Business Chief Praises Swiss Tax System

By ExpatBriefing.com Editorial 26 September, 2011

Underscoring the importance of taxation in a recent interview with KPMG Switzerland, Peter Baumgartner, Director and Chairman of the Executive Committee of Swiss Holdings, the Federation of Swiss-based multinational firms, stressed the need to preserve the fiscal attractiveness of the Confederation.

According to Baumgartner, an ideal tax system in Switzerland would maintain the existing federal structure, in which the right to levy taxes is shared between both the federal government and the Swiss cantons. Here Baumgartner noted that the federal government should receive consumer taxes while the cantons should collect revenues from income and profit taxes. In an ideal tax system, there would be no capital or wealth taxes, which punish investment, Baumgartner added, while also underlining the fact that tax competition within Switzerland, and in particular between the cantons, should continue to play a role.

Highlighting the fact that the Confederation’s current tax system is actually not that far from being the ideal model, Baumgartner suggested that the current tax system could nevertheless withstand a higher rate of value-added tax (VAT), explaining that this would be a neutral solution for companies, and therefore not damaging to Switzerland as a location. Baumgartner also alluded to the fact that direct federal tax is characterized by a very steep progression as regards individuals, serving as an actual wealth tax.

While pointing out that the current international trend is towards a shift away from direct to indirect taxation, Baumgartner revealed that he did not at the moment envisage such a shift in taxation in Switzerland, particularly given that the highest tax rates, both for VAT and for direct federal tax, are currently enshrined in the country’s constitution.

Alluding to the ongoing tax dispute between the Confederation and the European Union (EU) on the issue of cantonal tax regimes as one of the most important and urgent fiscal challenges currently facing Switzerland, Baumgartner noted that the simmering conflict, which began in 2007, represents a significant threat to Switzerland as a location. Baumgartner warned that EU pressure on Switzerland to amend its cantonal tax regimes, to ensure that they conform with European legislation, is only likely to increase, even though Switzerland is a non-member state.

Here Baumgartner explained that for Switzerland as a location the benefits of the cantonal tax regimes are so blatant that companies elect to move their headquarters or key activities to the Confederation, inevitably stirring up political emotions in other states.

Adamant that tax competition within the Swiss cantons is fundamentally a good thing, with cantons able to determine their own tax rates, Baumgartner pointed out that this has served to keep both the tax burden and public spending down. A large majority of the population are in favour of the existing system, he maintained.

Finally, turning to the controversial topic of the flat, or lump sum, tax in Switzerland, Baumgartner explained that the issue is polarized. On the one hand, Baumgartner stated that wealthy taxpayers have relocated to Switzerland as a result of the tax perk, while on the other reservations remain over the issue of unequal tax treatment. Undoubtedly the trend in Switzerland will be to reduce the gap between the flat tax levied on wealthy foreigners and the standard taxation of individuals in the Confederation, Baumgartner added.

The special rule applied by cantons in Switzerland provides that wealthy foreigners not working in Switzerland are subject to a flat rate of tax (Pauschalsteuer) instead of income tax. Determined by the local authorities, the amount of the lump sum tax is typically based on at least five times living costs.

Reflecting an increasing trend, while agreeing to retain the tax, voters in the Swiss canton Thurgau nevertheless adopted back in May an initiative submitted by the Grand Council aiming at toughening the tax's provisions. Consequently, in future rich foreigners will be required to pay more tax in the canton.

In response to mounting opposition to the increasingly unpopular method of taxation, the Swiss government has put forward recommendations that the flat rate tax be raised to seven times the rental value of properties, and that only people with an income of at least CHF400,000 would qualify for the tax break.

Tags: Individuals | Expatriates | Tax | Investment | Tax Incentives | Corporation Tax | Offshore | Switzerland | Tax Breaks | Individual Income Tax |

 





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