How much VAT will you pay for 1 franc of turnover in Switzerland?

Be it a necessary evil or smart compliance, VAT is a key topic – and now also concerns companies without a business location in Switzerland, from their very first franc of turnover in Switzerland.

You operate a shuttle company headquartered abroad and drive passengers to a Swiss airport. Or you are a kitchen manufacturer in the EU and equip houses in Switzerland with the latest designs. Or you are responsible for catering at an event on the Swiss side of the border. These examples have one thing in common: since 1 January 2018 all these companies have been subject to the partially revised Swiss Federal Act on Value Added Tax (VAT Act) – with far-reaching consequences.

New VAT provisions for all companies without a business location in Switzerland

If your company does not have a business location in Switzerland, the revised VAT Act introduces changes to the VAT registration obligation. Your company may be subject to Swiss VAT even if it is not established in Switzerland. The key question is whether your services have a connection to Switzerland. In principle, this is the case if your company generates turnover in Switzerland. This means that Switzerland represents a place of supply for VAT – which you will have to pay.

From the very first franc

Your tax liability in Switzerland is not determined by your turnover in Switzerland, but by your global turnover. If you generate less than CHF 100,000 from your services in Switzerland, but at least CHF 100,000 internationally, from 2018 onwards you are subject to VAT in Switzerland from the very first franc of turnover.

Low-value consignments remain exempt from tax on importation. However, under the new VAT legislation, (online) retailers that generate over CHF 100,000 of turnover per year in Switzerland through the supply of goods will be liable for VAT from 1 January 2019 onwards. In other words, you must charge Swiss VAT on services of this type.

From now on: proceed step by step

You no doubt wish to continue your business operations in Switzerland. To do so, you need an intelligent solution that avoids excessive costs and tedious complexity. We recommend proceeding as follows – if possible very soon, because the revised VAT Act has been in force since the beginning of the year.

  1. Register for Swiss VAT to receive your Swiss VAT number.
  2. Appoint a reliable fiscal representative to deal with the Swiss tax authorities on your behalf.
  3. Register for the electronic filing of quarterly Swiss VAT declarations.
  4. Submit the required quarterly VAT declarations.
  5. Keep an overview of all your correspondence with the tax authorities – including your replies.

Clever solution with Smart VAT

We have developed an online solution that is both simple and fast, and exclusively designed for businesses like yours: Smart VAT. This platform offers a number of advantages at the same time: Your VAT registration only takes a few moments. You can then continue your business activities in Switzerland without any interruptions – and with peace of mind, because you are acting fully in compliance with the law. And last but not least, Smart VAT is as simple and user friendly as online banking. And remember: registration for Smart VAT is free of charge. You simply pay a minimum annual fee for fiscal representation.

Find out more about Smart VAT here.

Contact

Julia Sailer
Director, VAT compliance services leader
+41 58 792 44 57
julia.sailer@ch.pwc.com

European Commission proposes new rules on the taxation of the digital economy

On 21 March 2018, the European Commission proposed new rules to ensure that digital business activities are taxed in a fair and growth-friendly way in the EU.

Background

While digital businesses have evolved rapidly in the recent past, the current tax rules do not fully fit the modern, increasingly digital economy, resulting often in a misalignment between the place where the profits are taxed and the place where value is created. In order to address the tax challenges from the digital economy the EU Commission presented its so-called “Digital Tax Package”, which mainly consists of two draft Directives and one Recommendation to the EU Member States. This package supports the Commission’s key priority of completing the Digital Single Market, which also takes into account the global dimension: the OECD has committed to bring forward a report on the next steps internationally by 2020.

Legislative proposals in a nutshell

Draft Directive on the corporate taxation of a significant digital presence:

  • To reform corporate tax rules so that profits are allocated and taxed where businesses have significant interaction with users through digital channels (assumption of a taxable digital presence or a virtual permanent establishment);
  • This is the EU Commission’s preferred long-term solution.

With respect to non-EU countries, not captured by this Directive, the EU Commission issued a Recommendation to the Member States for adaption of such rule via the double tax treaty (see also below).

Draft Directive on Digital Services Tax (DST):

  • To introduce a DST of 3% on certain revenues from digital activities;
  • The introduction of a DST is considered as an interim solution until the above long term solution is in place.

As a next step, both legislative proposals will be submitted to the European Council for adoption and to the European Parliament for consultation. If adopted by unanimous vote, the expected effective date would be 1 January 2020.

Legislative proposals in detail

Draft Directive on the corporate taxation of a significant digital presence (long-term, comprehensive solution)

A digital platform shall constitute a significant taxable digital presence in an EU Member State if it fulfils one or more of the following criteria:

  • Total annual revenues from digital services to users in that Member State in a taxable year exceed a threshold of EUR 7 million, and/or
  • Users of digital services in that Member State in a taxable year exceed 100’000, and/or
  • Business contracts for digital services in that Member State in a taxable year exceed 3’000.

The new rules would also change how profits are allocated to Member States in a way which better reflects how companies can create value online: for example, depending on where the user is based at the time of consumption or where the value is generated through user participation.

Such directive would apply to all companies that are resident in an EU member state. It would also apply to companies in non-EU member states rendering digital business to EU based users and customers unless there is a double tax treaty in place which does not provide for similar rules on significant digital presence and profits attribution (this is for the time being the case, since currently existing double tax treaties do typically not allow for such digital taxation). Hence the below recommendation to the EU member states to re-negotiate double tax treaties to include such digital business taxation rules.

Draft Directive on Digital Services Tax (short term, interim solution)

Unlike the common EU reform of the underlying tax rules, the interim DST would apply to revenues created from certain digital activities which under the current tax rules would not be taxed in the countries where the value is generated. This DST would only remain in force as an interim measure, until the comprehensive solution is in place. However, it would apply to any company rendering digital services in the EU irrespective whether an EU member state based company or not and irrespective of existing double tax treaties.

The tax would apply to revenues created from activities where users play a major role in value creation and which are the hardest to capture with current tax rules, such as those revenues:

  • created from selling online advertising space;
  • created from digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them;
  • created from the sale of data generated from user-provided information.

The DST would only apply to companies with total annual worldwide revenues of EUR 750 million and taxable revenues of EUR 50 million in the EU. This would help to ensure that smaller start-ups and scale-up businesses remain unburdened.

Recommendation relating to the corporate taxation of a significant digital presence

In connection with the long term Draft Directive on the corporate taxation of a significant digital presence, the EU Commission also issued an accompanying Recommendation to the EU Member States for cases where the proposed Directive would not apply, i.e. when Member States have tax treaties in place with non-EU countries (which would also be the case for Switzerland).

In particular the EU Commission recommends to Member States to amend their tax treaties with non-EU countries by a) changing the definition of permanent establishment to take into account significant digital presence and b) including rules for respective profit attribution.

For further details regarding the EU Digital Tax Package please refer to the detailed newsletter of the PwC Network EUDTG.

Implications of proposed rules for Switzerland

Although the above legislative proposals are EU Directives, the directives still impact companies operating out of Switzerland or other non-EU states, if finally adopted.

Draft directive on Digital Services Tax:
The DST would affect Swiss groups performing digital services in the EU as the tax becomes due if the user / customer is in the EU, provided they meet the thresholds mentioned above.

