Tax. Proposal 17. Dispatch of Federal Council Overview of elements, implementation and impact

Transcription

1 Tax Proposal 17 Dispatch of Federal Council Overview of elements, implementation and impact 28 March 2018

2 Speakers Peter Uebelhart Stefan Kuhn Partner Head of Tax Partner Head of Corporate Tax Olivier Eichenberger Director Corporate Tax

3 Agenda 1 Main 2 Tax 3 Snapshot 4 International 5 Overall reason of the reform: Tax privileges to be abolished Proposal 17: elements of the proposed cantonal implementation competitive tax rates today and tomorrow conclusion 6 Q&A Conclusion 2

4 Main reason of the reform: Tax privileges to be abolished

5 Current tax privileges and effective tax rates Holding company regime: 7.83% Mixed / Auxiliary Company regime: % Strong and seamless Principal presence in our clients over the long Company term practice: 5 9% Dominant player in the Finance professional services space branch confident in ability to generate practice: sustainable long 1 term 2% growth 4

6 Tax Proposal 17: elements

7 Goals of the reform Public tax revenues Attractiveness International acceptance 6

8 Current Status Timeline June 2017 Adoption of parameters Consultation procedure 1 st chamber 29 May - 15 June 2 nd chamber Sept. Referendum period (100 days) 12 February 2017: Public vote rejects CTR III 21 March 2018: Publication of dispatch by Federal Council 1 January 2019*: First measures could come into force (in particular financial equalization measures) 1 January 2020*: Earliest date for entry into force of main part of the reform (e.g. abolishment of status companies) Timeline (future data according to current estimates) *provided that no referendum is called 7

9 Current Status Timeline (potential public vote) June 2017 Adoption of parameters Public vote? Consultation procedure 1 st chamber 29 May - 15 June 2 nd chamber Sept. Referendum period (100 days) 12 February 2017: Public vote rejects CTR III 21 March 2018: Publication of dispatch by Federal Council 1 January 2020*: First measures could come into force (in particular financial equalization measures) 1 January 2021*: Entry into force of main part of the reform (e.g. abolishment of status companies) Timeline (future data according to current estimates) *current assumption 8

10 Overview of measures Abolishment of privileged tax regimes with transitional measures Increase of canton s share of direct federal tax and consideration of the cities and municipalities Patent box Additional R&D deductions Overall limitation Step-up upon relocation to Switzerland Relief on capital taxes Lump-sum tax credit for Swiss branches of foreign companies Increase of dividend taxation for individuals for qualifying investments Increase of child and education allowance Adjustment of rules regarding transposition for Swiss individuals 9

11 Transitional measures (change from privileged to ordinary tax status)

12 Change in tax status Transitional measures General information Ensure that hidden reserves are taxed under the tax regime in which such reserves have been created Only relevant for cantonal and communal taxes Current law step-up (old regulation) and transitional step-up (new regulation; special tax rate) Current law step-up (premature change in tax status) Effective (tax neutral) disclosure (in tax balance sheet) of hidden reserves created under the tax privilege Revaluated assets are to be depreciated by reducing taxable income Transitional step-up (special tax rate) The fiscal shock of the tax rate change shall be absorbed over a period of 5 years A similar tax rate as under the privilege shall be applied during this transitional period During the transitional period a special reduced tax rate is applied Proceeding is systematically justified After the transitional period: new ordinary tax rates are applied Such special tax rate varies between the cantons 11

13 Transitional Step-up Implementation of transitional step-up is mandatory for cantons For tax payers the transitional step-up is voluntary Over a period of max. 5 years the profit based on the realization of hidden reserves in place at the time of the change of status and to extent not taxable under the privileged tax status (max. determined step-up potential) will be taxed at a special reduced tax rate. The profit will be divided in Basket A (ordinary cantonal tax rate) and Basket B ( special reduced tax rate) No DTA needs to be accounted for! This measure may be introduced by the cantons even before the entry into force of the TP 17 - immediately after a potential positive public vote or the day when it is certain that no referendum is called 12

14 Transitional Step-up 250 0Annual profit Basket B will be taxed at special reduced tax rate (e.g. 2%) Basket A Will be taxed at ordinary cantonal/communal tax rate (e.g. 9%) Example: Hidden reserves of Company A amount to 500 (can be allocated over 5 years) Annual profit year 2020: will be taxed at ordinary cantonal/communal tax rate (Basket A) And 150 could be allocated to «special» tax rate (Basket B) 13

15 taxable profit Annual profit depreciation step-up Current law Step-up Step-up amount 2500./. Year /. Year ( ) ( )./. Year ,000 Remaining amount 0 1, Reduction of the taxable income (Effect on cantonal income tax)

