Tax Reform (TRAF / Tax Proposal 17) Webcast of 2 October 2018

Transcription

1 (TRAF / Tax Proposal 17) Webcast of 2 October 2018

2 Today s moderators Dominik Bürgy Partner, Tax Services EY Switzerland Phone: dominik.buergy@ch.ey.com Marco Mühlemann Associate Partner, Tax Services EY Switzerland Phone: marco.muehlemann@ch.ey.com Daniel Gentsch Managing Partner Tax & Law EY Switzerland Phone: daniel.gentsch@ch.ey.com Thomas Semadeni Partner, Tax Services EY Switzerland Phone: thomas.semadeni@ch.ey.com Page 2

3 Agenda Welcome and introduction Overview Step-up-approach / Two-rate-model Patent box / R&D super deduction Notional interest deduction (NID) Net equity tax Overview cantonal implementation (provisional as of ) Outlook and political process Key take aways Questions Page 3

4 Overview Objectives Strengthening Switzerland s fiscal competitiveness International acceptance International competitiveness Sufficient tax revenue Phasing out of noncompliant tax practices BEPS Action 5 Joint statement EU/CH Attractive tax rates (12%-15% in most cantons) Balanced national and cantonal budgets Switzerland follows the objectives of G20, EU and OECD: Coherence Substance Transparency Legal and planning certainty / investment security Tax laws and ruling practice in line with new international standards Page 4

5 Overview Key measures All new measures compliant with OECD / international taxation standards Envisaged corporate income tax rate: 12% - 15% in most cantons Federal level Abolishment of preferential tax practices (principal companies and Swiss Finance Branch SFB) Patent box Cantonal level Abolishment existing tax regimes (holding, domicile and mixed companies) Lower annual net equity taxes for patents, ICloans and qualifying participations (optional) R&D super deduction (optional) NID on surplus equity (optional and restricted to high-tax cantons) Overall tax relief restricted to maximum 70% Step-up upon migration Transitional rules Adjustments to the capital contribution principle Adjustments in taxation of dividend income Extension of the lump-sump tax credits Federal and cantonal tax holidays continued Social compensation by additional AHV (old-age and survivors insurance) financing Page 5

6 Step-up-approach / Two-rate-model Alternatives for the transition from cantonal tax regime to ordinary taxation Step-up-approach Current practice Possible in many cantons Voluntary waiver of a current tax regime (holding, mixed or domiciliary company) before entry into effect of new law Effective date of exit from the current tax regime and entry into ordinary taxation must be prior to entry into effect of the new (cantonal) law. Otherwise, two-rate-model is automatically applicable Tax-free step up with subsequent tax effective depreciation (max. 10 years) Step-up amount and depreciation modalities subject to agreement with cantonal tax administration (possibly in formal ruling) and reflected in tax balance sheet / tax return Step-up-approach reduces tax base for up to 10 years Group tax accounting (IFRS, US GAAP): Step-up creates DTA Subject to max. 70% overall cantonal tax relief limitation Two-rate-model MANDATORY for cantons Mandatory expiry of a current tax regime (holding, mixed or domiciliary company) upon entry into effect of new law Declaration of hidden reserves (including goodwill) together with the last tax declaration under old tax law to the extent of the previously exempted quota The cantonal tax administration reviews and confirms hidden reserves with a formal decree Application of 2 different tax rates during a 5-year transition period Separate (reduced) tax rate for "old" income, which is based on the disclosure of pre-existing hidden reserves Ordinary tax rate for new income Two-rate-model reduces tax rate for up to 5 years Group tax accounting (IFRS, US GAAP): no DTA Not subject to overall cantonal tax relief limitation Page 6