Draft directive on the corporate taxation of a significant digital presence:
These rules shall not apply if an entity is resident for tax purposes in a non-EU jurisdiction (e.g. Switzerland) that has a double tax convention (DTC) in force with the relevant Member State, and if the DTC does not provide for a taxable digital presence (which is currently the case for all Swiss DTCs). Hence, groups operating out of Switzerland are expected to be affected by this potential measure only in the longer term, i.e. when DTCs are renegotiated (as proposed in the EU Commission’s Recommendation) to include the taxable digital presence, subject also to any further OECD developments.

For further details on the progress of the OECD work in this respect as well as for a summarised overview of the different approaches between the OECD and the EU, please find here OECD’s Interim Report 2018 respectively our PwC Tax Policy Bulletin.

Overall, the attractiveness of Switzerland as a location for digital businesses is not negatively impacted compared to the EU as a result of these directive proposals.

Related VAT Aspects

Even if the digital taxation proposals implicate significant changes in the corporate tax landscape, from an indirect tax (VAT) point of view the taxation of turnovers for digitally provided services at the place of the consumer (B2C) is already in force in the EU since 2015. However, the question remains whether the digital presence will also affect the definition of fixed establishments for VAT purposes and such change would have a major impact on how digitally provided services would be taxed in a B2B context.

Current position of Switzerland regarding taxation of digital economy

The State Secretariat for International Finance (SIF) recently has performed an analysis regarding the taxation of the digitalised economy and is generally committed to tax rules that allow for and promote fair competition. However, there have not been any concrete measures yet. In any case Switzerland holds the opinion that measures outside the scope of DTCs are to be avoided and interim measures (e.g. DST) should be limited in scope and time. Read SIF’s position on taxing the digitalised economy here.

Call for action

At this stage it is not clear yet whether respectively how the proposed directives will be adopted by the EU (formal adoption still pending and subject to unanimity among the EU Member States). Further, also the developments on the OECD BEPS project should be taken into consideration and monitored.

Nevertheless, it is recommendable for groups operating out of Switzerland to:

  • identify the digital services rendered in each of the EU Member States;
  • start performing impact assessments of (i) the DST and (ii) a taxable digital presence in the EU Member States, and
  • continue monitoring the EU legislative process and potential unilateral country measures (such as the unilateral measures in Italy, introducing a new tax on digital transactions effective January 1, 2019).

Your contacts

Stefan Schmid
Tel. +41 58 792 44 82
E-Mail: stefan.schmid@ch.pwc.com

Anna-Maria Widrig Giallouraki
Tel. +41 58 792 42 87
E-Mail: anna-maria.widrig.giallouraki@ch.pwc.com

Christa Elsässer
Tel. +41 58 792 42 66
E-Mail: christa.elsaesser@ch.pwc.com

Jeannine Haiböck
Tel. +41 58 792 43 19
E-Mail: jeannine.haiboeck@ch.pwc.com

EU Direct Tax Group: January – February 2018

The following topics are covered in this issue of EU Tax News:

CJEU Cases

  • Germany – CJEU referral of German dividend withholding tax regime to in the case of a Canadian pension fund
  • Germany – AG Opinion on the compatibility of German Trade Tax exemption with EU law
  • Netherlands – CJEU judgment on compatibility of Dutch group taxation regime with EU fundamental freedoms
  • Spain – European Commission opens infringement procedure against Spanish state liability regime

National Developments

  • Italy – Italian court rules on incompatibility of presumption of abuse/tax evasion with EU freedom of establishment
  • Spain – Appeal at the Spanish Supreme Court against Andalusian tax on deposits on financial entities
  • Spain – Appeal at the Spanish Supreme Court on the rules to eliminate international double taxation

EU Developments

  • EU – European Commission publishes Roadmap on Evaluation of Administrative Cooperation in Direct Taxation
  • EU – European Commission announces comprehensive fitness check on public reporting by companies within the EU
  • EU – European Parliament sets up TAXE 3 Special Committee on financial crimes, tax evasion and tax avoidance

Read the full newsletter

This bi-monthly newsletter is prepared by members of PwC’s pan-European EU Direct Tax Group (EUDTG) network.

To receive this newsletter and our newsalerts automatically and free of charge, please send an e-mail to: eudtg@nl.pwc.com with “subscription EU Tax News”. For previous editions of PwC’s EU Tax News see: www.pwc.com/eudtg

Contact Us

Armin Marti
Partner Tax & Legal Services, Leader Tax Policy
+41 58 792 43 43
armin.marti@ch.pwc.com

Release of dispatch and bill for tax proposal 17

The Federal Council drew up the bill based on responses received during the consultation process on the revised tax proposal (TP17). This bill is supported by the cantons as well as the cities and communes and was forwarded to parliament for discussion on Wednesday, 21 March 2018.

If the reform proposal can be dealt with in Swiss parliament expeditiously and without referendum, it is anticipated that some measures of the bill will already enter into force in 2019 with the remaining provisions in 2020.

The objectives

The overall objectives of TP17 remain unchanged, i.e. abolition of special forms of corporate taxation (Swiss tax regimes) and improve the attractiveness of Switzerland as a business location for domestic and foreign companies, maintain and create jobs, adjust the corporate tax law to the new international standards and enhance international acceptance of it. In addition and to take into account the learnings from the negative vote on corporate tax reform III in February 2017, the bill puts more emphasis on the financial impact of the tax reform on the federal as well as on municipalities’ and cities’ budgets.

In detail, the bill includes the following measures:

