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June 26, 2019

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“Switzerland would be heavily impacted”

“Switzerland would be heavily impacted”

By the end of next year, the Organisation for Economic Co-operation and Development (OECD) aims to react with comprehensive measures to the tax-related challenges posed by digitalisation. Raoul Stocker, corporate tax specialist at Deloitte, explains what this means for Switzerland.

Portrait Raoul Stocker.jpeg
Raoul Stocker, corporate tax partner at Deloitte, Switzerland
The latest OECD initiative is being conducted under the motto “Addressing the Tax Challenges of the Digitalisation of the Economy”. The OECD recently proposed possible solutions to this end. Who are these objectives aimed at?

With its initiative, the OECD is not just targeting digital companies. Instead, it is very generally targeting companies that offer and sell products and services on the international markets – be it in the traditional sense, with a relevant local representation, or in a very streamlined manner with the help of digital business processes. The OECD, whose members consist of the most important industrialised nations, aims to use the initiative to re-allocate the taxing rights for corporate profits between countries. Corporate profits are also to be taxable if the internationally active companies concerned do not have a physical presence in a country, but only a digital presence. In the future, purely digital access to users, data or customers is therefore to be sufficient for the company to be obliged to pay corporate taxes in a country. The OECD tends to want to take this one step further: it is of the opinion that access to users, data or customers makes a significant contribution to the value creation of an international company. This would mean that companies that operate internationally would be forced to allocate a substantial part of their profits to the countries in which they operate for taxation.

What is the OECD’s motivation and what are the drivers behind the efforts to tax the digitalised economy?

I see two key drivers: firstly, to date, the prevailing taxing rights for corporate profits have been linked to a physical presence in a country (through a group company or a subsidiary). With the increasing digitalisation of business processes and new instruments for customer communication, a physical presence in sales markets is no longer necessary, or at least not to the same extent. Taxes flow to countries in which the corporate headquarters are located but which are not relevant sales markets. The OECD wants to change this practice, which is regarded by some as an unfair allocation of tax revenues. Secondly, the financial needs of countries with major sales markets are growing. These countries of course finance themselves through tax revenues and are now calling for the OECD to adjust the prevailing international taxing rights for corporate profits so that a greater share is allocated for taxation to countries that have many users, data or customers.

As an export country, would Switzerland be particularly affected?

Switzerland is doubly export-oriented; many company headquarters and internationally oriented SMEs are located here. In addition to this, we are a comparably small sales market. Such a change to the rules on taxing rights for corporate profits would therefore have a heavy impact on us. To date, a not insignificant share of corporate profits has been allocated for taxation to the country in which the central functions are located. Now, a significant proportion of corporate profits are to be allocated to the sales markets for taxation. Switzerland’s tax share of such profits would likely be miniscule due to the relative size of the Swiss market. The Swiss tax authorities would therefore have to prepare for heavy losses.

How would Switzerland’s typical sectors be affected by a change to the system?

That is difficult to predict. In principle, and assuming that the OECD proposals that have been published are accepted in one form or another, all companies that operate internationally and are domiciled in Switzerland will probably have to allocate a larger proportion of their profits to the sales markets in which they operate for taxation purposes, irrespective of their sector. Because most of these sales markets have higher corporate tax rates than Switzerland, the tax rates for Swiss companies would likely increase in the future.

What are the next steps and how high do you think the chances of success will be for the OECD initiative?

The OECD is based on the principle of consensus; measures can only be implemented if all OECD member states (including Switzerland) agree to them. However, recent developments have shown (for example BEPS, the OECD's initiative against "Base Erosion and Profit Shifting") that such a consensus can be reached relatively quickly in the area of corporate taxation, despite the fact that member states have significantly different interests. The OECD recently reaffirmed that new rules on the taxing rights for corporate profits are to be adopted by the end of 2020. What such rules will look like in concrete terms will be the subject of detailed discussions and negotiations within the OECD. However, the introduction of new rules for taxing rights would probably also mean that domestic tax laws, existing double taxation agreements and other multilateral instruments would have to be adapted accordingly.