Rechtswissenschaftliches Institut La Riforma III dell’imposizione delle imprese tra compatibilità e competitività SUPSI, La Riforma III dell’imposizione delle imprese 25 September 2014 René Matteotti Professor of Law, Attorney at law Chair of Swiss, European and International Tax Law University of Zurich Tax Counsel, Baker & McKenzie Zurich
Rechtswissenschaftliches Institut Table of Content • A brief introduction to the Corporate Tax Reform III • Which «international standards» apply? • Which repercussions does international standards have on the design of an IP-Box? • «Step up» and «grandfathering» as the silver bullets? • Conclusions 24 September 2014 Seite 2
Rechtswissenschaftliches Institut A brief introduction to the Corporate Tax Reform III 24 September 2014 Seite 3
Rechtswissenschaftliches Institut Overview Compensating measures BEPS OECD � IP-Box (promotion of R&D) � Interest adjusted corporate tax Harmful Tax Practices Reduction of corporate income tax (cant.) Code of Conduct Further measures Actionplan � EU Step-up � Issuance tax on equity capital � Participation exemption � Prohibition of Capital tax � Unlimited loss carry-forward State Aid � etc. Legal certainty through international acceptance Enhancement of international competitiveness (Attractiveness of Switzerland) 24 September 2014 Seite 5
Rechtswissenschaftliches Institut Memorandum of Understanding with EU Press release of Federal Department of Finance on 20 June 2014 “New tax measures should be in line with international standards. In return, the EU member states confirm their intention to lift corresponding countermeasures as soon as the regimes in question have been abolished . “ � Which international standards? Prohibition of state aid? � When will «the regimes in question» be regarded as abolished? 24 September 2014 Seite 6
Rechtswissenschaftliches Institut Consultation on Corporate Tax Reform III On 22 September 2014, Federal Council started consultation on CTR III and published legislative draft. Key points: • Abolishment of cantonal tax regimes, federal tax practice re principal companies and Swiss finance branches • New regimes to be implemented • IP-Box (based on British model) • Interest-adjusted corporate tax (notional interest deduction on safety- equity) • Reduction of corporate income tax rates on cantonal level (falls into cantonal autonomy) • Selection of further measures to improve the tax legislation system • Comprehensive rules for the disclosure of hidden reserves (step-up) • Abolition of issuance tax on equity capital • Adjustments to participation exemption • Unlimited loss carry-forward • etc. 24 September 2014 Seite 7
Rechtswissenschaftliches Institut Which «international standards» apply? 24 September 2014 Seite 8
Rechtswissenschaftliches Institut Overview Compensating measures BEPS OECD � IP-Box (promotion of R&D) � Interest adjusted corporate tax Harmful Tax Practices Reduction of corporate income tax (cant.) Code of Conduct Further measures Actionplan � EU Step-up � Issuance tax on equity capital � Participation exemption � Prohibition of Capital tax � Unlimited loss carry-forward State Aid � etc. Legal certainty through international acceptance Enhancement of international competitiveness (Attractiveness of Switzerland) 24 September 2014 Seite 9
Rechtswissenschaftliches Institut OECD Base Erosion and Profit Shifting Guidelines for the Corporate Tax Reform III International Coherence Transparency • Zero- or low taxation � Harmful Tax Practices • Clear legal framework (Action 5) • Qualification conflicts • Mutual administrative assistance in � Hybrid Missmatch Arrangements relation to companies (Action 2) • Ring-fencing • Disclosure of aggressive tax planning � Harmful Tax Practices (Action 12) (Action 5) • Allocation of tax base • TP documentation and CbC-Reporting � Conformity of TP with substance (Action 13) (Action 8-10) Counter-Measures 24 September 2014 Seite 10
Rechtswissenschaftliches Institut Potential measures to combat the distorting effects of harmful tax competition • Denial of deductions, exemptions or tax credits on payments to companies which are resident in countries with harmful tax measures • Increased disclosure requirement in relation to transactions in which countries with harmful tax measures are involved • Effective CFC legislation • Refusal of tax credits or tax exemptions for dividends received from companies resident in a country with harmful tax measures • Source tax on payments to persons resident in a country with harmful tax measures • Termination or suspension of DTT 24 September 2014 Seite 11
