tax reform (traf / tax proposal 17) - ey.com · page 5 tax reform overviewtaxreform key measures...

Tax Reform(TRAF / Tax Proposal 17)

Webcast of 2 October 2018

Tax Reform

Dominik Bürgy

Partner, Tax ServicesEY SwitzerlandPhone: +41 58 286 44 [email protected]

Marco Mühlemann

Associate Partner, Tax ServicesEY SwitzerlandPhone: +41 58 286 83 [email protected]

Daniel Gentsch

Managing Partner Tax & LawEY SwitzerlandPhone: +41 58 286 36 [email protected]

Thomas Semadeni

Partner, Tax ServicesEY SwitzerlandPhone: +41 58 286 31 [email protected]

Today’s moderators

mailto:[email protected]




Tax Reform

Agenda

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Welcome and introduction

Overview Tax Reform

Step-up-approach / Two-rate-model

Patent box / R&D super deduction

Notional interest deduction (NID)

Net equity tax

Overview cantonal implementation (provisional as of 01.10.18)

Outlook and political process

Key take aways

Questions

Tax Reform

Overview Tax ReformObjectives

International acceptance

Phasing out of non-compliant tax practices

BEPS Action 5Joint statement EU/CH

StrengtheningSwitzerland’s fiscal competitiveness

Switzerland follows the objectives of G20, EU and OECD: Coherence – Substance – Transparency

Legal and planning certainty / investment securityTax laws and ruling practice in line with new international standards

International competitiveness

Attractive tax rates (12%-15% in most cantons)

Sufficient tax revenue

Balanced national and cantonal budgets

Tax Reform

Overview Tax ReformKey measures

► Patent box► R&D super deduction (optional)► NID on surplus equity (optional and restricted

to high-tax cantons)► Overall tax relief restricted to maximum 70%

Envisaged corporate income tax rate: 12% - 15% in most cantons

Federal and cantonal tax holidays continued

All new measures compliant with OECD / international taxation standards

► Abolishment of preferential tax practices (principal companies and Swiss Finance Branch SFB)

► Abolishment existing tax regimes (holding, domicile and mixed companies)

► Lower annual net equity taxes for patents, IC-loans and qualifying participations (optional)

Federal level Cantonal level

► Step-up upon migration► Adjustments to the capital contribution principle► Extension of the lump-sump tax credits

► Transitional rules► Adjustments in taxation of dividend income

Social compensation by additional AHV (old-age and survivors insurance) financing

Tax Reform

Step-up-approach / Two-rate-modelAlternatives for the transition from cantonal tax regime to ordinary taxation

Step-up-approach Two-rate-model

Current practice – Possible in many cantons Tax Reform – MANDATORY for cantons

► Voluntary waiver of a current tax regime (holding, mixed ordomiciliary company) before entry into effect of new law

► Effective date of exit from the current tax regime and entry into ordinary taxation must be prior to entry into effect of the new (cantonal) law. Otherwise, two-rate-model is automatically applicable

► Tax-free step up with subsequent tax effective depreciation (max. 10 years)

► Step-up amount and depreciation modalities subject to agreement with cantonal tax administration (possibly in formal ruling) and reflected in “tax balance sheet” / tax return

► Step-up-approach reduces tax base for up to 10 years ► Group tax accounting (IFRS, US GAAP): Step-up creates

DTA► Subject to max. 70% overall cantonal tax relief limitation

► Mandatory expiry of a current tax regime (holding, mixed or domiciliary company) upon entry into effect of new law

► Declaration of hidden reserves (including goodwill) together with the last tax declaration under old tax law –to the extent of the previously exempted quota

► The cantonal tax administration reviews and confirms hidden reserves with a formal decree

► Application of 2 different tax rates during a 5-year transition period► Separate (reduced) tax rate for "old" income, which is

based on the disclosure of pre-existing hidden reserves

► Ordinary tax rate for “new” income► Two-rate-model reduces tax rate for up to 5 years► Group tax accounting (IFRS, US GAAP): no DTA► Not subject to overall cantonal tax relief limitation

Tax Reform

Step-up-approach / Two-rate-modelAlternatives for the transition from cantonal tax regime to ordinary taxation

Step-up-approach Two-rate-model

Varying cantonal practices Cantonal differences

► Step-up-approach under current law/practice is not applied by all cantons

► Until when will a canton accept status transition?► Some cantons will subject step-up amount (taxed hidden

reserves) to net equity tax. Others – like Canton ZH – will not.

