Switzerland: Selected Issues and Statistical Appendix
Author:
International Monetary Fund
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Publication Date:
05 May 1999
eISBN:
9781451807165
Language:
English
Keywords:
ISCR; CR; tax burden; income tax; rate of return; double taxation; transfer tax; retained earnings; rate bracket; Consumption taxes
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This Selected Issues paper and Statistical Appendix compares two alternative time series approaches to analyzing Switzerland’s recent business cycle experience: first, the traditional “smooth-trend-plus-cycle approach,” which envisages observed output growth as fluctuating around a relatively smooth potential output growth path; and, second, the more recently developed “regime change approach,” which views business cycles as shifts between “high-growth” states (expansions) and “slow-growth” states (recessions) of the economy. The paper also examines Switzerland’s monetary policy framework, and describes the challenges to the Swiss tax system.

Abstract

This Selected Issues paper and Statistical Appendix compares two alternative time series approaches to analyzing Switzerland’s recent business cycle experience: first, the traditional “smooth-trend-plus-cycle approach,” which envisages observed output growth as fluctuating around a relatively smooth potential output growth path; and, second, the more recently developed “regime change approach,” which views business cycles as shifts between “high-growth” states (expansions) and “slow-growth” states (recessions) of the economy. The paper also examines Switzerland’s monetary policy framework, and describes the challenges to the Swiss tax system.

III. Challenges to the Swiss tax system27

A. Introduction and Summary

65. Switzerland has a complex tax system, likened by some observers to a “jungle.”28 This chapter describes Switzerland’s tax system and the key domestic factors—the internal institutional features of direct democracy and a highly decentralized government structure—that may have hampered its adaptability. It then considers how external developments seem likely to pose particular challenges for the Swiss tax system. Increasing integration into the EU and globalization have intensified pressures for comprehensive tax reform, and Switzerland has already begun to adapt elements of its tax system to EU benchmarks to prevent tax revenue losses.

66. To highlight distinct features of the Swiss tax system, Section B compares trends in the tax burden in Switzerland with those in the EU member states. As in most other industrial countries, the increase in the tax burden since the 1970s has primarily fallen on labor. However, the greater dependence on the taxation of immobile factors has been more narrowly based in Switzerland than elsewhere. In contrast to the EU states, the share of indirect taxation in total tax revenues and the rate at which consumption is taxed are significantly lower in Switzerland.

67. The complexities stemming from the decentralized tax system are particularly marked in the area of direct taxation. Section C reviews the personal and corporate tax codes in Switzerland and highlights how lack of harmonization in tax base definitions and in collection procedures across cantons and the Confederation reduces transparency. Moreover, the interaction of various provisions in the corporate tax code result in a tax system that is non-neutral with respect to the method of financing investments. In particular, at the canton level, the taxation of profits from corporations—as a progressive function of the ratio of profits to equity capital and reserves—favors investment that is financed by retained earnings or debt. The absence of personal capital gains taxation together with the “double taxation” of distributed dividends further favors the use of retained earnings.

68. Section D identifies the areas of Switzerland’s tax system that are subject to, or will become increasingly sensitive to, external pressure for change. Because the internationalization of markets has had a particularly marked impact on the mobility of capital, the pressures that arise from cross-country differences in tax codes are the most immediate in the areas of capital and business income taxation, and taxes on financial transactions. The stamp duty on financial transactions is a particular example of where greater mobility—stemming from the introduction of remote access facilities to Switzerland’s stock exchange—reduces the ability to raise tax revenue. Further attempts at harmonizing taxation in Europe may also intensify the political pressure on Switzerland to change its system for withholding taxes on interest income.

69. The review of internal and external challenges leads to the discussion in Section E of two broad policy directions:

  • First, tax policy should tackle the root of the inefficiencies in the domestic tax system—the lack of harmonization in tax base definitions and collection procedures between cantons—by reforming the direct taxation laws.

  • Second, a shift from direct to indirect taxes through higher consumption and ecological taxation would raise the efficiency of the tax system. It would have the added advantage of reducing vulnerability to international competitive tax pressures.

B. International Comparisons and Recent Trends in Swiss Tax Revenues

70. When compared with the EU average, the level of taxation in Switzerland is quite low: including (excluding) social security contributions, the tax burden was 7.7 (8.5) percentage points lower than the EU average in 1996 (Figure III-1).29 Two pressures have helped contain the shift toward a higher tax burden which has characterized the EU experience. First, taxpayers in Switzerland can express their preferences concerning the level and structure of the tax burden via the referendum and initiative processes. Switzerland’s experience with the introduction of VAT—which was first proposed in 1977 and only approved in 1995 following three referenda—demonstrates how Swiss voters can successfully impact tax policy. Second, the migration of taxpayers to other cantons with more competitive tax regimes may have constrained the ability of each canton to raise its tax income.30

Figure III-1.
Figure III-1.

