It’s time to question whether the protectionist ideas of our OECD friends truly justify the loss of our legislative autonomy

At a time when the practice of tax optimization was not yet an affront to decency, the objective of bilateral tax agreements between states was to protect taxpayers from multiple taxation.

Recently, many states have reoriented their philosophy. Thus, OECD and G20 member countries have developed the Base Erosion and Profit Shifting (BEPS) project, which aims to replace existing agreements with a multilateral convention governing corporate taxation.

The OECD’s intention is clear: “In an increasingly interconnected world, national tax laws are no longer in sync with multinationals, capital mobility, and the digital economy, creating loopholes that can be exploited by companies to avoid tax in their home country by transferring activities abroad to jurisdictions where the tax burden is low or non-existent. These practices harm the fairness and integrity of tax systems.”

The measures studied under BEPS will therefore aim to moderate tax optimization and standardize the laws of contracting states, to prevent a company from benefiting from a tax regime considered too attractive.

Swiss Respect notes that Switzerland, being too good a student, is striving to honor the will of other OECD states by imposing significant changes to its legislation. Currently, Swiss law recognizes several privileged tax statuses granted to companies that exercise little or no commercial activity in Switzerland. For example, the holding company status, established to avoid triple economic taxation, or the domiciliary company status, which grants a cantonal tax reduction based on the importance of the activity carried out in Switzerland.

According to the European Commission, these tax reliefs would be comparable to state aid, contrary to the free trade agreement signed between Switzerland and the EU. These tax regimes will be abolished, as evidenced by the Confederation’s work on the third corporate tax reform (CTR III), which is intentionally BEPS-compatible.

To satisfy Europe, Switzerland is therefore working on a partial revision of its tax law, paradoxically titled “Measures to strengthen Switzerland’s tax competitiveness”. Among the changes envisaged to replace the privileged tax statuses, we can mention the introduction of patent boxes or the reduction of profit tax rates.

This concept of patent box is not new, as this tax regime exists in several OECD countries. At first glance, this point of the reform is therefore not a real competitive weapon. Moreover, patent boxes risk suffering from the assessment of “substantial activity”, whose BEPS definition is quite vague.

As for the reduction of profit tax, the minimum thresholds will have to be fiercely discussed within the OECD. We can only hope that the rates envisaged by our cantons will be accepted and that they will not prevent Swiss subsidiaries from benefiting from conventional advantages, considering the upcoming strengthening of rules on controlled companies.

In truth, CTR III proposes an adaptation of Swiss taxation to OECD requirements and not a reform that would allow competition with surrounding countries. If Switzerland aligns itself with the sometimes exaggerated tax rates and regimes applied within the OECD, how can it claim to “strengthen its competitiveness” ?

Following the adoption of OECD taxation standards, Switzerland will probably be left with only the limited possibility of setting its tax rates as freedom of action.

Less harmful – but freedom-killing! – is the indirect questioning by the BEPS project of the exemption method, applied by Switzerland, which allows the elimination of double taxation of corporate profits, but does not prevent non-taxation. To date, the OECD does not demand its suppression, but proposes significant correctives to avoid little or no taxation in the source state. Given the BEPS philosophy, we can expect this practice to disappear. This is potentially a further step towards ultra-community regulation.

Clearly, the OECD’s work tends to standardize the domestic law of member countries. Hence the disappearance of true tax competition, however healthy it may be for economic prosperity. After the abandonment of banking secrecy and adherence to automatic information exchange standards, Swiss Respect believes it is time to ask whether the protectionist ideas of our OECD friends really justify the loss of our legislative autonomy, our identity, and our economic dynamism.

* Tax specialist at Fidag SA, member of Swiss Respect

Clearly, the OECD’s work tends to standardize the domestic law of member countries

Source: https://www.letemps.ch/economie/luniformisation-lois-fiscales-nouvelles-libertes-perdues