Measures to sustain international acceptance and competitiveness

  1. Abolition of criticised Swiss tax regimes
    In line with its international commitments, Switzerland will abolish the holding, domicile and mixed company privileges at cantonal level as well as the practices regarding principal taxation and the Swiss finance branches at federal level.
  2. Introduction of a patent box (cantonal level only)
    The patent box regime shall be mandatory for the cantons. The law outlines that Swiss or foreign patents will qualify for the patent box, but also comparable rights, such as certain protection certificates (thereafter “IP” or “IP rights”). In line with international OECD standards, the modified nexus approach (nexus ratio) will apply by patent, by product or by group of products.
    Where the IP right is embedded in a product, the residual profit method shall apply. The net profit from such products shall be reduced by a (routine) profit component of 6% on attributable costs as well as by a trademark related profit component. The maximum allowable relief amounts to 90%, applied to net residual profits from patented products post nexus ratio. Cantons may further reduce the maximum relief.
    Upon the first application of the patent box to a specific IP, any related R&D expenses that were deducted in Switzerland as tax deductible expenses in the past must be added back to the taxable income. Cantons are free to determine the entry taxation modalities within the first five years after entrance into the patent box.
    An ordinance to be issued by the Federal Council will provide more detailed implementation guidance including details on the calculation of the qualifying patent net income, documentation rules and begin / end of the reduced taxation.
  3. Additional deduction for R&D (cantonal level only)
    The introduction of an additional deduction for R&D expenditures is optional for the cantons. The deduction can amount to a maximum of 50% of the R&D costs incurred by the tax payer or the amounts paid to a domestic third party. R&D is defined by reference to article 2 of the Federal law from December 14, 2012 on promoting research and innovation.
    The cost basis is defined i) by reference to the direct R&D labour costs increased by a 35% up-lift for R&D related indirect costs plus ii) 80% of R&D costs invoiced by domestic third parties.
  4. Maximum relief limitation (cantonal level only)
    The aggregated reductions of the tax basis through the patent box, additional deduction for R&D expenditures and a step-up tax depreciation stemming from an early exit from a current tax regime in accordance with current cantonal practice shall not exceed 70%. Cantons may introduce lower thresholds of the relief limitation.
  5. Increase of cantons’ share of direct federal tax and reduction of cantonal income tax rates
    In order to support cantons in connection with the implementation of the measures of TP17 it is envisaged to increase the cantons’ shares of direct federal tax receipts from currently 17% to 21.2%. Although not earmarked for specific purposes it is expected that the cantons will use the additional funds to implement the measures of TP17 according to their needs but also to finance (significant) reductions of corporate income tax rates. The latter element is not directly included in the newly issued bill, since the determination of the magnitude of the cantonal corporate income tax rate reduction is subject to individual decision and approval process for each of the cantons.
    The lowered overall effective income tax rates (federal and cantonal) is to be expected in the range of approx. 12% to 18%.
  6. Annual capital tax (cantonal level only)
    The cantons may implement a reduction of the portion of taxable equity relating to investments and qualifying patents.
  7. Transitional rules for previous special-regime companies (cantonal level only)
    The transitional rules foresee, that hidden reserves (including goodwill) will be subject to a separate reduced taxation during a 5 year period to the extent they have not been subject to income taxes in Switzerland to date. The relevant applicable tax rate is at the discretion of the cantons. This rule is not subject to the ordinary entry into force provision and may be applied by the cantons already somewhat earlier than the ordinary effective date of the other provisions of the reform.
    Companies will have to report the hidden reserves (including goodwill) with the last tax return prepared and filed under the old (currently applicable) law in order to benefit from the five year transition rule.
  8. Step-up of hidden reserves upon migration to Switzerland
    Companies or business functions migrated to Switzerland from abroad may benefit from a step-up of hidden reserves (including goodwill) up to the fair market values in the tax balance sheet in the first tax return. Such a step-up will not trigger Swiss income tax consequences. The tax deductible amortisation of the stepped-up assets must be in line with applicable Swiss safe harbour rates. Capitalised goodwill will have to be amortised over a period of 10 years.

Further measures

  1. Broadening of the lump-sum tax credit
    According to the bill, it is also the intention to provide a new legal basis to enable ordinarily taxed Swiss branches of foreign companies to claim a lump-sum tax credit for foreign withholding taxes under certain circumstances. Respective details will be part of a new ordinance.
  2. Transposition threshold abolished
    The 5% threshold applicable to shares transferred to a self-owned company will be abolished. Accordingly, the transfer or sale of any shares, regardless of the amount or stake held, could result in taxable income at the level of the individual shareholder.

Measures to balance the reform

  1. Increased taxation on dividends for Swiss individual residents
    Dividends from qualifying investments should be taxed at 70% on the federal level and at least 70% on the cantonal level. Currently, on the federal level, a taxation of 50% for business assets and 60% for private assets applies. At the cantonal level, it cannot be excluded that the minimum taxation threshold will even be higher than 70%.
  2. Family allowance
    The minimum children’s and education allowances shall be increased by CHF 30 per month to a minimum of CHF 230 and CHF 280 per child respectively.
  3. Notional interest deduction
    Despite the recognised importance of this measure for the attractiveness of Switzerland as a business location, the measure of a notional interest deduction – at least as a voluntary measure at cantonal level – is not included in the bill. It is possible that during the parliamentary debate some stakeholders may request a reintroduction of a notional deduction on qualifying equity into the reform package.

The takeaway

The starting point for the tax reform is the alignment of Swiss corporate taxation rules with international standards. TP17 and the cantonal implementation plans shall, however, also ensure that Switzerland remains an attractive business location.

Against the background of the rejected corporate tax reform III, the published bill is a political compromise which is supported by the cantons, as well as by the cities and communes with the objective of avoiding a referendum. Ultimately, according to the Federal Council’s assessment, TP17 means that status companies will have to pay some more taxes although new/transitional measures and reduced ordinary income tax rates may limit the increase – while local SMEs pay less taxes, despite the moderate increase in dividend taxation and the increase in family allowances.

The elimination of the notional interest deduction, the further limitation of the additional deduction for R&D expenditure and a stricter maximum relief limitation rule will put greater emphasis on the reduction of the cantonal corporate income tax rates. Further, it is possible that the final version of the legislation, which needs to pass the Swiss parliament, differs from the currently proposed version and it might be feasible, that it will be (even) more favorable to businesses.

Companies are well advised to prepare in good time for the changes and identify necessary actions.

Download this article as a PDF.

Your contact partners

Dieter Wirth
Tel. +41 58 792 44 88
E-Mail: dieter.wirth@ch.pwc.com

Armin Marti
Tel. +41 58 792 43 43
E-Mail: armin.marti@ch.pwc.com

Remo Küttel
Tel: +41 58 792 68 69
E-Mail: remo.kuettel@ch.pwc.com

Benjamin Koch
Tel: +41 58 792 43 34
E-Mail: benjamin.koch@ch.pwc.com

Daniel Gremaud
Tel: +41 58 792 81 23
E-Mail: daniel.gremaud@ch.pwc.com

Claude-Alain Barke
Tel: +41 58 792 83 17
E-Mail: claude-alain.barke@ch.pwc.com

US Tax Reform from a Swiss US investors perspective

Wednesday, March 14, 9:30 am -1:30 pm, PwC Bern

PwC is pleased to host a seminar with the Embassy of the United States and K&L Gates followed by a luncheon, on the U.S. Tax Cuts and Jobs Act signed by President Trump in December 2017. Tax professionals from PwC Switzerland and K&L Gates of South Carolina will highlight the implications of the U.S. federal tax code changes for current and future Swiss and Liechtenstein investors and U.S. companies operating in Switzerland.

When: 

Wednesday, March 14, 9:30 am -1:30 pm, PwC Bern,  Bahnhofplatz 10, 3001 Bern.

What:

  • “US Tax Reform in a Nutshell & How US Tax Reform impacts doing business and investments between the US and Switzerland”
  • “It’s a competition: Understanding the State and Local Incentive Process”
  • “Impact on European inbound US investment – One State’s Perspective”

The detailed agenda of the event will be provided upon registration.

Attire: 

Business

Registration:

Kindly respond by March 5 to Mr. Sandor Galambos, galamboss@state.gov or 031 357 7237 or Nathalie Fretz, nathalie.fretz@ch.pwc.com

Contact Us

Martina Walt
PwC | Partner – International Tax Services
Office: +41 58 792 68 84 | Mobile: +41 79 286 60 52
Email: martina.walt@ch.pwc.com
PricewaterhouseCoopers Ltd
Birchstrasse 160, 8050 Zurich
http://www.pwc.ch

EU Direct Tax Group

The following topics are covered in this issue of EU Tax News:

CJEU Cases

  • Finland – CJEU judgment on the compatibility of the Finnish legislation implementing Article 10(2) of the Merger Directive with EU law
  • Germany – CJEU judgment in Deister Holding and Juhler Holding
  • Germany – CJEU referral of German dividend withholding tax regime in the case of a Canadian pension fund
  • Germany – AG Opinion on the compatibility of German at arm’s length legislation with EU law