Switzerland: Change in Tax Burden, 1970-96

(In percent)

Citation: IMF Staff Country Reports 1999, 030; 10.5089/9781451807165.002.A003

Source: OECD Revenue Statistics, 1998.

71. The comparatively low level of taxation notwithstanding, the growth of the overall tax burden in Switzerland between 1970 and 1996 was higher than the EU average, with social security contributions and personal income taxation accounting for around 64 percent and 30 percent of that growth, respectively. The rise in the overall tax burden appears unusually high by EU standards; however, excluding social security contributions reduces the growth in taxation to within 1 percentage point of the EU average (see second panel of Figure III-1). Also, the rise in the EU tax burden was more broadly based, with consumption taxation playing a larger role. The largely unchanged tax burden on consumption in Switzerland has contributed to the dominance of direct taxes (including social security contributions) over indirect taxes in overall tax revenues (Table III-1).

Table III-1.

Switzerland: International Comparison of the Composition of Tax Revenues, 1996

(In percent of total tax revenues)

article image
Source: OECD Revenue Statistics (1998).

72. To encapsulate how the composition of the tax burden differs between Switzerland and other countries, the methodological approach by Mendoza, Razin, and Tesar (1994) is used to assess the average tax burden on consumption, labor income, and capital income in various countries. Effective average tax rates are computed by summing all taxes paid by economic function and then dividing by the relevant tax base (consumption, labor income, and capital income) as measured in the national accounts.31 For Switzerland, estimates of these rates confirm that the imbalance between direct and indirect taxes is mainly attributable to the low tax burden on consumption. However, substantial revenues are raised by capital-based taxes and this contributes to the larger share of direct tax revenues in Swiss tax revenues.

73. The effective tax rate on consumption in Switzerland has fluctuated in a narrow range around 8 percent of the pre-tax value of private consumption throughout the 1980s and 1990s (Figure III-2). In other European countries the effective tax burden on consumption is at least twice that in Switzerland. The low tax burden on consumption is mainly the result of the low standard VAT rate (7.5 percent), which is significantly below the average standard rate of VAT in the EU (19.4 percent).32

Figure III-2.
Figure III-2.

Switzerland: Effective Tax Burden on Consumption, Labor Income, and Capital Income, 1984-95

Citation: IMF Staff Country Reports 1999, 030; 10.5089/9781451807165.002.A003

Sources: OECD National Accounts, 1984-95; OECD Revenue Statistics; and staff calculations.

74. As regards the taxation of labor income (including social security contributions), the effective average tax burden on labor income in Switzerland has displayed an upward trend in line with the experience in most other European countries. Only the United Kingdom and the Netherlands saw a decline in the tax burden on labor between the 1980s and 1990s. Despite its upward trend, the effective average tax burden on labor income in Switzerland still remains one of the lowest in Europe (Figure III-3), and the top marginal income tax rate (51.4 percent) is below the average EU top marginal rate (53.8 percent).

Figure III-3.
Figure III-3.

Switzerland: Statutory and Effective Average Tax Rates on Consumption and Personal Income

(In percent)

Citation: IMF Staff Country Reports 1999, 030; 10.5089/9781451807165.002.A003

1/ With social security contributions.Sources: The OECD Tax Data Base (1998); and staff calculations.

75. The picture with respect to capital income is the opposite to that on labor income. The effective tax burden on capital income in Switzerland is significantly higher, at around 33 percent, than in most other European countries. With the exception of Austria and the Netherlands, the growth of the capital tax burden in other countries declined between the 1980s and 1990s, while it rose in Switzerland.33

C. Complexities in the Swiss Tax System

76. Evaluating the burden of the Swiss tax system on the basis of the ratio of tax revenues to GDP can be misleading because the efficiency and administrative costs incurred in the collection of the tax revenue are not included. Owing to differences in the structure of tax systems, in particular with regard to tax bases and tax rates, the efficiency costs of taxation can vary significantly between countries. In Switzerland, this issue is further complicated by the decentralized structure of government: the constitution allows the federal government, the 26 cantons, and the 3,000 communes to levy their own taxes to meet their expenditure requirements. In the area of direct taxation, all three levels of government levy personal and corporate income taxes which has generated a complex tax system with high administrative costs.34