16 Patent box regime

17 Patent box regime Overview Application of the patent box Applicable at cantonal level only (mandatory for all cantons), up to 90% relief Consideration of modified nexus approach based on R&D expenses incurred Qualifying IP Patents (Swiss and if comparable foreign patents) IP similar to patents, i.e.: - Supplementary protection certificates - Topographies - Protected varieties of plants - Protected documents according to the Therapeutic Products Act - Reports protected by the Ordinance on Plant Protection Products - Comparable foreign rights 16

18 Patent box regime Software Copyrighted software Copyrighted software is not covered by the definition of qualifying IP hence shall not benefit from the patent box Cases in which software can qualify for the patent box If the software is patented abroad (e.g. US) Software which is a part of an invention (so called computerimplemented invention ) which itself as a whole is patented 17

19 Patent box regime first application Taxation of entry into the patent box (capitalization of expensed R&D costs / IP amortization of last 10 years) can be delayed up to 5 years - Relevant for ordinary taxed companies amortization within the patent box - Companies currently benefitting from a tax privilege: only to the extent the R&D expense has been deducted from Swiss taxable income 18

20 Patent box regime 4 steps of calculation Step 1: Step 2: Step 3: Step 4: Determination of qualifying IP income Determination of nexus factor Determination of the scaling factor (depending on canton) and calculation of exempted income Consideration of overall limitation rule (depending on canton) 19

21 Patent box regime Step 1 Determination of qualifying income Direct determination (e.g. external royalty/license income) Indirect determination (due to embedded royalties in various products) - Net method (based on Transfer Pricing study) not applicable - Residual method applicable for Switzerland due to simpler administrative handling Residual profit computation from qualifying IP (based on total corporate profit) - simplified example Total profit./. Profit from financial activity./. Other profit not based on IP / products with IP = Profit from patented products./. Embeded trademark fees./. 6% of product costs (for routine functions) ordinary taxation ordinary taxation = residual qualifying IP income privileged taxation 20

22 Patent box regime Step 2 (mod. Nexus app.) Swiss Group Company GC Foreign Group Company R&D expenses Patentbox GC 60 Patent Income T T 30 Swiss Third Party Foreign Third Party To be confirmed by ordinance of the government «Uplift» of 30% of the qualifying R&D expenses GC T = Group Company = Third party Qualifying R&D expenditure Overall expenditure % Only 78% of qualifying residual IP income (box income) is to be tax privileged (i.e. only 78% may be tax exempted by up to 90%). 21

23 Additional R&D deduction

24 Additional R&D Deduction overview Broad Definition of R&D: Basic research Applied research Science-based Innovation Own domestic R&D An additional deduction of 50% of R&D expenses (domestic personnel expenses plus markup of 35%) may be granted in each tax year. Domestic contract R&D An additional deduction of 50% of 80% of invoiced R&D expenses may be granted in each tax year. 23

25 Additional R&D Deduction calculation example Own R&D Contract R&D 35* 35% 20% 20 R&D personnel 100 (domestic) expenses Contract R&D % % 215 Basis Additional R&D deduction * Assumption: there are at least other R&D expenses in the amount of 35 (in addition to personnel expenses); hence overall R&D expenses in the example amount to (at least)

26 Overall limitation of measures

27 R&D super deduction Current law step-up depr. Patent box Overall limitation of measures Maximum deduction of 70% of taxable income before loss carry forwards and excluding participation income Minimum income profit of of 20% 30% of of taxable profits income before loss carry forwards (approach before set per off entity) losses carried forward 26

28 Step-up upon Relocation to Switzerland

29 Step-up Relocation to Switzerland Upon relocation to Switzerland, a foreign company can disclose hidden reserves including goodwill in a tax free manner. Hence, in the first few (up to 10) years the company may benefit from additional depreciations on such disclosed hidden reserves. Abroad Switzerland Abroad Revaluation of assets to FMV in the tax balance sheet (even if not accounted for in the statutory balance sheet) Exit taxation (as already today) Taxed hidden reserves in the tax balance sheet Depreciation over maximum 10 years 28

30 Relief on capital taxes

31 Relief on capital taxes With the abolishment of the privileged tax regimes, privileged capital tax rates will also be abolished Therefore, a relief on capital taxes will be introduced The cantons are entitled to grant a reduction for equity related to participations, patents and similar rights (intercompany loan assets are not included anymore). Assets Liabilities Assets for deduction Quota (of total assets) 100 cash 200 debt 100 receivables 200 patents 300 equity 100 participations 500 total 500 total 200 patents 40% 100 participations 20% Total deduction from capital tax amount 60% Alternative procedure by the cantons: General (capital) tax rate reduction Credit of income tax towards capital tax 30

