Is the US tax reform endangering Switzerland as a tax location?


US President Donald Trump has enforced the tax reform he had already announced during the electoral campaign. On 22 December 2017, he signed the bill called "Tax Cuts and Jobs Act", which was pushed through the Senate and the House of Representatives within a very short time. And thus the largest US tax reform since 1986 came into effect on 1 January 2018.


But what does the 500-page bill actually contain? Probably not even the politicians who voted in favour of the bill can answer this question conclusively. Therefore, the main points of the US tax reform with a focus on corporate taxation are explained below and the question of what these changes could mean for Switzerland is examined.

The corporate tax will be reduced from 35% to 21%. At 35%, the US was one of the countries with the highest corporate tax rate. This reduction will therefore also strengthen the US's competitiveness and attractiveness compared to well-known low-tax countries such as Switzerland and Ireland. 

With the «Tax Cuts and Jobs Act», the US has switched from the world income principle to a territorial corporate tax regime, and a one-off transition tax of 8% or 15.5% is supposed to persuade the large American companies to return the trillions of US dollars they hold abroad to the US. However, critics are sceptical. It would be a great effort for such companies to move the entire apparatus they have built up in a country abroad back to the US. In addition, disputes with global tax authorities are pre-programmed in such manoeuvres, for example, when the disclosure of its tax structure brings to light how the company has taken

advantage of the system over the years to pay lower taxes. Another important location factor for a company is political stability. With Trump, however, political stability is anything but certain.

The main aim of the new corporate taxation in the US is to prevent abusive business structures and the erosion of the US tax base. Therefore, it at least follows the philosophy of the OECD's BEPS-project in principle. The regulations regarding controlled foreign company rules (CFC rules) and Subpart F (regulations requiring the immediate inclusion of certain types of foreign income in the US tax bases) have been maintained with some modifications. In addition, a tax has been introduced on the abusive erosion of the tax base («Base Erosion Anti-Abuse Tax») for "harmful" payments. This could have consequences for banks and insurance companies in particular, as the US is thus levying a tax on intra-group services as well as on interest and royalty payments. The tax is intended to encourage companies to avoid making such payments by transferring their activities to the US in the first place.

The WEKA article of 18 April 2018 sheds light on further tax-reducing and tax-increasing measures of the US tax reform and illustrates for which corporate structures these measures are relevant.

Conclusion

As the above points show, the US tax reform means new competition for Switzerland. In any case, these measures have good potential to make the US appear more attractive and innovative to large multinational companies. That way, the US could soon supersede Switzerland as the most innovative country, having ranked sixth in 2018.

In recent years, many American companies have settled in Switzerland. Will they succumb to the lures of Trump's government and move their corporate headquarters back to the US?

US American companies are certainly considered to be very tax-conscious and the US economic market naturally offers dimensions and a potential with which Europe and, above all, Switzerland can hardly compete. On the other hand, the new legislation is still subject to many uncertainties. In the last few days and hours before the adoption, numerous text passages have been added to the bill so that hardly anyone has an overview of what is written on the 500 pages. It remains to be seen what impact the numerous new regulations will have in practice. Furthermore, the sustainability of the «Tax Cuts and Jobs Act» is uncertain, as it is conceivable that the new rules could be abolished or amended if they do not bring the desired economic growth, if the US budget continues to be under pressure or if there is a change of government.

Initial studies show that in Switzerland the US tax reform has already caused high outflows. This is mainly due to US corporations now returning profits which they had previously retained in Swiss subsidiaries for years back to the US. However, US corporations have so far shifted hardly any value-adding activities and jobs back to their home country. Nevertheless, Switzerland must remain vigilant and ensure that it does not fall into the defensive in the international location competition. Therefore, an important step would be to implement the Steuervorlage 17 within a reasonable period of time.