Personal income and wealth taxation

77. Individuals resident in Switzerland on a permanent or temporary basis are liable to pay personal income tax to each of the three levels of government through their canton of residence. A supplementary wealth tax is levied in all the cantons and communes. Each canton assesses and collects the taxes that are due to each level of government and the taxpayer must complete separate columns in the tax return form to estimate the amount due in Confederation and cantonal taxes.35

78. Personal income and wealth taxes are normally assessed every two years and the long lag in the collection of personal income taxes imposes important macroeconomic costs. At the federal level, income tax liability is calculated on the basis of the average income earned in the two-year period that precedes the assessment period. For example, the federal income tax to be paid in 1998 and 1999 is calculated on the basis of the average income earned in 1996 and 1997. At the canton level, collection lags for income and wealth taxes are generally longer but the canton of Basel-Stadt assesses and collect taxes on a current-year basis.36 The lag between income tax accrual and income tax collection reduces the real value of tax revenues. For example, an average collection lag of three years and an annual inflation rate of 3.6 percent (the average Swiss inflation rate during 1970-98) reduces the real value of income tax collections by about 10 percent, equivalent to about 0.8 percent of GDP given current income tax collections of 13 percent of GDP. Moreover, the long collection lags also reduce the ability of the effectiveness of the automatic fiscal stabilizers.37

79. The efficiency and compliance costs of the Swiss tax system are compounded by the variation in the definition of the personal income tax base between the Confederation and the cantons. Generally, all sources of income earned by residents in Switzerland are taxable: wages, salaries, and any associated income such as bonuses; income from self-employment; unemployment benefit or sickness insurance; compensatory income such as annuities and pensions; dividends, interest, rents, and capital gains; and finally, benefits in kind such as the imputed rents from owner-occupied housing. However, some specific categories of income are treated differently for tax purposes by the Confederation and cantons.

80. Old age and disability pension benefits are fully liable for income tax at the Confederation and canton levels38 but the tax provisions for lump-sum payouts from the second and third pillars of the social security system vary. For federal income tax purposes, lump-sum pension payments attract tax at 20 percent of the standard Confederation tax rate. Although some cantons follow the Confederation and levy income taxes on lump-sum pension payouts, other cantons prefer to tax these payments separately from income by applying either a special tax or a separate tax rate that is between 10 percent and 40 percent below the standard cantonal tax rate.

81. Personal income and wealth tax exemptions and the rules governing permissible deductions also range in generosity across the cantons. The tax laws that adjust family income for the number of dependents and double-income couples differ greatly.39 Income exemptions to single individuals or allowances for dependents and children are not granted in all the cantons. Deductions from gross taxable income of part of the contributions paid into the fixed-term saving schemes of the third pillar of the social security system can be made in all but seven cantons, but elsewhere the maximum allowable deduction varies. For example, single (and married) individuals can subtract a maximum of Sw F 3,600 (Sw F 7,200 for married couples) from gross taxable income in the canton of Ticino but only Sw F 500 (1,000) in the canton of Basel-Stadt.

82. In addition to the above, various other differences exist in the taxation of personal income and wealth. In some cantons, bonus shares are not taxed. Poll or household taxes are levied on household income in some cantons. In most cantons, an annual property tax is levied on the market value of property, but some cantons also levy a special property gains tax. With the exception of the canton of Graubünden, the cantons and Confederation do not levy income taxes on private capital gains derived from the sale of movable property such as company shares.

83. As a result of the differences in direct taxation rules and tax rates, top marginal tax rates and the direct income tax burden vary widely. In 1998, the top marginal tax rate for federal income tax was 11.5 percent. But for the cantons, the top marginal tax rate on personal income ranged from a minimum of 2.4 percent on all taxable income in the canton of Obwalden, to 29 percent when income exceeded Sw F 1.25 million in Basel-Stadt. As illustrated in Table III-2, the personal income tax and the total tax burden is almost doubled or halved depending on the canton of residence. Even neighboring cantons sometimes have large permanent differences in the tax burden, for example, Zürich and Zug (77 and 55.1 points), or Basel-Stadt and Basel-Land (111.2 and 88.4 points).

Table III-2.

Switzerland: Indices of Tax Burden and Public Expenditures by Canton, 1996

(Index, average = 100)

article image
Source: Statistisches Jahrbuch der Schweiz (1998), Öffentliche Finanzen der Schweiz (1996).