National Developments

  • Cyprus – Public consultation on the EU’s Anti-Tax Avoidance Directives (ATAD1 & ATAD2)
  • Finland – Central Tax Board advance ruling on taxation of income from Luxembourg SICAV (UCITS)
  • Finland – Central Tax Board advance ruling on tax treatment of Finnish source real estate income
  • Italy – Final approval of the 2018 Finance Bill
  • Lithuania – Increased investment tax relief measures
  • Spain – Appeal before the Spanish Supreme Court on the rules to eliminate international double taxation

EU Developments

  • EU – ECOFIN Council publishes EU list of third country non-cooperative jurisdictions in tax matters
  • EU – ECOFIN Council Report to the European Council on tax issues
  • EU – European Parliament Recommendation to the Council and the Commission following the inquiry into money laundering, tax avoidance and tax evasion (PANA)

Fiscal State aid

  • Italy – Italian Supreme Court decision on recovery of illegal State aid granted to multi-utilities owned by municipalities
  • Netherlands – European Commission opens formal investigation into the Netherlands’ tax treatment of Inter IKEA
  • United Kingdom – European Commission publishes detailed opening decision regarding its State aid investigation into the financing income exemption within the UK’s CFC regime

Read the full newsletter

This bi-monthly newsletter is prepared by members of PwC’s pan-European EU Direct Tax Group (EUDTG) network.

To receive this newsletter and our newsalerts automatically and free of charge, please send an e-mail to: eudtg@nl.pwc.com with “subscription EU Tax News”. For previous editions of PwC’s EU Tax News see: www.pwc.com/eudtg

Contact Us

Armin Marti
Partner Tax & Legal Services, Leader Tax Policy
+41 58 792 43 43
armin.marti@ch.pwc.com

What will the Tax Proposal 17 add?

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The demands on Switzerland

Conformity with the OECD and EU standards. That means inter alia equal treatment of domestic and foreign income and therefore abolition of five special forms of corporate taxation (“tax regimes”), which are subject to international criticism:

  • Holding company,
  • domicile company,
  • and mixed company at cantonal level,
  • principal taxation,
  • and regime for Swiss Finance Branches at federal level.

The timeframe

On 14 October 2014, Switzerland assured the EU that it would abolish tax regimes considered by the EU to be harmful. In turn, the EU undertook to abolish in parallel existing measures of individual EU states against Switzerland. On 12 February 2017 Corporate Tax Reform III (CTR III) was presented to the sovereign and rejected with a resounding “No”.

Given the existing international pressure, the Federal Council had to act quickly and therefore launched the draft of a new tax proposal (known as Tax Proposal 17; TP 17). The consultation process on the Federal Council’s revised proposal was concluded on 6 December 2017.

The objectives of TP 17 are the same as for CTR III

The following target triangle is to be achieved in the best possible way:

  • Restore international acceptance of the Swiss tax system,
  • maintain its attractiveness as a business location and
  • secure appropriate tax revenues for confederation, cantons and communities.

The new corporate tax system should strengthen Switzerland as a competitive tax location and reliable value-adding partner for domestic and foreign groups and for Swiss SMEs. Attractive jobs should be created and retained and social prosperity consolidated. In addition, international conformity is strived for and a balanced corporate tax substrate ensured. It is the intention that TP 17 is more balanced, more comprehensible and politically more widely accepted, as the call for an acceptable solution and a suitable balance is becoming louder.

For those involved in the political process it is now a question of giving up their extreme positions and to come together to reach an agreement.

The basic concept

In order, to achieve the above-mentioned target triangle in the best possible way, the cantons must be permitted a high degree of flexibility in structuring their regimes. Rigid regulation with enforced conformity regardless of the cantonal characteristics would inhibit successful realisation and contradict Switzerland’s federalist concept. The reform package is therefore still based on modules and allows the cantons certain range of options in the realisation. The Helvetic success model, which in the last 30 years has brought Switzerland numerous corporate relocations and prosperity, should be retained this way.

During the CTR III referendum campaign it was frequently unclear, to what extent one would gain effective advantages and suffer disadvantages. The fact is: In the past, the Confederation has benefited from the regime companies to a much greater extent than the cantons. The substrate for these taxation forms represents about half of the corporate income tax revenues from Direct Federal Tax and, together with the cantonal corporate income taxes, amounts annually to about five billion Swiss francs. An exodus of the regime companies, which up to now have enjoyed privileged cantonal taxation, would therefore seriously damage not only the cantons, but also the Confederation. The measures foreseen by the Federal Council are intended to avoid this as far as possible and to ensure, that Switzerland will remain fiscally attractive for the location of companies in the future.

The prospective tax charge for those companies, which up to now have been taxed under the rules of the regimes being abolished, depends on how much the canton, in which they carry on their activities, will reduce the standard corporate income tax rate and whether they carry on research and development in Switzerland. In any event, previous regime companies will, after the reform becomes effective, at first pay the same or somewhat higher taxes and, after the expiry of a transitional period, depending on the canton pay a little or substantially higher taxes.

The proposed relief measures and cantonal reduction of the ordinary corporate income tax rates will benefit in particular Swiss SMEs. The increased partial taxation of dividend income at owner level will compensate this benefit to some extent. The total effect depends on the characteristics of a SME, and where in Switzerland the company and its owners carry on their activities or have their residence. In cantons, which reduce the corporate income tax rates significantly, SMEs will in spite of higher partial taxation overall be the winners. This in contrast to cantons, which cannot, or only marginally, reduce the corporate income tax rate.

The measures

Overview of the most important reform measures and their effects on the corporate location Switzerland:

  • Introduction of internationally accepted reliefs for all Swiss companies with research and development activities in Switzerland (including those that have previously not benefited from a tax regime);
  • Increase of financial contribution from the Confederation to the cantons, to finance the cantonal different potential for reduction of the corporate income tax rates for all companies;
  • Alleviation of the increase in the cantonal corporate income tax charge for international corporate activities, which previously benefited from a tax regime now being abolished, for a transitional period of five years;
  • Retention of taxation independently of the legal form by means of a moderate counter-correction in the partial taxation of private dividend income;
  • In comparison with CTR III reduced losses of tax revenues, with the aim of nevertheless keeping the business and tax location Switzerland internationally attractive and reliable.

Missing is:

  • the introduction of an incentive to create more equity by a deduction for secure financing (formerly interest adjusted corporate income tax) at least optionally for the cantons for the purpose of motivating greater self-financing and reducing the present tax motivation of higher debt. This would contribute to the stability of Swiss companies and job security, even in times of crisis.

