Dominik Gross ■ The global tax rate is now a tax haven rewards programme, and Switzerland wants in first
Originally, the OECD’s idea of the new minimum tax was to make the international corporate tax system a little fairer. Now, Switzerland is among the front-runners to implement the new GLoBE rules (Global Anti Base Erosion Model Rules). Why is an infamous corporate tax haven so keen to introduce new international rules supposed to stop the race to the bottom? And what does this tell us about the winners and losers of the newest OECD tax reform?
Guest blog by Dominik Gross, senior policy officer for tax and finance policies at Alliance Sud.
The technicalities of the minimum global tax rate are with no doubt very sophisticated, but for every fiscal patriot in Switzerland its calculation is very simple. Former Swiss Finance Minister Ueli Maurer (who recently resigned), was one of the longstanding big figures of the nationalistic right-wing “Swiss peoples party”. He made the calculation quickly: “If Switzerland doesn’t take the extra money, others will.”
If you are cheering for global tax justice, however, you have to reverse the calculation. Countries in the global south hosting subsidiaries or affiliates of Swiss based corporations are only able to receive the money, if Switzerland doesn’t take it. That is, if Switzerland doesn’t introduce the Domestic minimum top-up tax (DMTT), which is the country’s major tool for translating the GloBE rules into its national tax laws (the others tools would be the Income inclusion Rule (IIR) and the Undertaxed Payment Rule (UTPR), which are not of great importance in the Swiss context). Unlike the last OECD corporate tax reform known as BEPS I, this time the OECD, G20 and EU are not relying on “blacklists” to motivate countries to join the GloBE club. Instead, they’re relying on economic incentives, which the former Swiss Finance Minister summarised above with an elegance of his own.
Switzerland’s tax policies are built on radical fiscal nationalism
Theoretically, Switzerland is free to take into account the interests of other countries, where a significant amount of the economic activities of its multinational enterprises are taking place. But such consideration isn’t the case at all. Last December, the Swiss parliament decided to translate the OECD minimum tax rules into a so-called “national supplementary tax”, the Swiss version of the domestic minimum top-up tax (DMTT). This will see multinational enterprises in Switzerland, which have so far benefited from an effective corporate tax rate (ie the tax rate on taxable profit after all deductions) of less than 15 per cent, subjected to a top-up tax that will raise the effective tax rate to the OECD minimum of 15 per cent. A commodity trader like Glencore in the Swiss canton of Zug that has been enjoying a very low tax rate of 11 per cent will in the future have to pay a supplement of 4 per cent on its profits reported in Zug. So far so good – multinational enterprises will be paying more tax on their profits, even if a tax rate of 15 per cent is still abysmally low.
But the domestic minimum top-up tax has a big catch from a development policy point of view. If Switzerland decides to adopt a minimum tax and to apply it to multinational groups in line with the OECD’s suggestions, it pre-empts other countries’ possibility under the same OECD rules to recuperate some of the tax on undertaxed Swiss income. Much of this income shouldn’t be Swiss income in the first place, given that it also includes profits shifted away from subsidiaries in those other countries.
This is highly significant for the effects of the OECD’s new minimum tax across the world. Switzerland is known to be one of the major global hubs for multinational enterprises. It is the country with the highest density of multinational corporations in the world, the home of some of the biggest financial companies in the world (such as UBS, Credit Suisse, Zurich, Swiss Re), of very prominent players in the pharmaceutical industry (Novartis and Roche), in food (Nestlé) and last but definitely not least in commodity trading (Glencore, Trafigura, Vitol and others). At the same time Switzerland is one of the most infamous secrecy jurisdictions as well. It ranks second on the Financial Secrecy Index, a ranking of countries most complicit in helping individuals hide their finances from the rule of law, and ranks fifth on the Corporate Tax Haven Index, which is a ranking of countries most complicit in helping multinational corporations underpay corporate income tax.
What this all means is countries currently losing out on tax revenue to multinational enterprises using Switzerland’s tax havenry services won’t be empowered by the OECD’s global minimum tax rules to recover that lost tax revenue. Instead –shamefully – the OECD’s new rules will reward Switzerland’s decades-long harmful behavior while multinational enterprises continue to underpay tax, particularly in the global south, as usual.
Switzerland’s introduction of the OECD’s new rules has repercussions all over the world
For the world, the above bears bad news for the following reasons:
- The profit tax rates in the global south, where several Swiss multinationals are creating their values, are generally between 25 and 35 per cent. The introduction of the OECD minimum tax prevents profit shifting neither at the international level nor in Switzerland. The tax rate of 15 per cent is far too low for this. After the US tried to fix the minimum tax at a rate of 21 per cent during OECD negotiations in spring 2021, Switzerland together with other low tax jurisdictions such as Ireland and Luxembourg actively negotiated it down and pushed for the domestic minimum top-up tax. This is shown in a letter from the Swiss Finance minister to the OECD Secretary-General Mathias Corman in autumn 2021. The now much lower minimum tax of 15 per cent does nothing to prevent countries with higher tax rates from losing revenues due to profit shifting of Swiss multinational enterprises.