7 Step-up-approach / Two-rate-model Alternatives for the transition from cantonal tax regime to ordinary taxation Step-up-approach Two-rate-model Varying cantonal practices Step-up-approach under current law/practice is not applied by all cantons Until when will a canton accept status transition? Some cantons will subject step-up amount (taxed hidden reserves) to net equity tax. Others like Canton ZH will not. Some cantons will only allow depreciation period of 5 years (or five years from entry into effect of the new law), in order to align the step-up-approach with the two-ratemodel Some cantons will allow step-up of the previously exempted hidden reserves, others will require full step-up, which triggers one-off taxation of hidden reserves (at previously untaxed quota) Applicable reduced rate Cantonal differences Extent to which reduced rate income can absorb additional income (spillover effect) Possibility of combining two-rate-model with step-upapproach (e.g. proposed law Canton BS: taxed hidden reserves from prior step-up are automatically transferred into two-rate-model) Retroactive application of two-rate-model? Page 7

8 Step-up-approach / Two-rate-model Key questions and key challenges Calculation of hidden reserves for both models: Valuation of hidden reserves = (fair market value./. income tax value./. hidden reserves on participations and real property) x exempted quota Enterprise valuation (including goodwill) vs. valuation of (intangible) assets (excluding goodwill) Valuation methodology ( practitioner method vs. other methods) Group tax accounting issues Further aspects which impact the choice between step-up-approach and two-rate-model The step-up-approach triggers a deductible temporary difference for IFRS/US GAAP purposes (creation of DTA/reduction of DTL). I.e. the full tax benefit is realized upon step-up and the DTA-amortization negatively impacts ETR during the following years of the amortization period. Factors which increase uncertainty and therefore reduce the value of the DTA: Expectations and uncertainties with regard to development of future profits Uncertainty regarding actual usability of the amortization, if other mechanisms (patent box, NID, R&D super deduction) already reduce the taxable income. Question: which mechanisms are applied first? Level of uncertainty where cantonal tax administrations reserve the right to review the value of the taxed hidden reserves on a regular basis The application of the two-rate-model does not trigger any deductible temporary differences in the Group tax accounts, i.e. the tax benefit materializes year-on-year, as the reduced rate is applied to parts of taxable income Step-up-approach Flexibility of the relevant cantons regarding amount of annual amortization of taxed hidden reserves Practice of the cantons regarding amortization periods (differences per asset type; beyond 10 years?) Extent of accepted amortization prior to entry into effect of overall cantonal relief limitation Two-rate-model Approach to defining amount of old income which is subject to reduced rate during the 5 year period Possibility of achieving a spillover effect Page 8

9 Patent box / R&D super deduction Overview Patent box Output promotion MANDATORY Qualifying IP Patents (patents according to Swiss and EU patent law; equivalent foreign patents) Equivalent rights (protection certificates; topographies; plant protection rights; protected documents under the therapeutic products act and foreign rights equivalent to these Swiss rights) NOT: copyrighted software (unless included in patented product or patented abroad) Modified nexus approach Engagement in R&D activities R&D activities to be performed by Swiss IP owner Swiss group company (contract R&D) 3 rd party (contract R&D) Nexus between income and expenses Top/down / residual approach Substance requirements Nexus ratio = R&D super deduction Input promotion OPTIONAL Definition of R&D R&D activities performed in Switzerland (incl. contract R&D within Switzerland) No deduction for R&D contractor if principal is entitled to deduction Determination of qualifying R&D expenditures Own R&D costs limited to personnel costs (salary + social security costs) Uplift of 35% for other R&D related costs 80% of domestic contract R&D costs with 3 rd parties Mechanism Base reduction Benefit Compensation for routine activities (6% mark-up) and trademark use to be deducted from IP income Entry costs - recapture of previously deducted R&D costs Qualifying expenditures incurred to develop IP (+ up-lift of 30%) Overall expenditures incurred to develop IP Maximum 90% (can be lower at cantons discretion) Subject to max. 70% overall cantonal tax relief limitation Super deduction of max. 150% (lower or no super deduction at cantons discretion) No R&D tax credit system Page 9