► Some cantons will only allow depreciation period of 5 years (or five years from entry into effect of the new law), in order to align the step-up-approach with the two-rate-model

► Some cantons will allow step-up of the previously exempted hidden reserves, others will require full step-up, which triggers one-off taxation of hidden reserves (at previously untaxed quota)

► Applicable reduced rate► Extent to which reduced rate income can absorb

additional income (spillover effect)► Possibility of combining two-rate-model with step-up-

approach (e.g. proposed law Canton BS: taxed hidden reserves from prior step-up are automatically transferred into two-rate-model)

► Retroactive application of two-rate-model?

Tax Reform

Step-up-approach / Two-rate-modelKey questions and key challenges

Valuation ofhidden reserves

► Calculation of hidden reserves for both models:

= (fair market value ./. income tax value ./. hidden reserves on participations and real property) x exempted quota

► Enterprise valuation (including goodwill) vs. valuation of (intangible) assets (excluding goodwill)

► Valuation methodology (“practitioner method” vs. other methods)

Group taxaccounting issues

► The step-up-approach triggers a deductible temporary difference for IFRS/US GAAP purposes (creation of DTA/reduction of DTL). I.e. the full tax benefit is realized upon step-up and the DTA-amortization negatively impacts ETR during the following years of the amortization period.

► Factors which increase uncertainty and therefore reduce the value of the DTA:► Expectations and uncertainties with regard to development of future profits► Uncertainty regarding actual “usability” of the amortization, if other mechanisms (patent box, NID, R&D super

deduction) already reduce the taxable income. Question: which mechanisms are applied first?

► Level of uncertainty where cantonal tax administrations reserve the right to review the value of the taxed hidden reserves on a regular basis

► The application of the two-rate-model does not trigger any deductible temporary differences in the Group tax accounts, i.e. the tax benefit materializes year-on-year, as the reduced rate is applied to parts of taxable income

Further aspectswhich impact thechoice between

step-up-approach and

two-rate-model

Step-up-approach► Flexibility of the relevant cantons regarding amount of annual amortization of taxed hidden reserves► Practice of the cantons regarding amortization periods (differences per asset type; beyond 10 years?)► Extent of accepted amortization prior to entry into effect of overall cantonal relief limitationTwo-rate-model► Approach to defining amount of “old” income which is subject to reduced rate during the 5 year period► Possibility of achieving a “spillover effect”

Tax Reform

Patent box / R&D super deductionOverview

Patent box R&D super deductionOutput promotion – MANDATORY Input promotion – OPTIONAL

Qualifying IP Definition of R&D► Patents (patents according to Swiss and EU patent law; equivalent foreign patents)► Equivalent rights (protection certificates; topographies; plant protection rights; protected

documents under the therapeutic products act and foreign rights equivalent to these Swiss rights)► NOT: copyrighted software (unless included in patented product or patented abroad)

► R&D activities performed in Switzerland (incl. contract R&D within Switzerland)

► No deduction for R&D contractor if principal is entitled to deduction

Substance requirements Determination of qualifying R&D expenditures

Modified nexus approach► Engagement in R&D activities► R&D activities to be performed by

► Swiss IP owner► Swiss group company (contract R&D)► 3rd party (contract R&D)

Nexus between income and expenses

► Own R&D costs limited to personnel costs (salary + social security costs)

► Uplift of 35% for other R&D related costs

► 80% of domestic contract R&D costs with 3rd parties

Mechanism Base reduction Benefit► Top/down / residual approach► Compensation for routine activities (6% mark-up) and trademark use to be

deducted from IP income► Entry costs - recapture of previously deducted R&D costs

► Maximum 90% (can be lower at cantons’ discretion)

