Tax Proposal 17 - assets.kpmg.com · Proposal 17 28 March 2018 ... Step-up upon relocation to...
Transcript of Tax Proposal 17 - assets.kpmg.com · Proposal 17 28 March 2018 ... Step-up upon relocation to...
Tax Proposal 17
28 March 2018
Dispatch of Federal Council –
Overview of elements, implementation and impact
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Speakers
Peter
Uebelhart
Partner
Head of Tax
+41 58 249 42 24
Stefan
Kuhn
Partner
Head of Corporate Tax
+41 58 249 54 14
Olivier
Eichenberger
Director
Corporate Tax
+41 58 249 41 67
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Agenda
1 Main reason of the reform: Tax privileges to be abolished
2 Tax Proposal 17: elements
3 Snapshot of the proposed cantonal implementation
4 International competitive tax rates today and tomorrow
5 Overall conclusion
6 Q&A
Conclusion
Tax privileges to be abolished
Main reason of the reform:
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Current tax privileges and effective tax rates
1 2 3
Holding
company
regime:
7.83%
Dominant player in the
professional services
space confident in ability
to generate sustainable
long term growth
Strong and seamless
presence in our clients
over the long term
12 3 4Mixed /
Auxiliary
Company
regime:
8.3 – 12%
Principal
Company
practice:
5 – 9%
Finance
branch
practice:
1 – 2%
Tax Proposal 17: elements
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Goals of the reform
Public tax
revenuesAttractiveness
International
acceptance
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Timeline
1st chamber
29 May - 15 JuneConsultation
procedure
2018 2020
1 January 2020*:
Earliest date for
entry into force of
main part of the
reform (e.g.
abolishment of
status companies)
2017
12 February 2017:
Public vote
rejects CTR III
Timeline (future data according to current estimates)
2019
Cu
rre
nt
Sta
tus
21 March 2018:
Publication of
dispatch by Federal
Council
June 2017
Adoption of
parameters
2nd chamber
10-28 Sept.
Referendum
period (100 days)
1 January 2019*:
First measures
could come into
force (in particular
financial
equalization
measures)
*provided that no referendum is called
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Timeline (potential public vote)
1st chamber
29 May - 15 June
Consultation
procedure
2018 20212017
12 February 2017:
Public vote
rejects CTR III
Timeline (future data according to current estimates)
2019
Cu
rre
nt
Sta
tus
21 March 2018:
Publication of
dispatch by Federal
Council
June 2017
Adoption of
parameters
2nd chamber
10-28 Sept.
Referendum
period (100 days)
Public vote?
2020
1 January 2021*:
Entry into force of main part of the reform
(e.g. abolishment of status companies)
1 January 2020*:
First measures could come
into force (in particular
financial equalization
measures)
*current assumption
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Overview of measures
Abolishment of privileged tax regimes with transitional measures
Increase of canton’s share of direct federal tax and consideration of the cities and municipalities
Patent box
Additional R&D deductions
Overall limitation
Step-up upon relocation to Switzerland
Relief on capital taxes
Lump-sum tax credit for Swiss branches of foreign companies
Increase of dividend taxation for individuals for qualifying investments
Increase of child and education allowance
Adjustment of rules regarding transposition for Swiss individuals
Transitionalmeasures(change from privileged to ordinary tax status)
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Change in tax status
General
information
Current law
step-up
(premature
change in tax
status)
— Ensure that hidden reserves are taxed under the tax regime in which such reserves have been created
— Only relevant for cantonal and communal taxes
— Current law step-up (old regulation) and transitional step-up (new regulation; special tax rate)
— Effective (tax neutral) disclosure (in tax balance sheet) of hidden reserves created under the tax
privilege
— Revaluated assets are to be depreciated by reducing taxable income
Transitional
step-up
(special tax
rate)
— The fiscal shock of the tax rate change shall be absorbed over a period of 5 years
— A similar tax rate as under the privilege shall be applied during this transitional period
— During the transitional period a special reduced tax rate is applied
— Proceeding is systematically justified
— After the transitional period: new ordinary tax rates are applied
— Such special tax rate varies between the cantons
Transitional measures
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Transitional Step-up Implementation of transitional step-up is mandatory for cantons
For tax payers the transitional step-up is voluntary
Over a period of max. 5 years the profit based on the realization of hidden
reserves in place at the time of the change of status and to extent not taxable
under the privileged tax status (max. determined step-up potential) will be taxed
at a “special” reduced tax rate. The profit will be divided in Basket A (ordinary
cantonal tax rate) and Basket B (“special” reduced tax rate)
No DTA needs to be accounted for!