10 Patent box / R&D super deduction Key questions and key challenges Entry into patent box Long-term assessment Number of patent boxes Calculation of nexus ratio Patent box loss Documentation requirements Entry into patent box leads to retroactive taxation of previously deducted R&D expenses Likely R&D expenses of the current and the previous ten years Expenses for basic/general R&D activities to be reasonably allocated to patents/products Based on the methodology applied by the specific canton, different cash tax implications may result Method proposed by the Federation Method proposed by Basel-Stadt Method proposed by the Canton of Zug Calculation of expected long-term patent box benefit including entry costs requires a significant number of assumptions, e.g. Expected future income from patented products Expected development of nexus ratio over time Tax payer needs to determine whether the calculation is to be made per patent, per product or per product family Patents need to be allocated to each product in case of residual method Calculation per product family possible if there are only minor differences among the individual products Consistent application over time required To be separately calculated for each patent box Requires tracking and tracing of relevant R&D expenditures over time Based on the R&D expenses of the current and the previous ten years Simplified calculation for the first four years envisaged To be carried forward within the patent box To be determined by the Federal Council and each canton Federal Council and cantons to publish additional guidelines Page 10

11 Notional interest deduction (NID) Overview Objective Legislative scope Retention of group financing functions and fostering of treasury functions in Switzerland Only high-tax cantons shall have possibility of introducing a NID at cantonal level A high-tax canton must have a headline tax rate (federal, canton, municipality) of at least 18% across the entire tax scale NID is subject to the 70% tax relief limitation (i.e., capped at 70% of taxable profit) Impact Considering the announced cantonal tax cuts, only the Canton of Zurich is expected to meet 18% minimum tax rate threshold Based on 70% tax relief limitation, the NID may reduce the tax rate by up to 7% (from 18% to 11.2%) Mechanism NID is calculated on surplus equity only, core equity is not eligible Excluded assets are (1) participations, (2) non-operating assets, (3) patents or equivalent rights, (4) stepped-up assets, and (5) assets relating to transactions that give rise to unjustified tax savings (anti-abuse provision) Interest rate on surplus equity is based on 10-year government bond yield (~0.1%) or arm s length interest rate in case of receivables from related parties Federal Council will release the executive regulations (including ratios to determine the core equity) International context NID is known in several European countries (such as Belgium, Italy, Portugal, Malta, Cyprus, or Liechtenstein) NID not (yet) considered a harmful tax practice and also not covered by OECD BEPS Actions 2 and 4, but may be considered further by the OECD in separate work Page 11

12 Notional interest deduction (NID) Illustrative sample calculation Calculation of surplus equity Tax balance sheet Assets Ratio Core equity Cash Equity Cash % - I/C loans I/C loans % Total Total equity /. Core equity Surplus equity Sample NID calculation Headline tax rate 18.2% (anticipated income tax rate; no net equity taxes) Interest rate on I/C loan receivables 2.0% NID interest rate 1.5% (arm s length rate on I/C receivables) / 0.1% (remainder) Income statement Calculation of taxable profit (canton only) Tax expense Financial income (2.0%) Surplus equity x NID interest rate = NID x 1.5% / 0.1% = Net profit x Cantonal relief = Maximum relief x 70% = Net profit - NID (maximum relief) = Taxable profit Net profit = Reduction of tax rate from 18.2% to 11.2% (subject to 70% relief limitation) Page 12

13 Net equity tax Overview Current net equity tax situation outlook Is a cantonal / communal tax, no net equity tax on Federal level Typically one rate for ordinarily tax companies and a reduced rate for companies benefitting from a privileged tax regime (e.g. holding or mixed companies) Rates vary significantly between the cantons One tax rate depending on canton Cantons can grant the following reliefs based on the harmonization act: Tax credit system Partial exemption from net equity tax for: Participations Tax credit system in some cantons Patents and equivalent rights Inter-company loans Cantonal trends General reduction of net equity tax, but typically above privileged rate Broad application of tax reliefs (tax credit and exemptions for qualifying assets) No other relief due to harmonization act Page 13

14 Net equity tax Implications / questions to be asked Implications What is the new net equity tax rate? Increased tax rates for holding companies and mixed / auxilliary companies Relief based on assets (participations, patents, inter-company loans)? Mixed companies with high equity in a loss situation (in particular in light of step-up, with significant non qualifying IP) Profit / loss situation? Availability of tax credit? Net equity tax can become an increasingly important consideration for companies with significant equity Depending on above analysis additional tax planning considerations required? Page 14

