Reforms will lead to ʻmassiveʼ tax losses, cities warn

Corine Mauch, president of the city of Zurich, and Marcel Guignard, head of Aarau, fight against tax cuts for companies Keystone

Towns and municipalities may face “massive” tax losses of more than CHF1.5 billion ($1.6 billion), should fiscal reforms for companies based in Switzerland be implemented as planned, the Association of Swiss Cities warned on Monday.

Cities could lose about half of their fiscal revenue from corporations, according to a survey by the cities’ association and the Cities‘ Tax Conference, an association defending the interests of communal tax authorities. The groups demand that cities be involved when corporate tax reforms are drafted, and compensated for expected losses.

Under pressure from the European Union, the Swiss government worked out a proposal for tax regulations, which would no longer differentiate between revenues generated abroad and within the country, a system which has been criticised for giving Switzerland an unfair advantage. Up until now, companies registered in Switzerland paid lower taxes on foreign earnings.

The Swiss government proposed a number of measures communal tax authorities may take to prevent an exodus of companies, which previously benefitted from income tax breaks for foreign revenues. The most important option are so-called boxes – patent or licence boxes – which offer a reduced corporation tax rate on profits from patents.

But what the cities fear the most are not the boxes, but the fact that cantons would also have the right to lower tax rates as needed to remain competitive. As corporate bodies paying regular taxes make up for a large share of the fiscal income in larger towns, a lowering of the income taxes would preponderate in the cities.

Holding companies

Switzerland is the home of numerous multinational holding companies, which generate most of their revenues abroad and thus benefit from existing tax breaks.

Swiss-based corporations include oil company Weatherford, shipping firm Kuehne + Nagel and commodities giant Glencore.

Many of the companies have in the past warned they would leave Switzerland, should their tax burden increase.

In addition to the planned fiscal reform, they are also facing threats from popular initiatives demanding more transparency and salary caps.

ʻGloomyʼ prospects

“Even if the situation in Swiss cities is on the whole relatively good, their prospects are gloomy in view of the proposed plans for this tax reform,” warned Marcel Guignard, president of the city of Aarau and president of the Association of Swiss Cities at a presentation on Monday.

If the income tax rate is lowered to 15 per cent for corporations, as proposed by the government in one scenario, fiscal revenue from companies would be reduced by between 40 per cent to 60 per cent, the association calculated.

Measured as a percentage of the total tax yield, the share of the lost revenue would vary between five to 18 per cent depending on the city.

Winterthur would have a loss of CHF30 million or 11 per cent of its total, while Ittigen, a municipality close to the capital Bern, would have a tax loss of CHF5.2 million, which corresponds to 18 per cent of its total fiscal revenue.

The city of Zurich would lose about 13 per cent, or CHF300 million. According to Corine Mauch, president of the city of Zurich, about 60 per cent of the income taxes of the canton Zurich are paid in the city. And Zurich canton has a share of 20 per cent in the total inland revenue raised from corporate bodies, Mauch said.

Disputable services

“If already in the city of Zurich alone, we raise ten per cent of the total tax yield in Switzerland, you cannot just say that the cities are not concerned,” Mauch said, adding that if tax revenues should be 13 per cent lower, “even services, which are considered a given, would be disputable” in the future.

EU members offer tax breaks and licence box systems to attract businesses. In Switzerland, the licence box regime was for the first time introduced in the canton of Nidwalden in 2011.

Typically, a licence box company in Switzerland pays about 20 per cent taxes on income from intellectual property instead of 100 per cent. In Britain they pay 10 per cent.

National and cantonal governments had outlined the main features of a corporate tax reform in a progress report already in May. In June, the cantons already warned about “marked” income losses and demanded “substantial” federal aid.