A critical proposal for Switzerland

Below you can find an article that was published recently on UBS' intranet gateway on the forthcoming Swiss vote on the Corporate Tax Reform III, also known as CTR III. The article was co-authored by UBS Switzerland Chairman Lukas Gaehwiler and myself.

On 12 February, Swiss voters will cast their ballots for or against the Corporate Tax Reform III (CTR III). It is seen as one of the most important votes for the Swiss economy in recent years and will have a major impact on the future direction of our country. If the reform is adopted, Switzerland will abolish controversial tax privileges (especially for holding and domiciliary companies) that are the subject of international criticism, and introduce new measures in their place. For UBS, the reform matters not just because we are directly affected as one of Switzerland’s largest private employers, but also because of its impact on our corporate clients in Switzerland.

Reform is needed

Stricter international tax rules make changes to the corporate tax system unavoidable. As a result, the Swiss federal council and parliament have worked out a balanced compromise with a package of measures that gives the cantons enough freedom to attract internationally mobile companies. The federal council, parliament, the conference of cantonal governments and Swiss industry all back the tax reform. UBS also supports the reform as it improves the international standing of the Swiss tax system. At the same time, it makes Switzerland more attractive and thus more competitive as a business location for SMEs and large multinationals alike.

Doing nothing costs more

As shown in our recent research paper a large tax base is at stake. Today’s tax-privileged companies (“special status companies”) are major taxpayers. They contribute half, or CHF 3.3 billion, of all profit taxes collected by the federal government, as well as CHF 2.1 billion in profit taxes for the cantons. These companies employ around 150,000 people in Switzerland who themselves generate an estimated CHF 4 billion in income taxes. If you add indirect taxes (such as those paid by suppliers), the total tax revenue directly or indirectly attributable to special status companies is estimated to exceed CHF 13 billion.

This substantial tax contribution would be offset by a short-term loss of tax revenue that would result if the federal and cantonal governments implemented the reform. The federal finance department estimates that the reform will cost the federal government CHF 1.3 billion per year; the tax loss for the cantons cannot be easily quantified. It helps to look at it from a more dynamic viewpoint. Past tax reforms show that short-term tax revenue losses are always offset by higher tax revenues. As companies see Switzerland’s attractiveness, they invest and create jobs in the country. Previous tax reforms have always paid off in the long term. While nominal GDP has risen 80 percent since 1990, corporate taxes collected by cantons have doubled, and those collected by the federal government have increased fourfold. Much of the credit for this increase goes to today’s special status companies.

Acceptance: a forward-looking strategy

Adopting the CTR III is a chance for Switzerland. The reform gives companies legal certainty and equips Switzerland to face the ever-growing tax competition from abroad. Early signs of this are already evident in the US and competing European economies. Cantons will not only still be free to set their own effective profit and capital tax rates, they can also decide independently which CTR III measures they implement and how much tax relief to grant companies. This reflects our federal system that gives cantons the freedom to customize their tax conditions and strengthens Switzerland’s competitive position overall.

Sergio P. Ermotti is Group Chief Executive Officer of UBS, the world’s largest wealth manager