15 Overview cantonal implementation (prov. as of ) Corporate income tax / net equity tax / taxation of dividend income Current tax rate 1) Envisaged tax rate 1) Transitional reduced tax rate (two-rate system) Patent box exemption (max. 90%) R&D super deduction (max. 50%) Overall cantonal tax relief (max. 70%) Envisaged tax rate with max. cantonal tax relief Current net equity tax rate ordinary taxation 2) Current net equity tax rate holding company 2) Envisaged net equity tax rate 2) Relief net equity tax Current net equity tax credit Current taxation qualifying dividend income Envisaged taxation qualifying dividend income (mind. 50%) Systemic change AG 18.61% 18.17% 90% 50% 70% 11.20% 0.211% 0.017% 40% 60% AI 14.16% 12.66% 2% 30% X 50% 10.31% 0.050% 0.005% 50% 40% Minimum or today AR 13.04% 13.04% 3) 30% - 50% 3) 50% 3) 50% 3) 10.51% 0.073% 0.015% X 60% 70% 3) BE 21.64% <18.71% 50% 70% <11.39% 0.144% 0.01% % 0.144% 6) 50% 70% BL 20.70% 13.45% 2.2% / 2.56% 90% 20% 50% 10.73% 0.380% 0.021% 0.16% 80% 8) 5) X new 50% Minimum or 60% BS 22.18% 13.04% 3% 90% X 40% 11.03% 0.525% 0.050% 0.10% 80% 8) X 50% 80% X FR 19.86% 13.72% 90% 50% 20% 12.60% 0.308% 0.015% % 0.192% X new 50% 50% - 70% X GE 24.16% 13.49% % 4) 13.3% 4) 10% 4) 50% 4) 9% 4) 13.01% % 0.401% 0.067% 0.401% 4) 4) 7) 60%/50% 70% 4) X GL 15.70% 12.43% 3) X 3) 0.252% 0.005% X 35% 70% 3) 1) Max. tax rate on pre-tax income (i.e. taking into account the deductibility of tax expenditure) / including federal tax, cantonal and communal taxes and church tax / calculated for the capital city of the respective canton 2) Calculated for the capital city of the respective canton 5) Cantonal level, at communal level different handling 8) Only on participations and patents 3) Dispatch Tax Proposal 17 of 21 March 2018, Appendix Table ) No net equity tax credit for holding and domicile companies 4) Previous draft law under CTR III 7) Max. CHF 8 500; contemplated to extend tax credit to a greater extent post-reform (informal sources) Page 15

16 Overview cantonal implementation (prov. as of ) Corporate income tax / net equity tax / taxation of dividend income Current tax rate 1) Envisaged tax rate 1) Transitional reduced tax rate (two-rate system) Patent box exemption (max. 90%) R&D super deduction (max. 50%) Overall cantonal tax relief (max. 70%) Envisaged tax rate with max. cantonal tax relief Current net equity tax rate ordinary taxation 2) Current net equity tax rate holding company 2) Envisaged net equity tax rate 2) Relief net equity tax Current net equity tax credit Current taxation qualifying dividend income Envisaged taxation qualifying dividend income (mind. 50%) Systemic change GR 16.12% 14.02% 1% 70% X 70% 9.78% 0.488% 0.005% 0.488% X 60%/50% 70% X JU 20.66% 15% - 17% 9.28% % 90% 50% 70% 10.11% % 0.374% 0.031% 0.186% X 60%/50% 70% LU 12.32% 12.60% 1.48% 10% X 20% / 70% 11.69%/ 9.32% 0.185% 0.001% 0.185% 0.001% tax rate X 60%/50% 70% X NE 15.61% 13.4% 11.11% % 20% 40% 40% 11.26% 0.500% 0.001% 0.500% 60%/50% 70% X NW 12.66% 12.05% % 3) 80% 3) 3) 70% 3) 9.14% % 0.010% 0.010% X 50%/80% 70% 3) OW 12.74% 12.74% 80% 50% 70% 9.36% 0.200% 0.001% X new 50% 70% X SG 17.40% 15.20% 4) 1.68% 50% 50% 50% 11.67% 0.067% 0.003% 0.067% 100% 5) 50% 70% SH 15.75% 12% % 0.8% 90% X 70% 9.12% % 0.204% 0.005% 0.005% X 50% 60% SO 21.38% 13.00% 2.2% 90% 50% 50% 10.49% 0.176% 0.008% % 0.022% 80%5) 60%/50% 75% X 1) Max. tax rate on pre-tax income (i.e. taking into account the deductibility of tax expenditure) / including federal tax, cantonal and communal taxes and church tax / calculated for the capital city of the respective canton 2) Calculated for the capital city of the respective canton 4) Subject to further decrease (additional approx. 1%) 3) Dispatch Tax Proposal 17 of 21 March 2018, Appendix Table ) Only on participations and patents Page 16

