07/05/19

SWITZERLAND: Corporate tax vote, slowing down the race to the bottom.

As published on swissinfo.ch, Tuesday 7th May, 2019.

 

Swiss voters go to the polls on May 19 to vote on a complex revision of corporate taxation. How does this fit into international efforts to crack down on tax avoidance?

They say that the only certainties in life are death and taxes, but big multinational companies are pretty good at minimising the latter.

National exchequers around the world are losing out on some $100-240 billion (CHF102-245 billion) in revenues each year, according to the Organisation for Economic Co-operation and Development (OECD); other estimates put the figure even higher. The Financial Times reported last year that multinationals now pay less tax than before the 2008 financial crisis.

The May 19 vote to reform corporate tax in Switzerland is an example of what countries are doing to try to change companies’ practices amid a complex international landscape.

Much of the impetus for reform comes from the OECD. In 2013, the Paris-based group began the Base Erosion and Profit Shifting (BEPS) initiative, a project that has since been joined by over 125 countries, including Switzerland. The upcoming vote in the Alpine country is directly concerned with meeting BEPS guidelines.

The OECD project is not just about tackling low corporate tax rates. An OECD executive told swissinfo.ch that it aims to “increase transparency” so that tax administrations can do their jobs better; bring more “coherence” to international tax systems; and beef up the “substance” of these systems so that taxation happens at the place where value is created rather than where profits are declared.

So, the goal is not to fully harmonise tax laws or tax rates, but rather to allow governments – who remain sovereign, the OECD is at pains to point out – to learn from each other and create policies that can best protect the tax base of each, rather than engaging in an all-out race to the bottom.

The organisation is reluctant to make a clear judgement about the Swiss reform proposal, but it does welcome the fact that Bern is trying to push through new rules (albeit a few years later than planned). And if the idea was to be rejected? The OECD doesn’t have the power or desire to sanction, but as an institution operating based on “dialogue and goodwill”, the feet-dragging would not go unnoticed, its executive said.

Although Switzerland (due to its political system) is one of the few countries where citizens can have a direct say on tax matters, it is not the only nation to have recently come under scrutiny for harmful tax practices.

Back in the 1950s, when Ireland was an underdeveloped farming economy with ballooning emigration, its government consciously embarked on an industrial policy of attracting multinational subsidiaries rather than supporting domestic industry.

The strategy persisted, and in 2019 Dublin, the metamorphosis of the city’s once-decaying dockland district into a shiny high-rise zone occupied by major tech companies such as Google and Facebook is a visible symbol of Ireland’s staggering popularity as a low-tax, business-friendly destination.

But it’s not to everybody’s liking, especially since the financial crisis of 2008 decimated the economy, leading to fierce social debate and a new wave of emigration.

“Ireland is one of the frontrunners in the race to the bottom,” says Professor David Jacobson of Dublin City University, who recently edited Upsetting the Apple Cartexternal link, a book on tax practices in Ireland and the EU. (The title refers to the maker of the iPhone, who in a 2016 case was ordered by the EU to pay €13.1 billion in back taxesexternal link to the Irish exchequer; the Irish government says it doesn’t want the money.)

Jacobson says that the practice of offering a low nominal tax rate (12.5%) for business, then on top of this negotiating so-called “sweetheart deals” which bring the effective rate even lower, is not only wrong for the moral reasons of iniquity and inequality; it is a pragmatic danger to economic stability in the long run.

In a 1991 book called “Ireland and the Single European Market”, he was already warning that such a strategy should shift in favour of developing a domestic market, mainly because overreliance on any one plank of an economic strategy is risky; what would happen if international investment were to dry up?

And yet, he says, there remains little appetite within the government to seriously change this cornerstone of economic policy, even after a European Parliament declaration earlier this year that Ireland was one of five “tax havens” in the EU (the others being Cyprus, Luxembourg, Malta, and the Netherlands).

In 2014, OECD and EU pressure did see the scrapping of the infamous “double-Irish” loophole (whereby subsidiary firms based in Dublin could transfer profits to destinations like Bermuda, thus avoiding paying tax even in Ireland), but Jacobson says that new run-arounds are always found: for example, if tax breaks are offered for R&D projects, it’s all too easy for crafty accountants to create new internal procedures to shunt all sorts of activities under this banner.

The problem of taxing the intangible activities and products of big tech companies – the next big issue on the OECD’s agenda – is also especially tricky in Ireland, where so many of the multinationals it hosts are cloud-based data companies.

That’s less of a problem in Switzerland, where multinational companies are dominated by the pharmaceutical and commodities fields. Nevertheless, the proposition before voters on May 19 is seen by some as unsatisfactory in reforming a system that needs a major overhaul.

One opponent, Alliance Sud, an umbrella group for various Swiss charity organisations, says the proposition will do nothing to change the tax avoidance strategies of multinationals. In its analysis of the reform, it says that the same means of deductions and avoidance will continue, but simply under different names.

The group points out two particular means by which such practices will be not simply maintained, but indeed boosted, under the new system: deductions allowing for just a small section of profits to be taxed, and the “disappearance” of shareholder dividends which end up not being taxed anywhere.

This amounts to a practice that serves only big multinationals and their shareholders, Alliance Sud says, and will continue to encourage profit-shifting to Switzerland to the detriment of developing countries where economic activity actually happens.

For the Swiss government, of course, the objective is to remain competitive. Like Ireland, and other countries with which it competes to attract foreign capital, hosting multinationals is a key element of its economic success.

Alliance Sud, on the other hand, wants Bern to propose a more fundamental reform of the taxation system that would – in line with the OECD’s wishes – no longer be based on poaching tax receipts from other states. Doing this in a sustainable way would be a valuable social and ecological contribution globally, the group reckons.

“Switzerland is one of the engines driving the global race to the bottom on corporate tax,” it says. “If it were to step on the brakes for once, there would be positive repercussions for the whole system.”

GLOBAL REGULATION: OECD Calls…