84. The differences in the tax burden would be expected to reflect both differences in the cost and provision of public goods and services across cantons moderated by the impact of tax competition between the cantons for individuals and firms. However, the actual divergence between the tax burden and the level of services provided by cantons illustrated in Table III-2 is striking. Divergences in the type and structure of direct income and wealth taxes across the cantons are likely to have resulted in larger allocative inefficiencies because some locational decisions may have been influenced by the pecuniary advantages of taxes offered in different cantons. With respect to equity, the ability of poorer and less populated cantons to compete with larger cantons offering more favorable tax regimes is questionable. And many city cantons have suffered financing difficulties as taxpayers have migrated to neighboring cantons but the burden of public services and amenity provision has continued to grow. While the increase in property prices in less taxed cantons may have compensated for differences in the tax burden, this has benefited private individuals and not the public sector. More generally, the assumption that the divergence in the tax cost of public service provision is the outcome of competition between cantons may need some qualification because language differences within Switzerland can inhibit the migration of workers between cantons.

Corporate taxation

85. Corporate income and capital taxes are levied by the Confederation, the cantons, and the communes on all joint-stock and limited liability companies that are either registered in, or effectively managed from, Switzerland. The taxes paid to the three levels of government are generally payable on a corporation’s world-wide profits and capital in the canton of registration.40 However, if a corporation has branches across a number of cantons, profits and capital are assigned pro rata across the cantons where the registered office and branches are located and each canton levies its own taxes on the proportion of profits and capital that are assigned to it. Thus a corporation receives a tax bill from each of the cantons in which it operates; Confederation taxes are paid only in the canton of registration. Unlike personal income taxes, corporate taxes are assessed on a current-year basis.

86. The proportion of profits paid in taxes varies with the definition of taxable profits and the tax rates used in each of the cantons. Generally, net taxable profit is obtained by adjusting a firm’s balance sheet profits for commercially justified expenses but the permissible deductions vary. For instance, some cantons do not permit the deduction of Confederation, cantonal, and commune taxes; the period for the carry forward of the previous year’s business losses is different by canton; and the treatment of depreciation and the depreciation rates on specific assets diverge. Corporate income tax schedules vary as well. In 1997, the Confederation replaced its three-step schedule of corporate tax rates based on the ratio of a company’s profits to its equity with a single proportional tax of 8.5 percent, but many cantons still levy taxes on this basis. In 1998, 13 cantons levied a graduated corporate income tax that varied with the ratio of profits to equity, 5 levied a tax that was a linear function of the profit equity ratio, and the remainder levied a single proportional tax.

87. The corporate tax system imposes large administrative costs, especially on firms that operate in several cantons because they must fill out multiple non-uniform tax return forms and deal with the complications arising from the dissimilarities in the corporate tax rules. The compliance costs are particularly burdensome for small and medium-sized enterprises (SMEs). It has been estimated that the compliance costs imposed by the tax system amount to an average of Sw F 14,000 per SME per year.41 The OECD (1997) reported that these costs represent more than 40 percent of the estimated costs on SMEs from government regulations and amount to about 3 percent of spending on total machinery and equipment.

88. In addition, since the corporate tax liability is determined on the basis of the ratio of profits to equity, firms face large changes in the marginal tax rate that vary with the tax rate and type of tax schedule. For instance, when corporation taxes are calculated as a linear function of the ratio of profits to equity, the marginal tax rate changes dramatically as the ratio of profits to equity increases. In Figure III-4, the marginal tax rate in the canton of Zug drops from 22 percent to 11 percent (the average tax rate) when the ratio of profits to equity increases from 14 percent to 15 percent. The changes in the marginal tax rate are less sharp in the cantons which levy a graduated corporate income tax on the return to equity.

Figure III-4.
Figure III-4.

Switzerland: Company Taxation in the Canton of Zug, 1998

Citation: IMF Staff Country Reports 1999, 030; 10.5089/9781451807165.002.A003

Source: IMF staff calculations.

89. At a more aggregate level, the various provisions in Switzerland’s tax law—the taxation of profits on the basis of the ratio of profits to equity, the full deductibility of interest payments, the taxation of distributed profits at the corporate and personal level, the taxation of share issuances, and the absence of personal capital gains taxation—have resulted in a corporate tax system that is non-neutral with respect to investment financing decisions. For instance, the taxation of profits on the basis of the ratio of profits to equity encourages investments that are financed through retained earnings or equity issues, and investment financed by retained earnings avoid the “double taxation” of dividends.

90. The impact of various tax provisions on investment decisions in Switzerland can be assessed by calculating the tax wedge for investment (the divergence between the pre- and post-tax rate of return from an investment).42 The imposition of corporate and personal income taxes implies that a firm has to earn a higher pre-tax rate of return in order to match the prevailing rate of interest post tax.43 Differences in the tax treatment of various types of investment—machinery, construction, and inventories—and differences in the tax treatment of various types of financing—retained earnings, new equity, and debt—affect the size of the tax wedge.