Rechtswissenschaftliches Institut Overview Compensating measures BEPS OECD � IP-Box (promotion of R&D) � Interest adjusted corporate tax Harmful Tax Practices Reduction of corporate income tax (cant.) Code of Conduct Further measures Actionplan � EU Step-up � Issuance tax on equity capital � Participation exemption � Prohibition of Capital tax � Unlimited loss carry-forward State Aid � etc. Legal certainty through international acceptance Enhancement of international competitiveness (Attractiveness of Switzerland) 24 September 2014 Seite 12
Rechtswissenschaftliches Institut EU Code of Conduct / Actionplan of the EU Zero- or low taxation Potentially harmful tax measures (PHTM) Significantly lower effective level of taxation and non-taxation in comparison to the general level of taxation in the relevant EU Member State The general level of taxation can be measured through the nominal tax rate, the tax base or other relevant factors 24 September 2014 Seite 13
Rechtswissenschaftliches Institut EU Code of Conduct Criteria 1. Benefits are only granted to foreigners or for transactions with foreigners Ring- fencing 2. Benefits are completely isolated from the domestic economy so that they have no impact on domestic tax basis 3. Benefits are granted regardless of actual business activity and business substance in the member country granting the tax benefits 4. Deviation from internationally accepted principles, in particular from the tax principles set by the OECD 5. Lack of transparency 24 September 2014 Seite 14
Rechtswissenschaftliches Institut European State Aid Prohibition Legal Basis Art. 107 Treaty on the functioning of the European Union (TFEU, ex-Art. 87 TFEC) (1) Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States , be incompatible with the internal market. Art. 23 Free Trade Agreement between Switzerland and the EU (1) The following are incompatible with the proper functioning of the Agreement in so far as they may affect trade between the Community and Switzerland,(…) iii) any public aid which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods. 24 September 2014 Seite 15
Rechtswissenschaftliches Institut European State Aid Prohibition Selectivity Regional Selectivity Selectivity De jure Selectivity De facto Selectivity Results directly from May result from Substantive legal criteria to grant requirements or a benefit that is obstacles that prevent Selectivity restricted to certain companies formally determined from claiming a benefit companies 24 September 2014 Seite 16
Rechtswissenschaftliches Institut Which repercussions does international standards have on the design of an IP-Box? 24 September 2014 Seite 17
Rechtswissenschaftliches Institut IP-Box (proposed system) • Qualifying entities • Legal entities which are owner or beneficiary of a qualifying IP • Legal entities with exclusive license on qualifying IP • Qualifying IP • Patents • Supplementary protection certificates • Exclusive license to a patent and the so-called first to file protection in accordance with Article 12 of the Swiss Law on Therapeutic Products • Substance requirements • Qualifying entity must make a significant contribution to the development or further development to the invention underlying the qualifying IP • Calculation of the relevant profit based on the so-called residual method • Tax relief • Maximum 80% of the boxes success may be excluded from the tax base Cantons may grant further tax relief in justifiable cases • 24 September 2014 Seite 18
Rechtswissenschaftliches Institut Legal uncertainty regarding the European state aid rules and Code of Conduct 1. Decision of the Commission regarding the Spanish R&D regime 2008 � Broad definition of royalty payments, less selective 2. EFTA-decision regarding the Liechtenstein R&D regime 2011 � No selective differentiation since all companies may benefit 3. Decision of the Commission regarding Gibraltar 2013 � Is already the differentiation between types of income selective? 4. Press release of the Commission regarding Luxembourg R&D 2014 � Mobile companies as particular type of company? 5. Preliminary examination of the EU Code of Conduct Group regarding the UK patent box 2013 � Substance requirements regarding R&D activities? 24 September 2014 Seite 19
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