Swiss Corporate Tax Reform III Highlights of Federal Councils CTR III dispatch to Parliament

Transcription

1 Highlights of Federal Councils CTR III dispatch to Parliament Welcome!

2 Webinar manual Do you have a question? You can ask questions during the Webinar by using the Ask a Question button 1

3 Your presenters today Andreas Staubli Armin Marti Benjamin Koch Daniel Gremaud LeaderTax and Legal Services Switzerland and member of the Working Group CTR III Leader Corporate Tax Switzerland and member of the Working Group CTR III Leader Transfer Pricing and Value Chain Transformation Switzerland and member of the Working Group CTR III Leader Tax & Legal Services Romandie (Western Switzerland) and member of the Working Group CTR III 2

4 Contents 1 Overview of Proposed CTR III measures Dispatch 5 2 Cantonal Patent Box and R&D input promotion 7 3 Interest-adjusted profit tax Notional Interest Deduction (NID) 4 Systematic realisation of hidden reserves step-up 17 5 Cantonal Corporate Tax Rate Reductions and other measures to increase attractiveness 6 Measures considered but not included in reform package 27 7 Funding of the Reform Package 29 8 Next steps and Position 35 9 Q&A

5 Overview of Proposed CTR III measures Dispatch 5 3

6 CTR III positions post-consultation process 4

7 Overview of the parameters to be addressed in the CTR III CTR III Abolition of privileged cantonal tax regimes, principal taxation, Swiss finance branch regime and adaption of intercantonal reallocation of revenues (NFA) Other measures Cantonal Licence Box on Patent Income R&D Input incentive Notional Interest Deduction Step-up of hidden reserves Cantonal Corporate income tax reduction Adaption of cantonal capital tax Issuance stamp tax Participation relief Tax loss carry forwards Private capital gains tax Partial taxation of private dividends Lump sum tax credit for branches Sustainable effects for Switzerland High competitiveness Attractive jobs International acceptance Legal certainty & security of investment Economic benefit for everyone 5

8 Outlook / political agenda Publication of additional report CTR III Publication of consultation draft Approval of Dispatch Final decision by (19. Dec. 13) (22. Sep. 14) by Federal Council Parliament Popular vote Consultation of cantons on the Report Consultation procedure Preparation of Dispatch Parliamentary debates Referendum period Possible referendum Time until next 1 Jan Implementation period (6 months) Decision by Federal Council Parliamentary commissions (WAK-NR/WAK-SR) and Parliamentary chambers (NR/SR) Referendum deadline Law enters into force Implemented into cantonal law September 2014 ~January 2015 ~ ~2017 ~2018 ~2019 6

9 Cantonal Patent Box and R&D input promotion 7

10 Patent Box and R&D input promotion Overview Innovation Preferential tax treatment Input support R&D&I tax credit Output support Patent-Box Voluntaryon Cantonal Level Mandatory on Cantonal Level 8

11 Patent Box 3 key questions

12 Patent Box Adjusting screws Taxpayer Corporate Entities Self-employed individuals Qualifying IP a) Patents and equivalent rights b) Protection certificates c) Primary protection according to Art. 12 of pharmaceutical law Substance Modified Nexus Approach Mechanism Residual approach Step-wise approach to define income subject to preferential treatment Routine functions and marketing IP Entrance: Tax adjustment in the first year based on R&D spent Benefit Base Reduction max. 90 % Only applicable at cantonal level (mandatory; Tax Harmonisation Law) Cantons may further reduce the base reduction 10

13 Patent Box Calculation of Patent Box profit Qualifying Profit Nexus Ratio Base Reduction Patent Box Profit Step Step Step Result Qualifying Profit X X = Nexus Ratio Base Reduction Patent Box Profit Total Profit./.Finance result./.result from nonqualifying assets and services./.routine functions./.trademarks Qualifying expenditures (plusan uplift of max. 30 %) to develop IP Overall expenditures to develop IP Not more than 90 % Cantonsmay reduce base reduction further Part of Total Profit which will not be taxed 11

14 R&D Input promotion Adjusting screws Taxpayer Corporate Entities Self-employed individuals Definition of R&D Not defined Cantons are free to design the R&D tax credit; however R&D activities which have been performed in Switzerland, including contract R&D performed by 3d parties In case of contract R&D sponsor to claim the benefit Mechanism Superdeduction regime No cash pay-out in case of losses Volume or incremental based Benefit Only applicable at cantonal level (voluntary; Tax Harmonisation Law) Cantons may define the respective elements (i.e. multiplier) 12