91. The upper part of Table III-3 shows the difference between the pre-tax rate of return on a corporation’s marginal investment and the post-tax rate of return received by a corporate investor. The lower part of the table shows the effective tax wedge facing personal investors who are in the top personal income tax rate bracket.44 The overall average corporate tax wedge in Switzerland, excluding personal income taxes, is 0.4 percent (1.4 percent including personal taxes). This implies that the average pre-tax rate of return necessary to earn the equivalent to the post-tax rate of return on government bonds (5 percent) is 5.4 percent. However, the corporate tax wedge varies greatly by method of finance and by project; borrowing and machinery investment have comparatively low tax wedges.

Table III-3.

Switzerland: Marginal Effective Tax Wedges on Investments under the Current Tax Code 1/

article image
Source: Staff calculations.

Calculated using the 1998 inflation rate (0 percent) and a 5 percent real interest rate. Information on tax rates, deductions and allowances in Switzerland were taken from the OECD Tax Data Base (1998) which is based on the Confederation, canton and commune taxes paid in the canton of Zurich.

Tax wedge is the difference, in percentage points, between required pre-tax real rate of return and after-tax real rate of return received by investor. Tax rate (shown in parentheses) is defined as the ratio of the tax wedge to “the pre-tax real rate of return. For example, without personal income tax, the ratio of the average tax wedge (0.42) to the pre-corporate tax rate of return (5.42) was 7.76 percent.

92. The differential in the rate of return between assets represent a potential efficiency loss for the economy by affecting the direction of savings flows. At the corporate tax level, the full deductibility of interest payments and the stamp duty on equity issues bias investment toward debt financing. However, when personal income taxes are added to the tax wedge, the tax system favors investments financed by retained earnings. This reflects three influences: first, the taxation of profits on the basis of the return to equity; second, the “double taxation of dividends”; and third, the absence of effective personal capital gains taxation. This may in particular penalize new and expanding corporations that have limited self-financing capacity.

D. International Challenges to Taxation in Switzerland

93. The removal of controls on cross-border investments, the liberalization of foreign exchange regulations, and technological change have made financial transactions and capital income more mobile. Thus, the international challenges to tax systems resulting from closer economic integration, especially at the EU level, are most evident in these areas. In Switzerland, the stamp duty on the transfer of shares and the withholding system used to tax interest and dividend income are particularly subject to international pressures.

94. In response to competitive pressures from the EU, adjustments have already been made to the stamp duty levied by the Confederation on the issue of shares by corporations registered in Switzerland.45 These duties, which in 1995 stood at 3 percent of the value of share issues, have been quickly adjusted downward. The most recent adjustment, on April 1, 1998, saw the issuance stamp duty reduced from 2 percent to 1 percent, the maximum rate that applies within the EU. A stamp duty is also levied on the nominal value of newly issued bonds and money market paper.46

95. Unusual, by continental European standards, is the stamp duty that is levied on the dealings in securities by securities brokers in Switzerland (banks, fund management companies, large corporations, or stock brokers).47 The duty varies with respect to Swiss and foreign securities—domestic security transfers are subject to a 0.15 percent duty, and foreign securities, to a 0.3 percent duty. The rate applied also varies depending on the nature of the contracting partners; the duty is borne equally by the contracting partners when a broker acts as an intermediary; when a broker deals together with another contracting broker the duty is borne equally between them; when a Swiss broker deals in foreign securities with a foreign broker, the duty is halved.

96. The level of duty on securities transactions, which is high by international standards, discriminates against large transactions and against foreign transactions. Transfer stamp duties are reported to account for 40 percent of total transaction costs on volumes larger than Sw F 1 million.48 Another indicator of the comparatively high stamp duty rate is the large share of revenues from financial and capital transaction taxes in total tax revenues (Table III-4).49 The less favorable tax treatment of foreign securities transactions has also impacted the business strategy of Swiss banks that have participated in the share issues of foreign companies through foreign-controlled establishments. Meanwhile, domestic financial firms have lost some intermediation business with foreign partners.

Table III-4.

Switzerland: International Comparison of the Share of Financial and Capital Transaction Taxes in Total Tax Revenue, 1980-95

(In percent of total tax revenues)

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Sources: OECD Revenue Statistics (1998); and staff calculations.

97. The opening of the Swiss stock exchange to remote traders in 1999 will facilitate investment by Swiss brokers in foreign stock exchanges (and vice versa) and therefore increase the competitive tax pressures on stamp duty revenue. To ensure that the Swiss stock exchange is not at a competitive disadvantage relative to other European exchanges, the government has submitted a proposal to parliament to adopt the transfer tax on securities by exempting eurobond transactions on behalf of foreign clients and by eliminating double taxation of transactions on the new options/futures exchange (EUREX) established by the merger of Swiss and German exchanges in September 1998. Despite these changes, a transfer tax that treats large volume and foreign securities transactions unfavorably could put the Swiss securities exchange at a disadvantage and result in a loss of tax revenue as brokers take advantage of remote access facilities.