32 Not in the proposal: Notional Interest deduction (NID)

33 Notional Interest Deduction Overview NID is not included in the TP 17 (as it is understood as a main reason for the failure of the CTR III and hence the non-inclusion shall facilitate acceptance of the TP 17) The missing NID will be a disadvantage in particular for the canton of Zurich Further discussions are expected during the treatment in the parliament The NID may be a part of the Withholding Tax Reform (still to come) 32

34 Snapshot of the proposed cantonal implementation

35 Cantonal measures Overview Canton Patent Box regime (reduction) Additional R&D Deduction Overall Limitation of measures BS 90% No 40% GE 10% 50% 9% LU 10% No 20% / 70%* SH 90% No 70% TI 90% 50% 30% ZG 90% 50% 70% ZH 90% 50% 70% *20% overall limitation excluding Step-up / 70% including Step-up (current law) 34

36 International competitive tax rates today and tomorrow

37 12.5% 12.3%* 12.3%* 12.0%* 14.5%* 17% 18.2%* 21%** 19% 21.2%* 25% 25% 29.79% 33.99% 33.33% Headline tax rates today/tomorrow Belgium France Germany NL US UK Ireland Zurich Lucerne Zug * Overall ETR including federal tax ** Only federal tax 36

38 * * * Planned cantonal income tax rates 2018 TP17 * Gradually reduction within up to 5 years Remark: maximum effective pre-tax rate for federal government / canton / municipality for the respective principal town in percent. Sources: TaxWare, KPMG Schweiz. 37

39 Overall conclusion

40 Conclusion on TP 17 IP driven reform as a clear sign of commitment to Switzerland as a location for research and industry In particular from a holistic point of view: new measures as an attractive solution in combination with low ordinary tax rates consideration of substance approach (i.e. other income) Effective tax rate as low as 12% without tax planning! 39

41 Know where you are headed: impact analysis TP17 could already be a reality as of Do you know how this would affect your company? What would be the effect of the abolishment of privileged tax regimes? What would the impact of additional R&D reductions be? What would the introduction of a patent box imply? How can I benefit from transitional measures? Provide your company with the data necessary for predictive business decisions. 40

42 Q&A

43 Your regional contacts Zurich and Ticino Region Stefan Kuhn Badenerstrasse 172 CH-8036 Zürich T: Central-Switzerland Region Markus Vogel Landis + Gyr-Strasse 1 CH-6301 Zug T: Bern-Mittelland Region Hans Jürg Steiner Hofgut CH-3073 Gümligen-Bern T: Basel Region Reiner Denner Viaduktstrasse 42 CH-4002 Basel T: Eastern-Switzerland Region Peter Michael Bogenstrasse 7 CH-9001 St. Gallen T: Western-Switzerland Region Janick Pochon Avenue du Théâtre 1 CH-1002 Lausanne T:

44 Thank you!

45 Annex

46 Content of the new proposal CTR III TP 17 Abolishment of cantonal privileged tax regimes with transitional measures (special tax rate) Increase of the canton s share of direct federal tax revenues from 17% to 21.2% Abolishment of cantonal privileged tax regimes with transitional measures (special tax rate) Increase of the canton s share of direct federal tax revenues from 17% to 21.2% Lump sum tax credit for Swiss branches of foreign companies Lump sum tax credit for Swiss branches of foreign companies Step-up upon relocation to Switzerland Step-up upon relocation to Switzerland Patent box (output incentive) potential inclusion of software Patent box (output incentive) up to 90% exclusion of software R&D super deduction (max. 50%) Additional R&D deduction (max. 50% on defined basis) Overall limitation at 80% Overall limitation at 70% Relief on capital taxes for equity relating to investments, patents and similar rights and intercompany loan assets Relief on capital taxes for equity relating to investments and patents and similar rights (without intercompany loan assets) Notional Interest Deduction (NID) No NID Increase of dividend taxation for individuals direct federal tax: 70% cantonal tax: at least 70% Consideration of the cities and municipalities regarding financial support by the confederation (cantons stay autonomous) Increase of child and education allowance by CHF 30 Strengthening of the rules regarding the transposition for Swiss resident individuals Legende Adopted parameters Adjusted parameters Not adopted / new parameters Source: Swiss Federal Tax Administration 45

47 Indicative impact of TP 17 per company type Abolishment tax status Reduction income tax Patent box R&D super deduction Relief on capital tax Conclusion SME Holding company (pure) 1) Holding company (incl. other income) 2) Industrial company (domestic production) R&D company 3) Financial institution International trader Group financing Trademark administration Legend tax reducing, compensation tax increasing neutral 1) potentially regarding capital tax 2) If patent available 3) without / with tax status 46

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