Selected measures in detail:

  • Patent box profits, more precisely from patents and comparable rights are beneficially treated for tax purposes. They are intended to promote research and development activities and their value creation in groups and SMEs. At cantonal level – as previously proposed in CTR III – a patent box meeting the OECD requirements is foreseen as compulsory. It is, however, more narrowly defined in TP 17. For example, income from Copyrighted Software shall be excluded from the tax benefit.
  • Increased deductions for R&D expenditure: because the nexus approach reduces the effect of the patent box, optionally the cantons may supplement the patent box with an input oriented special deduction in the additional amount of at most 50 % of own research and development costs and of 40% of R&D costs purchased in Switzerland.
  • Deduction for secure financing: the so-called interest adjusted corporate income tax, also known as Notional Interest Deduction (NID) on excess equity has been struck out of TP 17 by the Federal Council. Interestingly, in the meantime the EU has published a proposed guideline for measurement common corporate tax base in the EU. Included in this proposal is also a so-called deduction for growth and investment, which is very similar to the Notional Interest Deduction. The aims of this rule were twofold: firstly, one wanted to give companies a fiscal incentive to create higher equity financing and, associated with this, greater resistance to a crisis. On the other hand, one wanted to retain highly mobile financing activities existing in Switzerland. Presumably this objective was not recognised by wide circles during the CTR III referendum campaign, not least because of the badly chosen expression “interest adjusted corporate income tax”. Being a sensible measure, it should nonetheless be permitted optionally at least at cantonal level under the positive labelling, “Deduction for secure financing“.
  • Step-up of hidden reserves: 18 of 26 cantons already permit under current law the change from a privileged tax status to ordinary taxation through the tax-free step-up of the hidden reserves that arose under the special regime. With the transitional rule under TP 17 the increase, mentioned at the beginning in the tax charge on the abolition of the current tax status, is to be cushioned for the first five years after enactment of TP 17. The cantons may tax the hidden reserves, hitherto tax free, at a special (low) rate to be fixed by the canton.
  • Reduction of the ordinary cantonal corporate tax rate for all companies: in order to avoid a fiscal shock after expiry of the transitional rules on the taxation of hidden reserves, the cantons want to reduce their cantonal corporate income tax rates as far as possible. Depending on the cantonal tax level, this reduction, which would be effective for all companies operating profitably, would be in the range between negligible and a substantial number of percentage points. This measure is not formally part of TP 17. Each canton must have such a measure approved in the normal cantonal legislative manner.
  • Revision of the capital tax: for companies under a tax regime, today the capital tax is applied more favourably than for companies without special tax treatment. Therefore, the cantons should be able to reduce the cantonal capital tax, to the extent the taxable capital is attributable to patents and participations. Here, too, consonant with the introduction of a deduction for secure financing optional for the cantons, the capital tax relief is also to be permitted, to the extent the equity is attributable to group loans.
  • The partial taxation of dividend income for income tax purposes of private investment holders was adopted in 2008 together with CTR II. This income is to be taxed at 70% in future. Compared with today this is higher. In various cantons this increase will be compensated respectively over-compensated, by the expected reduction of ordinary corporate income tax rates, which in future will apply to distributed profits. However, depending on the constellation, the situation is not consistent and can result in a higher charge for private company owners. Therefore, in order to avoid false incentives and distortions, it would be preferable, if the cantons could set the partial taxation percentage autonomously.
  • The overall limitation of reliefs was reduced from 80% to 70%. The cantonal minimum charge to income tax will be at least 30% (CTR III: 20%) of profits in the future. This limit is effective in those cases, in which the measures being newly introduced would provide greater relief.
  • The minimum children’s and education allowances shall be increased by CHF 30, following the example of Canton Vaud. As a reminder: children’s allowances are funded by the companies dependent on the number of jobs. This element is irrelevant and has nothing to do with corporate taxation. It should therefore be struck from the bill.

Based on the consultation replies received, the Federal Council will draw up the final bill and forward it to Parliament for discussion in spring 2018. If the reform proposal can be dealt with in Parliament expeditiously and without referendum, it is anticipated that the package can become effective on 1 January 2020.

Companies are well advised to prepare in good time for the changing conditions and to draw up alternative actions with a scenario planning. In a first step, they should review the overall tax effects. These include possible benefits from the Step-up practice, benefits from relief measures, such as the research and development deduction or the patent box and effects on the valuation of deferred taxes in the group financial accounts. And of course, it is worthwhile comparing their different possibilities in the various cantons.

Your contact partners

Dieter Wirth
Tel. +41 58 792 44 88
E-Mail: dieter.wirth@ch.pwc.com

Armin Marti
Tel. +41 58 792 43 43
E-Mail: armin.marti@ch.pwc.com

Benjamin Koch
Tel: +41 58 792 43 34
E-Mail: benjamin.koch@ch.pwc.com

Daniel Gremaud
Tel: +41 58 792 81 23
E-Mail: daniel.gremaud@ch.pwc.com

Remo Küttel
Tel: +41 58 792 68 69
E-Mail: remo.kuettel@ch.pwc.com

Claude-Alain Barke
Tel: +41 58 792 83 17
E-Mail: claude-alain.barke@ch.pwc.com

Laurenz Schneider
Tel: +41 58 792 59 38
E-Mail: laurenz.schneider@ch.pwc.com

Information on Tax Proposal 17

The most up-to-date information on and changes to the Tax Proposal 17 can be found at any time online.

Circular letter 13 on securities lending and repo transactions

Amendments to preclude dividend stripping transactions (applicable as of 1 January 2018)

On Friday 29 December 2017 the Federal Tax Administration (FTA) issued a revised version of Circular Letter 13 on securities lending and repo transactions. The amended circular letter contains important changes to the previous practice of the FTA, notably with regard to the Swiss Withholding Tax (WHT) refund position of foreign resident borrowers of Swiss securities.

The issue:

Under the previous circular letter issued in September 2006, Swiss and foreign borrowers of Swiss securities receiving a dividend or interest payment were able to claim for a full or partial refund of WHT levied at a rate of 35% either on the basis of Swiss domestic law in case of Swiss borrowers or on the basis of an applicable double tax treaty.

This rule was perceived by the FTA as a cause of a market behaviour, which was not intended. Indeed, the old practice was intended by the FTA as a pragmatic approach to solve situations where a borrower had “over-borrowed” a position over the dividend ex-date. From the FTA’’s perspective, the old practice was, however, being abused deliberately by lending Swiss securities to foreign borrowers over the dividend ex-date, which in several cases led to perceived dividend stripping cases.

The impact for foreign borrowers:

As of 1 January 2018, the old practice, which generally provided for the possibility of refunding WHT to foreign borrowers of Swiss securities, is no longer applicable, irrespective of whether the transaction is a long borrowing transaction (i.e. the borrower or the last borrower in a chain of several borrowers keeps the share) or if the shares sourced under a securities lending transaction are sold or delivered to a third party (e.g. to cover delivery obligations from a short sale).

The new rules stipulate that a WHT refund in case of long borrowing (including in chain transactions where the last borrower keeps the shares) can only be claimed by the original lender. The original lender is, in our view, to be understood as the party that held the long position and that initiated the first transfer of the Swiss securities under a securities lending transaction. Further to this rule and as only the original lender can claim for a refund, he will receive a compensatory payment of 65% of the income payment subject to WHT. In order to be in the position to claim a refund of WHT under an applicable double tax treaty, the new circular letter introduces a new requirement, which is that the original lender can prove that the payment received from the borrower is effectively the original dividend. Although the circular letter does not further define this proof, it is the common understanding that this burden of proof can only be fulfilled if the borrower (or, in case of chain transactions, the ultimate borrower) provides the lender with the original dividend payment advice received by the borrower. Under this procedure, the borrower would no longer dispose of the original dividend payment advice enabling him to make a refund claim; instead, only the original lender now holding the original dividend payment advice would have this opportunity. This new procedure also requires the whole chain of the lending transactions to be disclosed, which may be a difficult task.

