Global minimum tax: states turn to other incentives for companies

• With the introduction of the global minimum tax rate, a shift from tax-based competition to subsidy-based competition is emerging as a means of attracting or retaining companies. The trend is currently quite pronounced in the US and EU.
• In Switzerland, the tax rates levied on corporate profits and top incomes declined slightly in the last year. 
• If the vote is passed, Switzerland can implement the introduction of the OECD minimum tax in due time and must simultaneously use non-tax factors to continue safeguarding the location’s attractiveness.

If a global minimum tax rate of 15 percent is introduced in Switzerland, this would only apply to large corporations with more than EUR 750 million in consolidated revenue. Switzerland, too, is planning a supplementary tax to ensure that this tax burden is levied on all affected Swiss companies and the Swiss subsidiaries of major foreign corporations to prevent the tax base from eroding and shifting to other countries.  

Changes in tax competition are coming and Switzerland is well advised to get ready for them. Further measures will also have to be introduced or existing measures promoted to safeguard the country’s location attractiveness. “The additional tax revenue generated through the planned implementation in Switzerland will give the cantons leeway for taking any measures needed to promote the location,” explains Stefan Kuhn, Head of Tax and Legal at KPMG. Because according to the federal government’s proposal, 75 percent of the revenue generated through the supplementary tax is to remain in the cantons, therefore giving them the means to safeguard and promote the attractiveness of their cantons. Those measures will be supplemented by non-tax factors such as the availability of qualified workers, employer-friendly labor laws and competitive income taxes.

“There are a couple things to watch out for when devising new measures to promote the location. For one, either they should not negatively impact the minimum tax rate at all or, if so, only slightly. For another, they have to be accepted by both the OECD and the EU,” points out Olivier Eichenberger, Corporate Tax Expert at KPMG. 

An analysis of developments in other countries in response to the OECD’s minimum tax rate reveals a shift away from tax-based competition and toward subsidy-based competition. The EU and the US, for example, have introduced government grants that promote sustainability. The European Green Deal is aimed at reducing greenhouse gas emissions by at least 55 percent by the end of 2030. The US Inflation Reduction Act intends to incentivize greenhouse gas reductions while also promoting investments in domestic manufacturing and providing support for the development and commercialization of new technologies. “What that means for Switzerland in concrete terms is that the race for subsidies has already begun and that, now at the very latest, there needs to be a discussion about introducing similar promotional measures here,” says André Güdel, Head of Business Development Tax at KPMG, as he assesses the situation for Switzerland.

After many rates had been reduced in the previous years due to the Corporate Tax Reform (TRAF), the period from 2022 to 2023 only saw minimum tax cuts in a few individual cases. The ordinary corporate tax rates for businesses in Switzerland declined slightly year over year – from 14.68 percent to 14.6 percent. Those are some of the findings presented in KPMG’s Swiss Tax Report 2023, which compares corporate and income tax rates from more than 50 countries and all 26 Swiss cantons.

The biggest cuts were made in the cantons of Aargau (-1.16 percentage points) and Basel-Landschaft (-2.07 percentage points). The Canton of Neuchâtel, by contrast, raised its rate (+1.32 percentage points). The lowest ordinary corporate tax rates are still found in the cantons of Central Switzerland as well as the cantons of Glarus and Appenzell Innerrhoden. The Canton of Zug tops the list of low-tax cantons with a rate of 11.8 percent, followed by the cantons of Nidwalden (11.97 percent) and Lucerne (12.15 percent). The Canton of Bern brings up the rear with a corporate tax rate of 21.04 percent. “While another slight decline is possible in the next two years since a few cantons are planning further cuts in compliance with decisions previously made in connection with TRAF, individual hikes are not out of the question, either,” explains Olivier Eichenberger.

Compared with other countries around the world, Switzerland taxes companies at a low rate, particularly the cantons of Central Switzerland as well as Basel-Stadt, Geneva and Vaud. Only Guernsey (0.0 percent), Hungary (9.0 percent) and Bulgaria (10.0 percent) still offer even lower ordinary corporate tax rates. With a tax rate similar to Switzerland’s, Ireland (12.5 percent) remains the country’s most important competitor in Europe.

Nationwide, average tax rates for private individuals in Switzerland have changed only minimally compared to the previous years and remain stable with an average maximum tax rate of around 33.45 percent (-0.07 percentage points). A cantonal comparison shows that Zug, with a rate of 22.06 percent, still has the most attractive income tax rates followed by Appenzell Innerrhoden (23.82 percent), Obwalden (23.3 percent) and Schwyz (24.98 percent).

The cantons of Western Switzerland still bring up the rear, especially Geneva (44.74 percent) followed by Basel-Landschaft (42.17 percent) and Vaud (41.5 percent). The Canton of Schaffhausen (29.52 percent) surprisingly reduced its taxes by 1.22 percentage points for 2023.

For more information and the detailed study, please go to: www.kpmg.ch/swisstaxes