98. As EU members attempt to ensure some effective minimum taxation of interest payments, Switzerland is likely to come under increasing political pressure to change its withholding tax system.50 In contrast to other EU countries, withholding taxes are levied on all interest payments made to residents and nonresidents.51 Most other countries exempt nonresidents from withholding taxes. The coexistence of these two systems means that cross-border interest and dividend payments can go untaxed. For instance, an investor can avoid withholding taxes by investing in Swiss franc assets issued by foreign−based debtors. Moreover, income earned from trust funds based in foreign countries is also exempt from withholding taxes. As the EU attempts to move to a system where nonresident investors are subject to withholding tax or given the option to be taxed in their country of residence, external pressure to bring Switzerland’s system of withholding taxation into line with EU arrangements could be significant.

E. Directions for Tax Reforms

99. The discussion of the challenges posed both by Switzerland’s decentralized tax system and by the international competitiveness of capital income taxes suggests two broad directions for tax reforms: (i) the harmonization of the tax base definitions across the cantons and the Confederation; and (ii) a shift from direct to indirect taxes. While tax base definitions have been harmonized between the cantons and communes, a material harmonization of the Confederation and canton tax base definitions has not yet occurred. Opportunities to shift from direct to indirect taxes will arise in the context of decisions on raising the VAT rate to ensure the long-term financing of the social security system, and ecological tax reform.

100. Owing to various internal pressures, a formal harmonization of the decentralized system of direct taxation has already started in Switzerland. The 1990 Federal Law on the Harmonization of Cantonal and Municipal Direct Tax (StHG) provides a framework within which the cantons must define their direct taxation laws, particularly with respect to the tax liability of persons and legal entities, assets, and tax periods, by 2001.52 With the exception of the annual coefficient of taxation,53 the law has resulted in a real and formal harmonization of the direct income tax base between the cantons and the communes. However, the 1990 Federal Law on Direct Taxation (DBG) has not resulted in a material harmonization of the income tax base definition at the federal and lower levels of government54 The cantons are still free to define their own tax scales, the amounts of allowances and deductions, tax rates, and collection systems.

101. Under the StHG, the cantons have until 2001 to decide whether to assess and collect taxes on a current-year basis or to maintain their existing system. If most cantons have changed to the current-year assessment and collection system by the end of 2001, the federal government may also implement a similar system for its direct taxes and impose the system on those cantons which had not yet changed. To encourage the cantons to change and to compensate tax-payers for the administrative costs of annual assessment, the Confederation will reduce the federal income tax rate in those cantons that change. It is expected that when the larger cantons such as Zurich convert, the rest of the cantons will follow their example.

102. Notwithstanding the expected progress in the harmonization of income tax collection lags, further steps to ensure the material harmonization in the definition of income tax bases across the cantons would be desirable from the perspectives of fiscal neutrality and efficiency. Distortions in the use and allocation of resources stemming from the tax system would be minimized if the taxation of mobile tax bases were similar across cantons while material harmonization of tax base definitions would enhance the perceptibility of the tax system and reduce administrative and compliance costs. The financial constraints facing the mountain and the city cantons could be reviewed in the context of overall reform of inter-governmental relations. As regards corporate taxation, the compliance costs for firms that operate in several cantons could be reduced if they were taxed in only one canton. Finally, the neutrality of the corporate tax system would be enhanced by the introduction of proportional corporate tax rates at the cantonal level and by some minimum tax on personal capital gains.

103. An adjustment in the composition of the tax burden by shifting from direct to indirect taxes could improve the efficiency of the tax system because broad-based consumption taxes generally impose fewer distortions than direct taxes. From an employment and growth perspective, broad-based consumption taxes are more favorable than direct taxes because they spread the tax burden over the whole population instead of focusing on employees and lowering the required rate of return on investment. Moreover, higher consumption taxation would reduce the pressure from international tax competition by lowering the dependence on tax revenues raised from more mobile capital and personal income. Existing proposals to finance the social security system through increases in the standard VAT rate will help expand the share of indirect taxes in total tax revenues but will still leave the standard VAT rate substantially below the EU average (Table III-5). This suggests that there is even further scope for VAT rate adjustments.

Table III-5.

Switzerland: International Comparisons of VAT Rates and VAT Revenue

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Source: International Bureau of Fiscal Documentation, OECD Revenue Statistics (1998).

