely that someone has an overview of what's in the 500 pages. It therefore remains to be seen and observed what effects the numerous new provisions will have in practice. In addition, the sustainability of the Tax Cuts and Jobs Act is still in question, as it is conceivable that the new rules could be repealed or amended if they do not meet the desired economic growth, the US budget continues to be under pressure or a change of government takes place.
Initial studies show that in Switzerland the US tax reform has already caused high outflows. This is mainly due to US corporations now returning profits which they had previously retained in Swiss subsidiaries for years back to the US. However, US corporations have so far shifted hardly any value-adding activities and jobs back to their home country. Nevertheless, Switzerland must remain vigilant and ensure that it does not fall into the defensive in the international location competition. Therefore, an important step would be to implement the Steuervorlage 17 within a reasonable period of time.