► Super deduction of max. 150% (lower or no super deduction at cantons’ discretion)

► No R&D tax credit system

Subject to max. 70% overall cantonal tax relief limitation

Qualifying expenditures incurred to develop IP (+ up-lift of 30%)

Overall expenditures incurred to develop IP

Nexusratio =

Tax Reform

Patent box / R&D super deductionKey questions and key challenges

Entry intopatent box

► Entry into patent box leads to retroactive taxation of previously deducted R&D expenses► Likely R&D expenses of the current and the previous ten years► Expenses for basic/general R&D activities to be reasonably allocated to patents/products► Based on the methodology applied by the specific canton, different cash tax implications may result

► Method proposed by the Federation► Method proposed by Basel-Stadt► Method proposed by the Canton of Zug

Long-term assessment

► Calculation of expected long-term patent box benefit including entry costs requires a significant number of assumptions, e.g. ► Expected future income from patented products► Expected development of nexus ratio over time

Number ofpatent boxes

► Tax payer needs to determine whether the calculation is to be made per patent, per product or per product family ► Patents need to be allocated to each product in case of residual method► Calculation per product family possible if there are only minor differences among the individual products► Consistent application over time required

Calculation ofnexus ratio

► To be separately calculated for each patent box► Requires tracking and tracing of relevant R&D expenditures over time► Based on the R&D expenses of the current and the previous ten years► Simplified calculation for the first four years envisaged

Patent box loss ► To be carried forward within the patent box

Documentationrequirements

► To be determined by the Federal Council and each canton

Federal Council and cantons to publish additional guidelines

Tax Reform

Notional interest deduction (NID)Overview

Objective ► Retention of group financing functions and fostering of treasury functions in Switzerland

Legislative scope

► Only high-tax cantons shall have possibility of introducing a NID at cantonal level► A high-tax canton must have a headline tax rate (federal, canton, municipality) of at least 18% across the

entire tax scale► NID is subject to the 70% tax relief limitation (i.e., capped at 70% of taxable profit)

Impact

► Considering the announced cantonal tax cuts, only the Canton of Zurich is expected to meet 18% minimum tax rate threshold

► Based on 70% tax relief limitation, the NID may reduce the tax rate by up to 7% (from 18% to 11.2%)

Mechanism

► NID is calculated on surplus equity only, core equity is not eligible► Excluded assets are (1) participations, (2) non-operating assets, (3) patents or equivalent rights, (4)

stepped-up assets, and (5) assets relating to transactions that give rise to unjustified tax savings (anti-abuse provision)

► Interest rate on surplus equity is based on 10-year government bond yield (~0.1%) or arm’s length interest rate in case of receivables from related parties

► Federal Council will release the executive regulations (including ratios to determine the core equity)

International context

► NID is known in several European countries (such as Belgium, Italy, Portugal, Malta, Cyprus, or Liechtenstein)► NID not (yet) considered a harmful tax practice and also not covered by OECD BEPS Actions 2 and 4, but may

be considered further by the OECD in separate work

Tax Reform

Notional interest deduction (NID)Illustrative sample calculation

Sample NID calculation► Headline tax rate 18.2% (anticipated income tax rate; no net equity taxes)

► Interest rate on I/C loan receivables 2.0%

► NID interest rate 1.5% (arm’s length rate on I/C receivables) / 0.1% (remainder)

Tax balance sheetCalculation of surplus equity

Assets Ratio Core equityCash 10’000’000

I/C loans 100’000’000

Equity 110’000’000 Cash 10’000’000 0% -

I/C loans 100’000’000 15% 15’000’000

Total 110’000’000 15’000’000

Total equity 110’000’000

./. Core equity - 15’000’000

110’000’000 110’000’000 Surplus equity 95’000’000

Income statement Calculation of taxable profit (canton only)Tax expense 224’148 Financial income (2.0%) 2’000’000 Surplus equity x NID interest rate = NID