In 1999, the standard rate of VAT is to be increased by 1 percent to 7.5 percent.

104. Without any compensatory reductions in direct taxes, further increases in the standard VAT rate to the minimum in neighboring EU countries (15 percent) would have substantial revenue implications for Switzerland. However, a number of factors could reduce these initial budgetary gains. First, changes in demand could follow the VAT rise because the rise in prices could leave consumers feeling worse off because their income would purchase less than before. Second, VAT increases could affect frontier trade by pushing the Swiss price level even higher.55 Finally, rising VAT rates could also have macroeconomic repercussions on inflation, wages, interest rates, and exchange rates. While calculations are not available for Switzerland, it has been estimated for some EU countries that the initial impact of a VAT rate rise on the budget balance is reduced by a factor of two to three after five years.56

105. In line with initiatives taken in other countries, environmental taxation can be expected to play a growing role in efforts to shift the tax structure away from income taxation toward indirect taxes. Proposals already exist in Switzerland that stress the need to shift the tax burden away from wage income onto consumption and production, which have a negative effect on the environment. However, it is also important that environmental taxes be structured to give consumers correct incentives in their use of energy. In this regard, emission-based taxes (specific taxes on emissions) or indirect environmental taxes (carbon taxes on nonrenewable fossil fuels) could have positive effects on the environment, although the impact of such taxes on international competitiveness must be considered. Moreover, if effective in reducing emissions, green-taxes could undermine the tax base and generate lower tax revenues than predicted. Nevertheless, an environmental tax reform could seek to remove the hidden subsidies to environmentally damaging activities, such as the reduced VAT rate on fertilizers, that are embedded in the present tax system.

106. In conclusion, the challenges to the tax system in Switzerland are both domestic and external in origin. Currently, both the Confederation and the cantons can change tax rates and set tax bases. This has resulted in a lack of harmonization in tax base definitions across Switzerland that has increased the efficiency and compliance costs of the tax system. In addition, the dominance of direct taxes in overall tax revenues further raises economic efficiency costs. Externally, closer EU integration and globalization have increased the pressures for comprehensive reform, especially in the area of financial transaction taxation and interest income taxation. Two broad policies could address these challenges: the further harmonization of tax base definitions across the cantons and a strengthening of indirect taxation through increased consumption and ecological taxation.

APPENDIX I Effective Average Tax Rates Based on Macroeconomic Data

107. Mendoza, Razin, and Tesar compute effective average tax rates using national accounts and actual tax revenue data. These effective tax rates are consistent with the average tax rates faced by a representative agent in a general equilibrium setup. The numerators measure the difference between the before-tax and after-tax values of consumption, labor income, and capital income, approximated by the tax revenue collected from each tax. The tax bases in the denominators measure consumption, labor income, and capital income net of taxes.

Effective average tax rate on consumption

108. The effective average tax rate on consumption, τc, is calculated as the ratio of revenues from indirect taxation (general taxes on goods and services, tg, and excise taxes, te) relative to the net of tax value of consumption as the tax base,

τc=[(tg + te)/(C+G−Gw−tg−te)],

where the part of public consumption that is typically subject to indirect taxes excludes compensation of government employees, Gw.

Effective average tax rate on labor income

109. The effective tax rate on labor income, τ1, is derived in two steps, under the assumption that all sources of household income are taxed at the same rate. First, the average tax rate on total household income, τh, is calculated as the ratio of household income tax revenue, th, as a percent of the sum of wage income, W, households’ property and entrepreneurial income, Ph, and the operating surplus of unincorporated businesses, OSu.

τh = th/[W + Ph + OSu]

Second, the effective average tax rate on labor income combines the estimated tax on wages and salaries, τhW, with social security contributions, ts, and other payroll taxes, tp, and expresses it as a ratio to gross income from dependent employment (i.e., the sum of wages and salaries, W, plus employer-paid social security contributions, SE)

τl = [τhW + tS + tp]/[W + SE].

Effective average tax rate on capital income

110. The effective average tax rate on capital income, τk, is defined as the ratio of capital income taxes to the total operating surplus in the economy, OS.

τk = [τh(OSu + Ph) + tcorp + tprop + tfin]/OS.

Capital income taxes in the numerator are the sum of the estimated capital income tax paid by households, τh(OSu + Ph), the corporate income tax, tcorp, property taxes, tprop, and taxes on financial transactions, tfin.