In transactions where the foreign borrower has sold or delivered the Swiss securities sourced via securities lending to a third party, e.g. to cover a short sale, the circular letter precludes both the original lender as well as the borrower from filing a claim for a Swiss WHT refund. In such circumstances only the final buyer of the shares shall be seen as entitled to a Swiss WHT refund under the applicable double tax treaty. This new practice may put the lender in a difficult situation, notably in chain transactions where his borrowing counterparty becomes lender to a subsequent securities lending transaction without his knowledge, as the original lender may no longer have control over whether his shares remain in the securities lending chain (resulting in a long borrowing situation for the final borrower) or if the shares are sold by the final borrower to a third party. In the first case, the lender may file for a refund claim, assuming that he is provided with the original payment advice by the final borrower (or through the chain of borrowers); in the second case no such dividend payment advice should be available, as the third party would have this document and the entitlement to a refund claim. Lenders should therefore review their contractual arrangements to either preclude delivery of lent shares to third parties in order to ensure their own right to file a refund claim.

The takeaway:

The old practice of Circular Letter 13 applying to foreign resident borrowers has been changed. Under the new practice, the right to claim a WHT refund would lie with the original lender to the extent that the borrower (or the last borrower in a chain of securities lending transactions) held a long position on dividend day, the whole lending chain was disclosed and the lender proved that he had received the original dividend payment from the borrower. If the securities were sold or delivered to a third party by the borrower, only the third party would be entitled to file a claim for a WHT refund, with no possibility for the original lender or the borrower to do so.

It is worth noting that the old rules have not changed in cases where the borrower is resident in Switzerland, as the borrower has to levy a second WHT on any manufactured payment he makes to a lender in order to be in the position to claim the WHT levied on the original dividend payment received. In addition, the circular letter also contains amended rules with regard to the Swiss individual and corporate income tax treatment of the different income flows resulting from securities lending transactions, including a general corporate income tax anti-abuse clause in connection with participation relief.

Do not hesitate to contact us, should you wish to further discuss.

Contact Us

Luca Poggioli
Director, Corporate Tax
luca.poggioli@ch.pwc.com
+41 58 792 44 51

Victor Meyer
Partner, Tax & Legal
victor.meyer@ch.pwc.com
+41 58 792 43 40

Martin Büeler
Partner, Tax & Legal
martin.bueeler@ch.pwc.com
+41 58 792 43 92

Sandra Barke-Baumgartner
Partner, Tax & Legal
sandra.barke.baumgartner@ch.pwc.com
+41 58 792 94 34

Geneva International VAT Breakfast – New Year and new challenges in Indirect Taxes

International VAT Breakfast

In the fever of December’s last moment, many VAT topics such as the GST implementation in India or the change of the Swiss VAT rates across systems before New Year could have gone unspotted. For those who manage indirect taxes, it is clear that unnoticed changes can have significant consequences.

As a New Year’s resolution, during our next VAT Breakfast, we will look into recent topics that enable strategic development as well as those that are less game-changing but nevertheless require your attention in the start of 2018.

From a strategic perspective, we will address the latest progress in Brexit negotiations, the implementation of GST in India and the introduction of VAT in the GCC. We will also discuss the latest updates about the EU Commission initiatives and the upcoming end of the Cross Boarder Ruling pilot. Sharing feedback from various European countries, we will focus on reporting developments in 2017/2018 in Poland, Hungary and Serbia; the introduction of anti-fraud measures such as split payment in Romania, Poland and Italy; the reporting of imported e-services in Turkey as well as the Polish transport package.

Finally, we want to share with you the lessons learned and the biggest challenges faced in the first months after the Swiss VAT reform and the recent Swiss / EU case law. We hope to receive your views in return.

To register for this event: Click Here

Contact Us

Patricia More
Tel.+41 58 792 95 07
patricia.more@ch.pwc.com

US Tax Reform – The Final Tax Legislation as approved for enactment

In brief

Congress on December 20 gave final approval to the House and Senate conference committee agreement on tax reform legislation (HR 1) also called “Tax Cuts and Jobs Act” that would lower business and individual tax rates, modernize US international tax rules, and provide the most significant overhaul of the US tax code in more than 30 years.

The only remaining uncertainty is whether President Trump will sign the legislation into law before the end of this year, or if the signing might be delayed until January 2018.

The final conference committee agreement for HR 1 (the ‘Conference Agreement’ or the ‘Agreement’) will lower permanently the US federal corporate income tax rate from 35 percent to 21 percent. The Conference Agreement will further temporarily reduce the current 39.6-percent top individual income tax rate to 37 percent and revise other individual income tax rates and brackets. Both the new corporate tax rate and revised individual tax rates shall be effective for tax years beginning after December 31, 2017. The Agreement will repeal the corporate alternative minimum tax (AMT), while retaining a modified individual AMT with higher exemption amounts and phase-out thresholds.

In short, the Conference Agreement provides for the most significant overhaul of US international tax rules in more than 50 years by moving the United States from a ‘worldwide’ system to a 100-percent dividend exemption ‘territorial’ system. As part of this change, the Agreement includes two minimum taxes aimed at safeguarding the US tax base from erosion, along with other international tax provisions.

The Agreement further includes a broad range of tax reform proposals affecting businesses and individuals, including a new 20-percent deduction for certain pass-through business income. In addition, the Agreement repeals or modifies many current-law tax provisions to offset part of the cost of the proposed tax reforms. The Joint Committee on Taxation (JCT) staff have estimated that the net revenue effect of HR 1 will be to increase the on-budget federal deficit by $1.456 trillion over 10 years.

Highlights of the US tax reform bill

The final US tax bill appears to attract investments, jobs and business in the US and increases the attractiveness of the US by introducing a 21% federal income tax rate, participation relief on foreign subsidiary dividend income (though not on capital gains) or an incentive for US production for sale to “foreign” customers (Foreign Derived Intangible Income – FDII). On the other hand, the above benefit come with a toll charge tax on foreign untaxed profits of US controlled foreign companies (CFCs) and many new rules that enlarge the US tax base such as interest deduction limitation, a new Base Erosion Anti Abuse Tax (BEAT), expanded controlled foreign company (CFC) definitions and new foreign profit inclusion (Sub F) rules such as the global intangible low-taxed income (GILTI) and the anti-hybrid rules.

One can for sure say that cross border group transactions with the US become more complex. So do US compliance and reporting obligations, which especially for non-US groups increase significantly. The Trump campaign planned to create an easy and simple US tax code under which the US tax return should have the format of a “postcard”. Though the new rules will significantly increase the complexity. The final US tax legislation also has international discussion potential as WTO and EU already address incompatibility concerns for the new BEAT and FDII rule. The US tax reform as passed should be reviewed carefully in international context or unilateral reactions and measures as well.

The new rules are complex and impact of the US tax reform is to be reviewed on a case by case basis by every company. For a detailed summary of HR1 rules, see PwC Tax Insight

What to do now?

While the new tax legislation wording may not be precise in all details or results in unintended consequences, treasury and IRS now have to present underlying regulations and practice notices as guidance for application and interpretation. Such details are only expected to become available over the next weeks and months.

The immediate implication of the US tax reform is however its impact on 2017 financial reporting and tax accounting. For both, US GAAP and IFRS the enactment date is the signing date by President Trump. Accordingly, in case of signing in 2017, respective tax accounting entries and in case of signing in 2018, disclosure requirements need to be considered for the financial statements 2017.