95’000’000 x 1.5% / 0.1% = 1’285’000

Net profit x Cantonal relief = Maximum relief

1’775’852 x 70% = 1’243’096

Net profit - NID (maximum relief) = Taxable profit

Net profit 1’775’852 1’775’852 - 1’243’096 = 532’756

Reduction of tax rate from 18.2% to 11.2% (subject to 70% relief limitation)

Tax Reform

Net equity taxOverview

Current net equity tax situation

► Is a cantonal / communal tax, no net equity tax on Federal level

► Typically one rate for ordinarily tax companies and a reduced rate for companies benefitting from a privileged tax regime (e.g. holding or mixed companies)

► Rates vary significantly between the cantons

► Tax credit system in some cantons

Tax Reform outlook

► One tax rate depending on canton

► Cantons can grant the following reliefs based on the harmonization act:

► Tax credit system

► Partial exemption from net equity tax for:

► Participations

► Patents and equivalent rights

► Inter-company loans

Cantonal trends► General reduction of net equity tax, but typically above privileged rate► Broad application of tax reliefs (tax credit and exemptions for qualifying assets)► No other relief due to harmonization act

Tax Reform

Net equity taxImplications / questions to be asked

What is the new net equity tax rate?

Relief based on assets (participations, patents, inter-company loans)?

Profit / loss situation? Availability of taxcredit?

Depending on above analysis additional tax planning considerations required?

Implications

► Increased tax rates for holding companies

and mixed / auxilliary companies

► Mixed companies with high equity in a loss

situation (in particular in light of step-up,

with significant non qualifying IP)

► Net equity tax can become an increasingly

important consideration for companies with

significant equity

Tax Reform

Overview cantonal implementation (prov. as of 01.10.18) Corporate income tax / net equity tax / taxation of dividend income

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AG 18.61% 18.17% 90% 50% 70% 11.20% 0.211% 0.017% ✓ 40% 60% ✓

AI 14.16% 12.66% 2% 30% X 50% 10.31% 0.050% 0.005% 50% ✓ 40% Minimum or today ✓

AR 13.04% 13.04%3) 30% -50%3) 50%3) 50%3) 10.51% 0.073% 0.015% X 60% 70%3) ✓

BE 21.64% <18.71% ✓ 50% 70% <11.39% 0.144% 0.01% -0.04% 0.144% ✓ 6) 50% 70% ✓

BL 20.70% 13.45% 2.2% / 2.56% 90% 20% 50% 10.73% 0.380% 0.021% 0.16% 80%8) ✓ 5)

X new 50% Minimum or 60% ✓

BS 22.18% 13.04% 3% 90% X 40% 11.03% 0.525% 0.050% 0.10% 80%8) X 50% 80% X

FR 19.86% 13.72% 90% 50% 20% 12.60% 0.308% 0.015% -0.033% 0.192% X

✓ new 50% 50% -70% X

GE 24.16% 13.49% -13.79%4) 13.3%4) 10%4) 50%4) 9%4) 13.01% -

13.29% 0.401% 0.067% 0.401%4) ✓4) ✓ 7) 60%/50% 70%4) X

GL 15.70% 12.43%3) X3) 0.252% 0.005% X 35% 70%3) ✓

1) Max. tax rate on pre-tax income (i.e. taking into account the deductibility of tax expenditure) / including federal tax, cantonal and communal taxes and church tax / calculated for the capital city of the respective canton2) Calculated for the capital city of the respective canton 5) Cantonal level, at communal level different handling 8) Only on participations and patents3) Dispatch Tax Proposal 17 of 21 March 2018, Appendix Table 19-24 6) No net equity tax credit for holding and domicile companies4) Previous draft law under CTR III 7) Max. CHF 8’500; contemplated to extend tax credit to a greater extent post-reform (informal sources)

Tax Reform


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GR 16.12% 14.02% 1% 70% X 70% 9.78% 0.488% 0.005% 0.488% X 60%/50% 70% X

