Business and unions trade blows over tax cuts

Cutting red tape for small companies is one of the aims of the reform Keystone

The campaign ahead of a nationwide ballot in February on planned tax breaks for small and medium-sized enterprises (SMEs) is gathering pace.

Centre-left political parties and trade unions are challenging a reform of company tax laws – approved by parliament last year – while the government and the business community have come out in favour.

Earlier this week the Trade Union Federation warned that the reform plans would lead to a shortfall of up to SFr400 million ($367 million) for social security spending, including the old age pension scheme.

“The reform package is a mistake. Switzerland has low corporate tax rates compared with other European states,” said the unions’ chief economist, Daniel Lampart.

But the Association of SMEs accused opponents of focusing on a controversial reduction in shareholder dividends to 60 per cent and ignoring other measures aimed at boosting investment in small companies.

The arguments echo statements by the political parties, business representatives and the government.

The president of the centre-left Social Democratic Party, Hans-Jürg Fehr, argued that the tax cuts are unconstitutional.

“It goes against the principle of fair taxation if only shareholders with more than a ten per cent stake can benefit,” he said.

“The reform encourages companies to pay out higher dividends to shareholders instead of increasing employees’ salaries. Dividends are not subject to deductions for the social security system unlike salaries,” he added.

Opponents, including the Green Party, also say that fewer than 10,000 people stand to benefit from the controversial tax breaks for major shareholders in SMEs.

Backbone

Supporters of the legal amendment, however, maintain that it encourages investments, helps create jobs and boosts the competitive edge of the country.

It will reduce the financial and administrative burden for 300,000 SMEs and 60,000 farm owners, according to representatives of the business community.

“Switzerland is of one of the last industrialised countries which imposes a tax on company profits and on dividends,” said Gerold Bührer, president of the Business Federation, economiesuisse.

He added that the reform also allowed the federal authorities to bring legislation into line with that in most of Switzerland’s 26 cantons. Under the three-tier tax system cantons and local authorities also levy taxes on businesses and individuals.

Expert opinion

Three of the four main political parties as well as cantonal finance directors have come out in support of the federal reforms.

They dismiss allegations by prominent economists – quoted in the prestigious Neue Zürcher Zeitung newspaper – that the reform is in breach of the constitution and would have little economic impact.

Christophe Darbellay of the centre-right Christian Democratic Party said parliament had consulted experts and they had given the green light.

But opponents have appealed to the Federal Court to examine the legitimacy of corporate tax cuts in two cantons.

The Social Democrats expect the verdict, due after the February vote, to have an impact at the federal level and imagine that the law might have to be amended once again.

For its part, the government has thrown its weight behind the tax cuts.

“It is a modest but necessary reform,” said Finance Minister Hans-Rudolf Merz. He said it was aimed at boosting economic growth in Switzerland, and this would offset an expected shortfall in revenue.

Similar corporate tax cuts in 1998 for holding companies resulted in an increased number of companies, more jobs and more revenue, according to the federal authorities.

In 2004 voters threw out a proposed package of tax cuts amounting to SFr2 billion for families, property owners and shareholders.

swissinfo, Urs Geiser with agencies

In brief

Businesses based in Switzerland pay income tax at federal, cantonal and local level. Each of the country’s 26 cantons sets its own rates, so the tax burden varies according to where the company is registered.

The bulk of corporate taxes is paid to cantons which have their own regulations.

Most Swiss cantons have already introduced tax breaks for shareholders, but two complaints are pending in the Federal Court.

In a separate issue, Switzerland is locked in a dispute with the European Union over tax breaks for holding companies from EU countries.

Parliament is likely to discuss a reform of value added tax later this year. The government wants a unified VAT rate of 6.1%, reducing the current list of preferential rates.

Small and Medium-sized Enterprises (SMEs)

There are just under 300,000 SMEs (companies with fewer than 250 employees) in Switzerland. They represent 99.7% of all companies.

Nearly 88% of firms have a staff of fewer than ten people.

SMEs play an important role in the career training of young people. Four out of five SMEs offer apprenticeships.