15 Patent Box and R&D input promotion Conclusion 01 Flexibility International Developments Delegation to Federal Council Effective Tax Rate 10 % internationally accepted Design of R&D tax credit Tax credit vs. superdeduction Mandatory vs. voluntary Winners SMEs MNEs with strong Swiss R&D footprint 04 13

16 Interest-adjusted profit tax Notional Interest Deduction (NID) 14

17 Interest Adjusted Corporate Income Tax on Surplus Capital Overview Current political status / where do we stand? The Swiss Federal Council has excluded the NID from the reform package in April 2015 as the majority of the Cantons argued against this measure in the consultation process. Main reasons for not pursuing the measure were perceived high tax losses, new tax planning possibilities and questioned long-term international acceptance Accordingly, the NID does not form part of the dispatch Nevertheless, the NID is strongly supported by a majority of the political parties and the economy. Thus, it will very likely be reintroduced during the parliamentary debate. and representatives of the economy are in close contact with political decision makers to enable this reintroduction Key features of proposal NID only on qualifying surplus capital (= taxable equity./. core capital) Interest rate: 10-year Swiss Federal bond rate + margin of 50bps(standard case) market rate (applicable for group internal receivables, i.e. in particular loans) Objectives Retention of highly mobile financing functions in Switzerland (tax revenues of some CHF 240m DFT + CHF 100m CCT + indirect effects) and relocation of new financing activities to Switzerland Strengthening of financial centre Switzerland (treasury functions) and reviving the Swiss capital market Privileging of well equity financed SME & MNCs (security / stability & economic impulses) 15

18 Interest Adjusted Corporate Income Tax on Surplus Capital Overview In general The NID is a crucial element to retain an attractive location for mobile activities of MNCs in general and to offer a tax attractive solution for financing activities in particular Tax burden: 3-6% for large financing volumes otherwise 8-12% The measure is a MUST (!) and cannot be replaced by general tax rate reductions Tax planning / financing of the NID NID is designed to exclude inappropriate tax planning possibilities NID is not applicable for non-business assets (non-operational assets) Expected tax losses are compensated by retaining existing finance companies / branches and relocation of new financing activities to Switzerland International acceptance NID currently not classified as harmful by the EU / OECD NID-mechanism already known in other European countries (BE, FL, IT). Similar solutions available as well in UK, Lux, NL, IR BEPS demands consolidation of mobile corporate activities; NID fosters such consolidation processes 16

19 Systematic realisation of hidden reserves step-up 17

20 Systematic realisation of hidden reserves Changes in tax status StHG 28 Step-Up of hidden reserves Entry into Patent Box Exit from Patent Box t Entry into Swiss tax liability e.g. immigrating into Switzerland Intercantonalchange of statutory seat Constitutional prohibition of an inter-cantonal exit taxation Exit from tax liability e.g. leaving Switzerland t

21 Systematic realisation of hidden reserves Changes in tax status Constitutional requirements as per legal opinion of Prof. René Matteotti: Fiscal shock resulting from transition to be softened by either: a. No or mild taxation of hidden reserves and goodwill generated in tax free environment under current regimes upon realisation, or b. Substantial decrease in cantonal tax rates. Separate rules for: 1. Transition rule upon abolition of current StHG Art. 28 statusart. 78g StHG 2. Rules concerning entry into patent box Art. 24a Lit. 2 StHG 3. Harmonised rules upon entry into tax liability Art. 24b StHG; Art 61a DFT 4. Harmonised rules upon exit out of the tax liability Art. 24c StHG; Art 61b DFT 19

22 Separate taxation upon transition vs future general status changes Example Statutory profit Tax balance sheet Step-up amount Step-up deprec. Taxable profit./. depreciation y1 <250>./. depreciation y2 <250>./.depreciation y5 <250> Remaining amount Separate tracking Step-up potential Statutory profit separate low rate ordinary tax rate./. whereof realized in y1 <450>./. whereof realized in y2 <600>./.whereof realized in y5 <350> 0 Remaining unused amount