This measure may be introduced by the cantons even before the entry into force of
the TP 17 - immediately after a potential positive public vote or the day when it is
certain that no referendum is called
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Transitional Step-up
“Basket B”
will be taxed at
“special” reduced
tax rate (e.g. 2%)
Annual pro
fit
0
“Basket A”
Will be taxed at
ordinary
cantonal/communal
tax rate (e.g. 9%)
Example:
Hidden reserves of Company
A amount to 500
(can be allocated over 5
years)
Annual profit year 2020: 250
100 will be taxed at ordinary
cantonal/communal tax rate
(Basket A)
And 150 could be allocated to
«special» tax rate (Basket B)
150
100
250
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Reduction of the taxable
income
(Effect on cantonal income tax)
1,000
taxa
ble
pro
fit
depre
cia
tion
ste
p-u
p
0
Step-up amount 2500
./. Year 1 - 250
./. Year 2 - 250
(…) (…)
./. Year 10 - 250
Remaining amount 0
Current law Step-upA
nn
ua
l p
rofit
250
750
1,000
Patent box regime
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Patent box regime – OverviewApplication of the patent box
Applicable at cantonal level only (mandatory for all cantons), up to 90% relief
Consideration of modified nexus approach based on R&D expenses incurred
Qualifying IP
Patents (Swiss and – if comparable – foreign patents)
IP similar to patents, i.e.:
- Supplementary protection certificates
- Topographies
- Protected varieties of plants
- Protected documents according to the Therapeutic Products Act
- Reports protected by the Ordinance on Plant Protection Products
- Comparable foreign rights
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Patent box regime – Software Copyrighted software
Copyrighted software is not covered by the definition of qualifying IP – hence
shall not benefit from the patent box
Cases in which software can qualify for the patent box
If the software is patented abroad (e.g. US)
Software which is a part of an invention (so called “computerimplemented
invention”) which itself – as a whole – is patented
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Patent box regime – first application Taxation of entry into the patent box (capitalization of expensed R&D costs
/ IP amortization of last 10 years) – can be delayed up to 5 years
- Relevant for ordinary taxed companies – amortization within the patent
box
- Companies currently benefitting from a tax privilege: only to the extent
the R&D expense has been deducted from Swiss taxable income
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Patent box regime – 4 steps of calculation
Step 1:
Determination of
qualifying IP
income
Step 3:
Determination of
the scaling factor
(depending on
canton) and
calculation of
exempted
income
Step 2:
Determination of
nexus factor
Step 4:
Consideration of
overall limitation
rule (depending
on canton)
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Patent box regime – Step 1Determination of qualifying income
Direct determination (e.g. external royalty/license income)
Indirect determination (due to embedded royalties in various products)
- Net method (based on Transfer Pricing study) not applicable
- Residual method applicable for Switzerland due to simpler
administrative handling
Residual profit computation from qualifying IP (based on total corporate profit) - simplified example
Total profit
./. Profit from financial activity
./. Other profit not based on IP / products with IP
= Profit from patented products
./. Embeded trademark fees
./. 6% of product costs (for routine functions)
= residual qualifying IP income
ordinary taxation
privileged taxation
ordinary taxation
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30
Patent box regime – Step 2 (mod. Nexus app.)
Patent-
box
1.
Patent Income
2.
3.
4.
5.