- The way Swiss based multinational enterprises are shifting profits from low-income countries to Switzerland is illustrated, for example, through the case of the Swiss-Luxembourg agricultural commodity trader Socfin. A 2021 report by Swiss civil society organisations Bread for All (now HEKS/EPER), Alliance Sud and the German “Netzwerk Steuergerechtigkeit” (the German Tax Justice Network) shows that the company doesn’t book its profits where it creates its values (ie Liberia, Sierra Leone and Cambodia, where it operates its plantations for palm oil and rubber) Rather, Socfin books its profits where tax rates are the lowest, such as Switzerland and other corporate tax havens. In 2019, a study by the economists Petr Janský and Miroslav Palanský reported that at least about €80 billion in profits are being shifted annually from developing countries to low-tax jurisdictions like Switzerland. How much of this money ends up in Switzerland exactly is impossible to say, due to the secrecy of the Swiss tax haven and a lack of data in the source countries. But what is clear is that corporate tax havens like Switzerland, which are harming others by constantly producing new incentives for multinational enterprises to shift their profits to them, are at the same time the ones who will use the OECD’s new rules to collect the tax revenues lost to the profit shifting they enable.
- Switzerland is a tax haven for multinational enterprises indeed. According to “economists without borders”, multinational corporations shifted $111 billion in profits to Switzerland last year. 39 per cent of the $22.7 billion corporate tax revenue Switzerland collected came from profit shifted into the country. But as mentioned before, due to the secrecy of the Swiss corporate tax haven we have to assume that not even Gabriel Zucman and colleagues are able to catch everything that flows into this small country in western Europe. Cases like Socfin’s, however, show that the corresponding amounts of such profit shifting must be expected to be considerably higher.
- If Switzerland introduces the OECD’s minimum tax, it will deprive countries in the global south hosting subsidiaries of Swiss corporations of the right to tax these companies as they see fit under the GloBE rules. Unilateral measures, such as withholding tax on intra-group cross-border payments above 9 per cent (which is the threshold still allowed under the new OECD rules), can then no longer be applied by these countries to the subsidiaries of Swiss groups.
The economically disadvantaged countries of the global south will therefore not only be left empty-handed by the OECD’s reform, but their tax policy independence will also be further restricted. In order to at least mitigate this global injustice, which is anchored in the OECD’s minimum tax rules, Alliance Sud, in March 2022, proposed that a share the additional revenues expected to occur in Switzerland be returned to low-income countries in the global south. This could be easily done via financing instruments of international cooperation or international climate financing. In an open letter dating from June 2022, high-ranking representatives of the Association of African Tax Authorities (ATAF) backed this proposal by Alliance Sud. In the parliamentary discussion of the Swiss bill, however, no one paid attention to the spillover effects the Swiss domestic minimum top-up tax will have for countries in the global south. Developments like this may also be one of the reasons why important African economies such as Nigeria and Kenya have announced that they will not introduce the minimum tax. However, this would be of little help to them, as seen, when they are dealing with corporations that have their headquarters in a country that – like Switzerland wants to do – introduces a domestic minimum top-up tax. The additional tax revenue accrues there and the taxing rights of the country with the subsidiaries are curtailed.
Revenues from shifted profits will benefit the profit shifters
To make matters worse, Switzerland is already planning to use the additional revenues from the domestic minimum top-up tax to reward the tax abusers. Switzerland’s new rules force the federal and cantonal governments to use the additional revenue to further improve Swiss “competitiveness” (in global comparison, it is already one of the highest). These “improvements” can include reductions in capital taxes or in personal income taxes (especially for high incomes of for example corporate managers). Also being discussed are new special arrangements between the cantonal tax authorities and corporations in which the state takes over part of the companies’ operating costs; research promotion measures for (pharmaceutical-related) start-ups (in Basel); direct subsidies for wages paid by corporations.
So it’s not just people from other countries losing out to Switzerland’s domestic minimum top-up tax, but most Swiss citizens too. Attempts by Switzerland’s Greens and Social Democrats in parliament to put some of the additional revenues from the domestic minimum top-up tax towards subsidising childcare and health insurance did not succeed.
The result of all this that the revenues Switzerland collects from the domestic minimum top-up tax will flow back to the corporations that paid it. From the point of view of the corporations, this is a very clever plot: the tax revenues that Swiss corporations cheat other countries out of by shifting their profits to Switzerland, are now to be used in Switzerland for the benefit of precisely these corporations. No wonder the corporate associations such as Economiesuisse or Swiss Holdings want this reform at all costs – even if at first glance their members have to pay more taxes than before.
To summarise, what started out as an effort to undo the harms of profit shifting has been contorted by the OECD into a reward programme for corporate tax havens enabling profit shifting, and these corporate tax havens are already planning on passing along their rewards to companies doing the profit shifting. Rather than bring an end to the race to the bottom, the OECD’s new rules will preserve it in a perfect, perverse loop.
A referendum as the last chance
Swiss corporations are not only exploiting workers and polluting the environment in global south countries through their operations, they’re preventing the development of public services and infrastructure systems through their tax abuses in these countries.
In June, Swiss citizens will have the opportunity to vote on the introduction of the minimum tax in a referendum. We at Alliance Sud cannot accept another corporate tax reform that will ultimately only benefit these shameless corporations. It directly harms developing countries. If Switzerland doesn’t introduce the domestic minimum top-up tax, producing countries in which Swiss subsidiaries are operating will be granted more taxing rights than they would have under the OECD’s new global minimum tax rules. Alliance Sud therefore hopes that citizens will reject the proposal and send it back to government and parliament in order to bring about a better proposal that works for the people of Switzerland and the world all over.