23 Systematic realisation of hidden reserves Transitional rule resolving tax accounting problem Transition rule StHG Art. 78g: 1 Wurden juristischen Personen, die vor dem Inkrafttreten der Änderung vom nach Artikel 28 Absätze 2-4 besteuert, so werden die bei Inkrafttreten der Änderung bestehenden stillen Reserven einschliesslich des selbst geschaffenen Mehrwerts, soweit diese bisher nicht steuerbar gewesen wären,im Falle deren Realisierung innert den nächsten fünf Jahren gesondert besteuert. Die Höhe der bei Inkrafttreten dieser Änderung von der juristischen Person geltend gemachtenstillen Reserven einschliesslich des selbst geschaffenen Mehrwerts ist von der Veranlagungsbehörde mittels Verfügung festzusetzen. Mandatory for cantons Separate (low) rate to be determined by cantons Optional for companies Discretion by cantons to determine annual amounts of hidden reserves and goodwill to be allocated to separate rate but should be aligned with reality No negative tax accounting impact 21

24 Systematic realisation of hidden reserves Harmonised rules for other future tax systematic changes Entry intotaxliabilitysthg 24b anddgb Art. 61a Step-up upon transfer of seat or place of effective management into Switzerland transfer of assets or functions from abroad into a Swiss trade of branch loss of tax exemption according to StHGArt. 23 para. 1 resp. DFT Art. 56 Optional for companies Step up of all hidden reserves and goodwill except for qualifying participations (of min. 10%) Depreciation of stepped-up hidden reserves applying normal tax depreciation rates Depreciation of goodwill over 10 years Entry into Patent Box: StHG 24a Creation of taxed hidden reserve by adding to taxable income in the year of status change prior years R&D costs relating to the patent rights qualifying for box taxation (if lower than FMV of patent at time of entry), and input R&D incentives received, if any 22

25 Systematic realisation of hidden reserves Step-up Topics to address Tax Accounting DTA Valuation DCF vs SSK Circular 28 (2008) re valuation of non-quoted securities Duration 5 years vs 10 years in accordance to actual realization Timing status change prior or after enactment of CTR III Principal Companies Canton vs Federation: different timing and approach Impact on capital tax International acceptance 23

26 Cantonal corporate tax rate reductions and other measures to increase attractiveness 24

27 Cantonal corporate tax rate reduction Reduction of cantonal corporate income tax rates at the discretion of the cantons Various cantons announced target tax rates Geneva, Vaud: Target rate of ~13% announced Fribourg: 13.72% (cantonal income tax for legal entities: 4%) Zug: Target rate of 12% announced Zurich: Depending on positioning of neighbouring cantons Lucerne, Schwyz, Nidwalden: Current rate already approx. 12.5% 25

28 Further measures to increase attractiveness 1. Optional adaption of cantonal capital tax Reduction for equity relating to qualifying participations, patents and similar rights (aligned with patent box) but not for financing assets (e.g. loans) 2. Abolition of issuance stamp tax on equity capital 3. Amendment of partial taxation of dividend income from qualified investments for individuals for min. 10% shareholdings Standardised relief of 30% at both federal and cantonal level; mandatory for all cantons 70% taxation (today typically higher reliefs granted; federal level 50%, cantons up to 80%) 4. Lump sum tax credit for Swiss branches of foreign companies Eligibility for residual foreign withholding tax on income that is subject to full ordinary taxation Federal council to determine detailed conditions 26

29 Measures considered but not included in reform package 27

30 Other measures not included Measures explained in dispatch but not included in reform package: No introduction of Notional Interest Deduction (NID) No capital gains tax on privately held securities by individuals No switch to direct participation exemption, and No change of tax loss carry forward rules No introduction of Tonnage Tax (due to lack of compatibility with constitution) 28

31 Funding of the Reform Package 29

32 Vertical equalization measures Contribution by Federation to cantons sharing the burden and supporting cantonal tax rate reduction: Calculation of tax revenue loss based on (weighted) average income tax rate of 16% 50% contribution by Federation to canton By means of increasing the participation of cantons in Federal income tax from 17% to 20.5% => approx. CHF 1bn Supplementary contribution of CHF 180m to resource-weak cantons, funded by means of reallocation out of anyway planned reduction of hardship fund ( Härteausgleich ) Additional funding by means of increase of 75 new positions for tax auditors at SFTA 30

33 Intercantonalreallocation of tax revenues Finance flows (2015) Payments in mchf Federation 239 2' vertical horizontal 120 vertical horizontal 1'552 Federal equalization of costs/ Lastenausgleich Hardship contributions Härteausgleich Equalization of resources Ressourcenausgleich geographicaltopographical sociodemographic 359 3' Resource-weak cantons AG AI AR GR SG SO TG TI UR VS BE FR GL JU LU NE OW Cantons with hardship allowance Source: economiesuisse Well-resourced cantons BS GE NW SH SZ VD ZH Cantons with special burdens 31