JU 20.66% 15% -17%

9.28% -9.99% 90% 50% 70% 10.11% -

10.79% 0.374% 0.031% 0.186% ✓ X 60%/50% 70% ✓

LU 12.32% 12.60% 1.48% 10% X 20% / 70%

11.69%/9.32% 0.185% 0.001% 0.185% 0.001%

tax rate X 60%/50% 70% X

NE 15.61% 13.4% 11.11%-12.66% 20% 40% 40% 11.26% 0.500% 0.001% 0.500% ✓ ✓ 60%/50% 70% X

NW 12.66% 12.05% -12.66%3) 80%3) ✓3) 70%3) 9.14% -

9.34% 0.010% 0.010% X 50%/80% 70%3) ✓

OW 12.74% 12.74% 80% 50% 70% 9.36% 0.200% 0.001% X✓ new 50% 70% X

SG 17.40% 15.20%4) 1.68% 50% 50% 50% 11.67% 0.067% 0.003% 0.067% 100%5) ✓ 50% 70% ✓

SH 15.75% 12% -12.5% 0.8% 90% X 70% 9.12% -

9.29% 0.204% 0.005% 0.005% X 50% 60% ✓

SO 21.38% 13.00% 2.2% 90% 50% 50% 10.49% 0.176% 0.008% -0.032% 0.022% 80%5) ✓ 60%/50% 75% X

1) Max. tax rate on pre-tax income (i.e. taking into account the deductibility of tax expenditure) / including federal tax, cantonal and communal taxes and church tax / calculated for the capital city of the respective canton2) Calculated for the capital city of the respective canton 4) Subject to further decrease (additional approx. 1%) 3) Dispatch Tax Proposal 17 of 21 March 2018, Appendix Table 19-24 5) Only on participations and patents

Tax Reform


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SZ 15.19% 14.4% or 12.51%

1.7% or 1% 90% 50% 70% 9.91% or

9.29% 0.167% 0.011% 0.013% or 0.007% X ✓ 50% 70% X

TG 16.43% 13.40% 1.4% 40% X 50% 10.70% 0.084% 0.003% 0.042% 90%5) ✓ 60%/50% 70% X

TI 20.67% 16% -17% 90% 50% 30% 13.71% -

14.45% 0.290% 0.029% ✓X

✓ new 70% 70% X

UR 14.92% 12.51% 1% 30% X 50% 10.23% 0.001% 0.001% 0.001% X 40% 70% X

VD 21.37% 13.79% 0.070% 0.175% ✓ 70%/60% X

VS 21.56% 15.96% -20% 11.1% 90% 50% 34% 13.36% -

16.24% 0.500% 0.020% 0.500% ✓ X 60%/50% 70% X

ZG 14.62% 12.09% 1.2% -2.4% 90% 50% 70% 9.15% 0.074% 0.003% 0.075% 98%5) X 50% 70% X

ZH 21.15% 18.19% 1.15% 90% 50% 70% 11.21% 0.172% 0.034% 0.172% 90% X 50% 60% ✓

1) Max. tax rate on pre-tax income (i.e. taking into account the deductibility of tax expenditure) / including federal tax, cantonal and communal taxes and church tax / calculated for the capital city of the respective canton2) Calculated for the capital city of the respective canton3) Dispatch Tax Proposal 17 of 21 March 2018, Appendix Table 19-244) Previous draft law under CTR III5) Only on participations and patents

Tax Reform

Outlook and political process

► If no referendum is held► first measures of the tax reform could enter into force in 2019► main part of the measures from 2020

► Certain parties have already announced intention to hold a referendum► referendum period 100 days of the final bill’s publication in the Official Gazette► 50’000 voters signatures necessary► people’s vote on 19 May 2019► entry into force still planned for 1 January 2020

► Cantonal political processes► implementation of tax reform requires amendment of the cantonal tax law which is

subject to a political referendum

► Possible international reactions► EU has given Switzerland until end of 2018 to abolish tax privileges► EU finance ministers will meet in March 2019 for a general update on the tax policy

discussion

Tax Reform

Key takeaways

► The proposed tax reform achieves its main goal of retaining Switzerland’s international

attractiveness while having an internationally accepted tax system.

► Even though a referendum is rather likely, the tight time frame requires swift

review from the tax payers regarding the transition to the new regulations.

Tax Reform

Questions?

Thank you!

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