17 Overview cantonal implementation (prov. as of ) Corporate income tax / net equity tax / taxation of dividend income Current tax rate 1) Envisaged tax rate 1) Transitional reduced tax rate (two-rate system) Patent box exemption (max. 90%) R&D super deduction (max. 50%) Overall cantonal tax relief (max. 70%) Envisaged tax rate with max. cantonal tax relief Current net equity tax rate ordinary taxation 2) Current net equity tax rate holding company 2) Envisaged net equity tax rate 2) Relief net equity tax Current net equity tax credit Current taxation qualifying dividend income Envisaged taxation qualifying dividend income (mind. 50%) Systemic change SZ 15.19% 14.4% or 12.51% 1.7% or 1% 90% 50% 70% 9.91% or 9.29% 0.167% 0.011% 0.013% or 0.007% X 50% 70% X TG 16.43% 13.40% 1.4% 40% X 50% 10.70% 0.084% 0.003% 0.042% 90% 5) 60%/50% 70% X TI 20.67% 16% - 17% 90% 50% 30% 13.71% % 0.290% 0.029% X new 70% 70% X UR 14.92% 12.51% 1% 30% X 50% 10.23% 0.001% 0.001% 0.001% X 40% 70% X VD 21.37% 13.79% 0.070% 0.175% 70%/60% X VS 21.56% 15.96% - 20% 11.1% 90% 50% 34% 13.36% % 0.500% 0.020% 0.500% X 60%/50% 70% X ZG 14.62% 12.09% 1.2% - 2.4% 90% 50% 70% 9.15% 0.074% 0.003% 0.075% 98% 5) X 50% 70% X ZH 21.15% 18.19% 1.15% 90% 50% 70% 11.21% 0.172% 0.034% 0.172% 90% X 50% 60% 1) Max. tax rate on pre-tax income (i.e. taking into account the deductibility of tax expenditure) / including federal tax, cantonal and communal taxes and church tax / calculated for the capital city of the respective canton 2) Calculated for the capital city of the respective canton 3) Dispatch Tax Proposal 17 of 21 March 2018, Appendix Table ) Previous draft law under CTR III 5) Only on participations and patents Page 17

18 Outlook and political process If no referendum is held first measures of the tax reform could enter into force in 2019 main part of the measures from 2020 Certain parties have already announced intention to hold a referendum referendum period 100 days of the final bill s publication in the Official Gazette voters signatures necessary people s vote on 19 May 2019 entry into force still planned for 1 January 2020 Cantonal political processes implementation of tax reform requires amendment of the cantonal tax law which is subject to a political referendum Possible international reactions EU has given Switzerland until end of 2018 to abolish tax privileges EU finance ministers will meet in March 2019 for a general update on the tax policy discussion Page 18

19 Key takeaways The proposed tax reform achieves its main goal of retaining Switzerland s international attractiveness while having an internationally accepted tax system. Even though a referendum is rather likely, the tight time frame requires swift review from the tax payers regarding the transition to the new regulations. Page 19

20 Questions? Page 20

21 Thank you!

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