GC
T
GC
T
Foreign Group Company
10
30
80
10 + 60 + 20 + + 36
+ 80
«Uplift» of 30% of the
qualifying R&D expenses
156
200
R&D
expenses
Swiss Group Company
Swiss Third Party
Foreign Third Party
78%
Qualifying R&D expenditure
Overall expenditure
20
60
10 + 60 + 20 +
To be confirmed by
ordinance of the
government
GC
T
= Group Company
= Third party
30
Only 78% of qualifying residual IP income (box income) is to be tax privileged
(i.e. only 78% may be tax exempted by up to 90%).
Additional R&D deduction
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Additional R&D Deduction – overview
Own domestic R&D
An additional deduction of 50%
of R&D expenses (domestic
personnel expenses plus
markup of 35%) may be granted
in each tax year.
Domestic contract R&D
An additional deduction of 50%
of 80% of invoiced R&D
expenses may be granted in
each tax year.
Broad Definition of R&D:
Basic research
Applied research
Science-based Innovation
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Additional R&D Deduction – calculation example
* Assumption: there are at least other R&D
expenses in the amount of 35 (in addition to
personnel expenses); hence overall R&D
expenses in the example amount to (at
least) 235.
R&D
personnel
expenses
35%35*
100 (domestic)
Contract R&D
80%
20% 20
100
Basis
50%
Additional
R&D deduction
215
107.5
135 80
Own R&D Contract R&D
Overall limitationof measures
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Overall limitation of measures
R&
D s
up
er
de
du
cti
on
Cu
rren
tla
wste
p-u
p d
ep
r.
Pa
ten
t b
ox
Minimum profit of 20% of taxable profits
before set off losses carried forwardMinimum income of 30% of taxable income before loss carry forwards
(approach per entity)
Maximum
deduction of
70% of taxable
income before
loss carry
forwards and
excluding
participation
income
Step-up uponRelocation toSwitzerland
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Step-up – Relocation to SwitzerlandUpon relocation to Switzerland, a foreign company can disclose hidden reserves including
goodwill in a tax free manner. Hence, in the first few (up to 10) years the company may benefit
from additional depreciations on such disclosed hidden reserves.
Abroad Switzerland Abroad
Revaluation of assets to
FMV in the tax balance
sheet (even if not
accounted for in the
statutory balance sheet)
Exit taxation
(as already today)
Taxed hidden reserves in the
tax balance sheet
Depreciation over maximum
10 years
Relief on capital taxes
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Relief on capital taxes With the abolishment of the privileged tax regimes, privileged capital tax rates will
also be abolished
Therefore, a relief on capital taxes will be introduced
The cantons are entitled to grant a reduction for equity related to participations,
patents and similar rights (intercompany loan assets are not included anymore).
Assets Liabilities
100 cash 200 debt
100 receivables
200 patents 300 equity
100 participations
500 total 500 total
Assets for deduction Quota (of total assets)
200 patents 40%
100 participations 20%
Total deduction from
capital tax amount
60%
Alternative procedure by the cantons:
General (capital) tax rate reduction
Credit of income tax towards capital tax
Not in the proposal:
Notional Interest deduction (NID)
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Notional Interest Deduction – Overview NID is not included in the TP 17 (as it is understood as a main reason for the
failure of the CTR III and hence the non-inclusion shall facilitate acceptance
of the TP 17)
The missing NID will be a disadvantage in particular for the canton of Zurich
Further discussions are expected during the treatment in the parliament
The NID may be a part of the Withholding Tax Reform (still to come)
Snapshot of theproposed cantonalimplementation
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Cantonal measures – Overview
CantonPatent Box regime
(reduction)
Additional R&D
Deduction
Overall Limitation
of measures
BS 90% No 40%
GE 10% 50% 9%
LU 10% No 20% / 70%*
SH 90% No 70%
TI 90% 50% 30%
ZG 90% 50% 70%
ZH 90% 50% 70%
*20% overall limitation excluding Step-up / 70% including Step-up (current law)
International competitive tax ratestoday and tomorrow
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Headline tax rates today/tomorrow
Zug
2018
* Overall ETR – including federal tax
** Only federal tax
USGermany
29
.79
%
UK
19
%
17
%
2018
2020
2018
NL
33
.33
%
25
%
2018
14
.5%
*
33
.99
%
Belgium
20182018
France
21
%**
25
%
2021
2018
12
.0%
*
2020
18
.2%
*
21
.2%
*
Zurich
2018
2020
12
.3%
*
12
.3%
*
Lucerne
2018 2020
12
.5%
2018
Ireland
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Planned cantonal income tax rates2018
* Gradually reduction within up to 5 years
Remark: maximum effective pre-tax rate for federal government / canton / municipality for the respective principal town in percent. Sources: TaxWare, KPMG Schweiz.