Relevance of the US tax reform for Swiss companies and economy

The US tax reform will increase global tax competitiveness for US business. Switzerland and the US have very strong trading relations. With USD 224 billion of cumulative direct investments, Switzerland is the 7th largest investor into the US. Many Swiss companies have a significant US footprint either by US manufacturing or with sales and distribution functions or services rendered and are impacted by the new legislation as the US is an important export market. On the other hand, Switzerland is also a key trading partner of the US as it is the 7th largest export market for services, the 17th largest for goods and is an important location for European headquarters of US multinational groups. Switzerland as well as Swiss companies will thus for sure be impacted by the US tax reform.

The most important considerations from a Swiss perspective:

  • Review global supply & value chain as well as pricing approaches considering the new foreign profit inclusion and anti-base erosion rules
  • Review US funding and investment & acquisition plans considering the interest limitation rules and expensing rules
  • Increase of international tax competitiveness for US business and Switzerland
  • Review international and Swiss tax developments in the light of US tax reform

The rules in more detail

HR 1 is proposed generally to be effective for tax years beginning after 2017. Certain provisions have separate effective dates, while others are effective after the date of enactment and some are effective for tax years beginning after 2016. The bill also proposes some temporary measures and provides transition rules for certain proposals. The below summarizes the most important general provisions. Many exemptions and special rules however exist for specific facts or certain industries in the more than 500 pages of tax legislation that are to be considered in detail on a case by case basis.

Corporate rate reduction
The current 35% top federal corporate rate is reduced permanently to 21% for tax years beginning after 2017. The current corporate alternative minimum tax is repealed. State taxes are to be added and thus the combined US tax rate will be in average around some 26%. This rate will still be slightly higher than the 23.75% average rate for all other OECD nations in 2017.

Tax location competition for Switzerland will increase not only with the US but especially also the EU to attract US business. Passing Swiss tax reform is an important measure to maintain Switzerland’s competitiveness and business location attractiveness.

Interest expense limitation
Interest expenses both for related and unrelated party debt is limited to the sum of business interest income plus 30% of the “adjusted taxable income”. Adjusted taxable income is defined similar to EBITDA for taxable years beginning after December 31, 2017 and before January 1, 2022, and is defined similar to EBIT for taxable years beginning after December 31, 2021. Disallowed interest is allowed to be carried forward indefinitely.

US companies are typically highly debt leveraged under today’s rules favoring debt over equity. Accordingly companies should reconsider the US operation’s funding structure in detail.

Cost recovery / full expending of certain property
100% full expensing for investments in new and used property made after Sept. 27, 2017 and before January 1, 2023 is introduce. A five-year phase down of full expensing will begin in 2023.

This rule intends to attract investments into the US. Swiss groups that plan investments into the US should (re-)consider the funding and expensing of US investments as well as timing of planned investments under this rule.

NOL’s / Tax loss carry forward
NOLs are limited to 80% of income for losses arising in taxable years beginning after December 31, 2017. Indefinite carryforward but no carryback for losses arising in taxable years ending after December 31, 2017 will be applicable. For insurance companies special rules will apply.

Companies with tax loss carry forwards in the US will need to assess the impact on deferred tax positions for financial reporting purposes. In future, companies with NOLs will have to pay US cash tax in years with taxable profit as only 80% of income per year can be set off with NOLs.

R&D Credit / Domestic Production Credit
The R&D credit as per the current rules remain in place to maintain the jobs and attractiveness of the US for research and development activities. This measure combined with the new “foreign derived intangible income” rule shall increase the attractiveness to keep intangible property in the US. On the other hand, domestic production credits for taxable years beginning after December 31, 2017 are repealed.

Participation Relief and Toll Charge Tax
A territorial tax system providing a 100% dividends received deduction (DRD – participation relief) for certain qualified foreign-source dividends (10% shareholding and 1 year holding period required) received by US corporations from foreign subsidiaries is introduced effective for distributions made after 2017.

The territorial system is introduced only for foreign dividends while for any other activities, the current CFC (controlled foreign company) and Sub F (inclusion of CFC foreign profit for US taxation) is maintained.

Under DRD, no more tax credits are available for dividend income. From a Swiss perspective, dividends from a Swiss subsidiary to a US parent are subject to Swiss withholding tax resulting generally in a 5% residual Swiss withholding tax under the Swiss – US double tax treaty. Any foreign withholding tax will become a final tax cost as no more tax credit available in the US.

As a consequence of the change to a territorial tax system, previously untaxed foreign earnings of US CFCs (foreign subsidiaries of US companies) are subject to repatriation toll charge tax at 15.5% for cash & cash-equivalents and 8% on non-cash assets. Such toll charge tax will be payable over 8 years.

Any US company owning shares in foreign subsidiaries will be subject to the toll charge tax resulting in an immediate impact on its tax accounting and financial reporting.

Expanded CFC definition and new Sub F Rules
In general, the current CFC (controlled foreign companies) and Subpart F rules (inclusion of foreign CFC’s profit into the US tax base) are generally maintained. Under the current CFC attribution rules, foreign subsidiaries of non-US parented groups that are not held by US entities are not treated as CFCs. Under the new expanded CFC definition, if a non-US parented group has at least one US subsidiary or an interest in a US partnership, any other non-US subsidiary would generally be treated as CFC. Although there would be no income pick up or attribution of profit to US tax base as long as the US entity does not have a direct or indirect interest in such foreign entities. However, there may be a reporting requirement (reporting 5471) for all of the foreign entities under the non-US parent. Such expanded CFC definition is effective the last taxable year before January 1, 2018 (effectively already for 2017).

Under these rules, a Swiss parent group that owns one US subsidiary would have a tax reporting duty in the US for all its subsidiaries.

The new tax code also adopts a deduction for ‘foreign derived intangible income’ (FDII) and the global intangible low-taxed income’ (GILTI) provisions, as well as the ‘base erosion and anti-abuse tax’ (BEAT).

BEAT

The BEAT targets US base erosion payments from US companies to any group entities abroad resulting in higher US taxes. The intention of such rules is to create an incentive to provide such activities in the US rather than “outsourcing” to non-US group companies and avoid base erosion payments. The US base erosion with payments of interest, royalties or other transfer prices such as management fees, services etc. should be limited. A big relief for many Swiss companies is the fact that the BEAT does not include payments for costs of goods sold (except for former US groups that inverted abroad). A Swiss company selling goods to US customers directly or via a US distribution company should not be adversely impacted.

The BEAT is a new add-on minimum tax that is imposed in addition to the corporate tax liability. Subject to BEAT are generally corporations with average annual gross receipts of at least $500 million and that make certain base-eroding payments to related foreign persons for the taxable year exceeding 3% (2% for certain banks and securities dealers) of all their deductible expenses.

The BEAT is a comparable calculation and the additional tax is imposed if
(i) 10% of taxable income (5% in 2018 and 12.5% for tax years after 12/31/2025, 6% for certain banks and securities dealers) generally determined without regard to amounts paid or accrued to a foreign related party (other than COGS and certain services), including amounts includible in the basis of a depreciable or amortizable asset;
exceeds
(ii) regular tax liability (consideration of available credits apply based on specific rules).

The BEAT of $1 is levied on top of the regular US tax charge of $21.

The BEAT will result in higher taxes in the US and impacts Swiss groups rendering services, licensing intangible assets or financing activities to US group companies. Swiss groups as well as US multinational groups need to review the cross border value chain and transaction flows to assess the extra US tax to become due under the BEAT.

