Trump’s tax reform and Switzerland
May 04, 2017

Trump’s tax reform and Switzerland

US tax reform is one of President Trump’s key campaign promises. If it materialises, economic relations between the US and Switzerland will change significantly.

With a volume of 224 billion dollars, Swiss companies are the seventh largest foreign direct investors in the US. We export 52 billion dollars in goods and services to the US annually. Five hundred Swiss companies provide 460,000 jobs in the US and 1,600 American companies provide 86,100 jobs in Switzerland. In light of these substantial figures, showing a strong interest in Uncle Sam’s tax policies is a must.

The corporate taxation system in the US is getting very long in the tooth. The tax rate at the federal level is around 34 percent. There are countless special rules. And most notably, the system incentivises American companies to generate profits overseas and not repatriate them to the US.

The new power brokers in tax matters, President Donald Trump, House Speaker Paul Ryan, Kevin Brady, Chairman of the House Ways and Means Committee, and Chair of the Senate Finance Committee Orrin Hatch, are determined to tackle the reform.

The House Blueprint

What do they want to change? Among other things, the so-called Republican House Blueprint aims to:

  • Transform the existing income tax into a 20 percent “Cash Flow Tax” (the cost of investments would be deducted immediately, there would be no deduction of interest expenses and other deductions, exports would be exempted and imports taxed additionally).
  • Foreign income that has to date not been repatriated would be taxed in the US.
  • A Border Adjustment Tax (BAT), similar to a value-added tax system, would be applied to all imports to the US.

The White House Proposals

In parallel to the above Republican House proposals Finance Minister Steven Mnuchin and Advisor to the President Gary Cohn announced their own ideas for tax reform on April 26. Basically, they would:

  • Lower the corporate income tax rate to 15%,
  • also tax foreign income that has to date not been repatriated to the US,
  • but not introduce a BAT.

For the layperson, this likely sounds like a lot of technical or tax jargon. To put it in clear terms, it would come down to more or less the following: If a BAT and Cash Flow Tax are introduced, our exports to the US would become much more expensive compared to domestic providers. Does a tax that protects imports make sense in terms of US competitiveness? I have my doubts about that. Wouldn’t providers in the US just raise their prices, to slightly below the cost of imports? Furthermore, American companies in Switzerland would face having to pay taxes for a second time on their income held and already taxed in Switzerland. Whether this would even be possible under the prevailing double taxation agreement would have to be examined.

The way things look at present, the reform would be disadvantageous for the Swiss economy with respect to the US. However, we are still far from hearing what the final say will be in the US. Therefore, although there is no need to give way to agitation at the moment, we should keep an eye on the matter.