TP17
*
*
*
Overall conclusion
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Conclusion on TP 17
In particular from a holistic point of view: new measures as an attractive solution
in combination with
low ordinary tax rates
consideration of substance approach (i.e. other income)
IP driven reform as a clear sign of commitment to Switzerland as a location for
research and industry
Effective tax rate as low as 12% without tax planning!
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Know where you are headed: impact analysis
What would be the
effect of the
abolishment of
privileged tax
regimes?
What would the
introduction of a
patent box imply?
What would the
impact of additional
R&D reductions be?
How can I benefit
from transitional
measures?
TP17 could already be a reality as of 2020. Do you know how this would affect your company?
Provide your company with the data necessary for predictive business decisions.
Q&A
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Your regional contacts
Central-Switzerland Region
Markus Vogel
Landis + Gyr-Strasse 1
CH-6301 Zug
T: +41 58 249 49 64
Zurich and Ticino Region
Stefan Kuhn
Badenerstrasse 172
CH-8036 Zürich
T: +41 58 249 54 14
Eastern-Switzerland Region
Peter Michael
Bogenstrasse 7
CH-9001 St. Gallen
T: +41 58 249 25 54
Basel Region
Reiner Denner
Viaduktstrasse 42
CH-4002 Basel
T: +41 58 249 42 40
Bern-Mittelland Region
Hans Jürg Steiner
Hofgut
CH-3073 Gümligen-Bern
T: +41 58 249 20 57
Western-Switzerland Region
Janick Pochon
Avenue du Théâtre 1
CH-1002 Lausanne
T: +41 58 249 46 45
Thank you!
Annex
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Content of the new proposalCTR III TP 17
— Abolishment of cantonal privileged tax regimes
with transitional measures (special tax rate)
— Abolishment of cantonal privileged tax regimes
with transitional measures (special tax rate)
— Increase of the canton‘s share of direct federal tax
revenues from 17% to 21.2%
— Increase of the canton‘s share of direct federal tax
revenues from 17% to 21.2%
— Lump sum tax credit for Swiss branches of foreign companies — Lump sum tax credit for Swiss branches of foreign companies
— Step-up upon relocation to Switzerland — Step-up upon relocation to Switzerland
— Patent box (output incentive) – potential inclusion of software — Patent box (output incentive) up to 90% – exclusion of software
— R&D super deduction (max. 50%) — Additional R&D deduction (max. 50% on defined basis)
— Overall limitation at 80% — Overall limitation at 70%
— Relief on capital taxes for equity relating to investments,
patents and similar rights and intercompany loan assets
— Relief on capital taxes for equity relating to investments and
patents and similar rights (without intercompany loan assets)
— Increase of dividend taxation for individuals
– direct federal tax: 70%
– cantonal tax: at least 70%
— Consideration of the cities and municipalities regarding financial
support by the confederation (cantons stay autonomous)
— Increase of child and education allowance by CHF 30
— Strengthening of the rules regarding the transposition for Swiss
resident individuals
— Notional Interest Deduction (NID) — No “NID”
Legende
Adopted parameters Adjusted parameters Not adopted / new parameters
Source: Swiss Federal Tax Administration
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Indicative impact of TP 17 per company typeAbolishment
tax status
Reduction
income taxPatent box
R&D super
deduction
Relief on
capital taxConclusion
SME
Holding company (pure)
Holding company
(incl. other income)
Industrial company
(domestic production)
R&D company
Financial institution
International trader
Group financing
Trademark
administration
tax reducing, compensation
tax increasing
Legend
1) potentially regarding capital tax
2) If patent available
3) without / with tax status
1)
2)
3)
neutral
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governing auditor independence.
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legal entity. All rights reserved.