From an international point of view, the BEAT is not undisputed and both the WTO and the EU have addressed to the US government concern whether such tax is permitted under international trade and double tax treaty rules. Further expert assessment is expected. In case deemed to be a concern, potential international counter measures might result.

Foreign derived intangible income’ FDII) and global intangible low-taxed income’ (GILTI)
The FDII should create an incentive to keep the IP in the US for domestic production in the US and sale of goods and services abroad by allowing a 37.5% deduction on foreign-derived intangible income from a US trade or business. The deduction is reduced to 21.875% for taxable years beginning after 12/31/2025.

Income eligible for such deduction would be taxed at a 13.1% effective tax rate (21% federal tax less 37.5% deduction) effective for tax years beginning after 2017.

Such rule is comparable to a patent / IP box and shall intensify to keep and relocate IP to the US. The US legislation is silent on modified nexus approach as defined as OECD and EU standard and thus, such rule also triggers discussion on an international level for compatibility with new OECD BEPS international standards. While it appears to be a benefit to transfer IP into the US, Swiss groups should consider such a step carefully also in the light of sustainability of US tax legislation as well as future US exit taxes and the overall value chain and operational set up. For location Switzerland, this means that US companies have less of an incentive to transfer IP abroad. To assess the most competitive IP and business location, any of the existing and new rules as well as international developments should be considered holistically to assess overall pros and cons. Especially the combination with any other base erosion and US tax base enlargement rule and the comparison of tax impacts on a holistic basis may differ significantly from case to case.

The GILTI introduces a new Subpart F category in which US shareholders of CFCs become subject to current US tax on “global intangible low-taxed income”. GILIT is defined as income in foreign CFCs that generate a 10% margin or more on certain products. If so, such profit of CFCs exceeding the 10% margin is to be included in the US tax base under consideration of a 50% deduction and an 80% foreign tax credit.

The GILTI rule will only impact structures where a US company owns foreign subsidiaries. As long as the US subsidiary however does not own any shares or partnership interests in foreign entities, such rules would not apply. Thus a Swiss group that holds a US distribution or manufacturing subsidiary, which itself is not invested in foreign entities should not be impacted by GILTI. Considering the 80% foreign tax credit that is available in the GILTI calculation, GILIT tax is as an approximation only expected to result in an additional tax burden if the foreign tax rate of the CFC is below 13.125%.

Anti-Hybrid Rules
New anti-hybrid rules inspired by the OECD BEPS rules are introduced. Accordingly, a US company will not be allowed a tax deduction in the US for interest or royalty payments if the income is not taxed or results in a double deduction in the recipient’s jurisdiction. This rule applies to hybrid entities or hybrid instruments and also applies to the newly introduced US participation relief. Since the rule largely follows OECD BEPS wording, further explanations, on how the rule will be applied in detail, are expected to be included in upcoming IRS and Treasury regulations and practice notices.

Accordingly, any payment of US companies have to be reviewed whether paid to a hybrid entity or whether the instrument as such is qualified as hybrid.

State Taxes
The US tax reform covers federal income tax. How and at what point in time the States adopt the new US tax code matters is unclear at this stage. Companies should carefully monitor State tax interactions under the new rules as well.

Individual Tax Matters
The US tax reform legislation includes many rules for individual tax payers and aims to reduce the tax burden for low and middle calls families. However, the rules are highly complex and impact depends literally on very specific individual facts which define allowed deductions, incentives and applicable tax rates. Whether you are a winner or not so lucky individual tax payer under the new rules has to be assessed personally.

The following shows a few of the important provisions that will impact individual taxpayers living and working abroad.

The following rules do not change and continue to apply:

  • US citizens and residents taxed on worldwide income
  •  409A rules (Nonqualified Deferred Compensation Plans)
  • Taxation of nonqualified stock options at exercise
  • Net investment income tax
  • 401(k), qualified plan pre-tax contribution limits
  • Foreign earned income exclusions for taxpayer living and working abroad
  •  Foreign tax credit rules
  • Gift tax
  • Qualified dividend and Capital gain rates and holding periods
  • Charitable contribution deduction

The following rules will change:

  • Standard deduction increase to $24K for married taxpayers
  •  Limit on property tax deduction, combined with state and local tax deductions to $10K
  • Mortgage interest deduction, limited to $750K including the repeal of deduction on home equity indebtedness
  • Relocation costs paid directly to the vendor by an Employer may become taxable to the employee
  • Increase in lifetime estate and gift tax exemption to $11M per donor
  • Sale of US Partnership interest by a foreigner is considered US effectively connected income
  •  Taxation of income from tax-transparent entities (i.e. LP, LLP, LLC) at the entity level rather than the individual owner, except for certain personal services businesses
  •  Increase of the current AMT exemption
  • A ‘toll tax,’ which would subject certain individuals and trusts to a one-time reduced tax on the undistributed foreign earnings and profits (E&P) in US-owned foreign corporations.

Depending on your personal tax situation, there are certain actions you may take before the end of the year to benefit from the existing provisions that are subject to change or that are expected to be completely repealed from the tax code.

Questions & How can PwC help you?

PwC would be pleased to assist you with:

    • Any questions on how the US tax reform may impact yours and your company’s US tax position;
    •  Assist with modelling US tax reform impact. PwC has developed specific financial modelling tools;
    •  Support you for any tax accounting questions for your financial report;
    • Support assessment of global value chain and US related business transactions;
    • Follow our publications and blogs via:

a. https://news.pwc.ch/category/managing-taxes/
b. https://www.pwc.com/us/en/washington-national-tax/us-tax-reform.html
c. https://twitter.com/PwC_Tax

  • PwC will present a series of webcast in January 2018 explaining several of the new rules in more detail
  • Our US experts are available for individual meetings and discussions upon request.

Contact Us

Corporate and business tax

Martina Walt
PwC | Partner – International Tax Services
Office: +41 58 792 68 84 | Mobile: +41 79 286 60 52
Email: martina.walt@ch.pwc.com
PricewaterhouseCoopers Ltd
Birchstrasse 160, 8050 Zurich
http://www.pwc.ch

Stefan Schmid
PwC | Partner, International Tax Services
Office: +41 58 792 44 82 | Main: +41 58 792 44 00
Email: stefan.schmid@ch.pwc.com
PricewaterhouseCoopers AG
Birchstrasse 160 | Postfach | CH-8050 Zürich
http://www.pwc.ch

Monica Cohen-Dumani
PwC | Partner, International tax services, Central Cluster ITS Leader
Office: +41 58 792 97 18 | Mobile: +41 79 652 14  77
Email: monica.cohen.dumani@ch.pwc.com
PricewaterhouseCoopers SA
Avenue Giuseppe-Motta 50 | Case postale | CH-1211 Genève 2, Switzerland
http://www.pwc.ch

Pascal Buehler
PwC | Partner on Secondment – Swiss Tax Desk
Office: +1 646 471 14 01 | Mobile: +1 917 459 8031
Email: buehler.pascal@us.pwc.com
PricewaterhouseCoopers LLP
300 Madison Avenue, New York, NY 10017
http://www.pwc.com/us

Individual tax

Richard Barjon, CPA
PwC | Director
Office: +41 58 792 13 53 | Mobile: +41 79 419 55 16
Email: richard.barjon@ch.pwc.com
PricewaterhouseCoopers AG
Birchstrasse 160 | Postfach | CH-8050 Zürich
http://www.pwc.ch