34 National Fiscal Equalization Adaption of resource equalization factors Present System: Profits: Resource potential: Ordinary taxed companies MixCo Domiciliary Co HoldCo 100% β G β D β H New System: Profits: Ordinary taxed companies at 16% Patent Box at 10% Resource potential: ζ ordinary ζ Box Zeta-factor: Weighting based on relative actual exploitability of corporate tax base; Ø-taxation of corporate profits relative to income taxation of individuals Source: EFV 32

35 Intercantonalreallocation of tax revenues Financial effects at federal level Charges(in mchf) Counter financing Replacement measures: Patent box 0 Notional interest deduction new tax inspectors +250 Abolition of issuance stamp tax -200 Already included in finance plan +200 Improvement of the systematic: Participation exemption -200 Private Capital gains taxation +300 Tax loss carry forward 0 Partial taxation of dividends -100 Partial taxation of dividends +100 Fiscal balance: Verticalcompensation(from2019) Supplementarycontribution/ Ergänzungsbeitrag (from 2023) Buildupstructuralsurplustobuiltintofinancialplan Phase out of hardship contribution fund +180 Total charges Total discharges

36 Intercantonalreallocation of tax revenues Financial effects at cantonal and communal level Charges(in mchf) Counter financing Replacement measures: Patent box 0 Notional interest deduction -344 Capital tax 0 Improvement of the systematic: Participation exemption -250 Private Capital gains tax +830 Partial taxation of dividends -250 Partial taxation of dividends +300 Fiscal balance: Vertical compensation(from 2019) Supplementary contribution(from 2023) +180 Total charges 0 Total discharges

37 Next steps and Position 35

38 Next Steps The current corporate taxation rules and specifically the tax regimes that will be abolished have contributed to the success of Switzerland. The fact, that Switzerland has to eliminate these 30 year old rules has caused severe legal uncertainty. The proposed package is aimed at re-establishing certainty to the extent possible. Due to the Swiss political process it can be expected that the new reform measures will not come into effect before 2017 (Federal tax provision) and 2019 (Cantonal tax provisions). Implementation may be delayed depending on the speed the two Swiss Chambers will deal with the reform package and whether a referendum will be called making a public vote necessary. 36

39 Position Focus on measures to restore attractiveness of Switzerland as a tax location 1. We welcome introduction of Patent Box at Cantonal level Patent and similar rights should be defined broadly 2. We welcome possibility for Cantons to introduce input R&D promotion rules Should be made mandatory for all cantons Mechanism should be set in smart way (R&D tax credit is superior to super-deduction of expenses) 3. NID should again be reintroduced into the CTR III package Notional interest rate for group financing to be determined applying arm s length interest rates and not a prescribed fixed rate derived from Swiss government bonds Intercompany loans should qualify for reduction of cantonal capital tax similar to participations and patent rights 4. Abolition of issuance stamp tax could be traded in against re-introduction of NID, if required 5. We welcome step up rule upon loss of current cantonal status, especially since it eliminates negative tax accounting implications, but limitation to 5 years is to short and should be extended to 10 years again Discretion given to cantons should be applied generously (e.g. fixing a low separate tax rate; accepting reasonable maximum amount of hidden reserves and goodwill; accepting reasonable amount of annually realised portion) PPA logic for step-up is unnecessary (step-up of one integral amount would be preferred) 6. Lump sum tax credit proposition could be deferred Lump sum tax credit system must be modernised comprehensively taking into account new reform elements 37

40 Q&A 38

41 For any questions please contact your usual contact or the members of the CTR III core team below Andreas Staubli Partner, Leader Tax and Legal Services Switzerland Direct: Mobile: andreas.staubli@ch.pwc.com Armin Marti Partner, Leader Corporate Tax Switzerland Direct: Mobile: armin.marti@ch.pwc.com Benjamin Koch Partner, Leader Transfer Pricing and Value Chain Transformation, Switzerland Direct: Mobile: benjamin.koch@ch.pwc.com Daniel Gremaud Partner, Leader Tax and Legal Services Romandie Direct: Mobile: daniel.gremaud@ch.pwc.com Claude-Alain Barke Partner, Tax and Legal Romandies Direct: Mobile: claude-alain.barke@ch.pwc.com Remo Küttel Director, Tax and Legal Switzerland Direct: Mobile: remo.kuettel@ch.pwc.com Laurenz Schneider Director, Corporate Tax Switzerland Direct: Mobile: laurenz.schneider@ch.pwc.com This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers AG, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it All rights reserved. In this document, refers to PricewaterhouseCoopers AG which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.