APPENDIX II Marginal Effective Tax Rates on Investment

111. The measures of marginal effective tax rates on investments follow the methodology of King-Fullerton.57 Corporate and personal income taxes drive a wedge between the pre-tax real rate of return, p, on an investment, and the after-tax real rate of return, s. Thus, the tax wedge reflects the marginal effective tax rate on capital in that it measures the impact of tax on a marginal investment. The wedge can be thought of as the additional return needed to cover the cost of capital income taxes, and incorporates the statutory tax rate the structure of the tax system, and the definition of the tax base into one measure.

112. Consider an investment project with a depreciation rate of δ. The present value of the marginal investment project is calculated using information on the corporate tax rate, the economic depreciation rates of the assets involved, and the rate of inflation. Depreciation allowances and other tax incentives are denoted by A, and the net cost of an investment projection (1-A) is equal to the present value of the discounted future post-tax cash-flow. The pre-tax rate of return, p, is calculated as
p=[(1−A)(1−τ)(1+π)]{ρ−π+δ(1+π)}−δ

where τ is the corporate tax rate, ρ is the discount rate, and π is the inflation rate.

113. Suppose an investor can earn a nominal interest rate, i, on an alternative investment subject to a personal income tax rate of m. Then the post-tax rate of return, s, on the alternative investment is
s=[1+i(1−m)1+π]−1.

114. The marginal effective tax rate, t, on income from an investment project is defined as the ratio of the tax wedge (between the pre-tax rate of return on an investment, p, and the post-tax rate of return for an investor, s) and the pre-tax rate of return, p,

t = (p − s)/p

115. In the absence of taxes, the discount rate used to discount the project’s cash flow would be equal to the rate of return in the capital market, i. However, with corporate and personal taxes, the discount rate depends on how the investment project is financed. For example, for debt financing the appropriate discount rate is p=(1-τ)i, because interest payments are tax deductible for the corporation. For new equity issues, the discount rate is p=I/φ, where φ captures the different tax rates on retained earnings and distributed profits. For retained earnings, the absence of capital gains taxation implies that the discount rate is p=(1-τ)i.

STATISTICAL APPENDIX

Table A1.

Switzerland: Real GDP Developments

(Percentage changes at 1990 prices) 1/

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Source: Swiss Institute for Business Cycle Research, data tape.

For quarterly data, growth rates are with respect to the same quarter of the previous year.

Contribution to growth of GDP.

Table A2.

Switzerland: Components of Nominal GDP

(In millions of Swiss francs, at current prices)

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Source: Swiss Institute for Business Cycle Research, data tape.
Table A3.

Switzerland: Components of Real GDP

(In millions of Swiss francs, at constant 1990 prices)

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Source: Swiss Institute for Business Cycle Research, data tape.
Table A4.

Switzerland: Implicit Price Deflators

(Percent changes)

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Source: Swiss Institute for Business Cycle Research, data tape.
Table A5.

Switzerland: Household Disposable Income and Savings

(Percent change, unless otherwise indicated)

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Source: Swiss Institute for Business Cycle Research, data tape.
Table A6.

Switzerland: Labor Market

(In millions)

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Source: Swiss Institute for Business Cycle Research, data tape; Federal Statistical Office.
Table A7.

Switzerland: Prices, Wages, and Productivity

(Percentage changes) 1/

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Sources: Swiss Institute for Business Cycle Research, data tape; IMP, World Economic Outlook database.

For quarterly data, growth rates are with respect to the same quarter of the previous year.

Deflators for goods.

Table A8.

Switzerland: Federal Government Finances

(In billions of Swiss francs)

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Source: Federal Ministry of Finance.

Up to 1996 excluding railway loans.

Includes military procurement.

Includes loans to unemployment insurance fund.

Table A9.

Switzerland: Federal Government Tax Revenue

(In billions of Swiss francs)

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Source: Federal Ministry of Finance.

VAT was introduced at the beginning of 1995.

Table A10.

Switzerland: Federal Government Assets and Liabilities

(End-of-period; in billions of Swiss francs)

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Source: Federal Ministry of Finance.

Amount by which liabilities exceed all other assets.

Largely deposits of federal pension fund (EVK) with the federal government.

Difference between gross financial debt and financial assets.

Table A11.

Switzerland: General Government Finances

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Source: Federal Ministry of finance.

Excluding cash surplus of the civil servant pension fund from 1997 onwards including railway loans.

Table A12.

Switzerland: Interest Rates and Equity Prices

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Source: Bloomberg and WEFA.
Table A13.

Switzerland: Money and Credit

(Percentage changes over a year earlier)

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Sources: Swiss Institute for Business Cycle Research, data tape; IMF, International Financial Statistics database.

For 1998, January-October 1998.

Table A14.

Switzerland: Exchange Rate Developments

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Source: IMF, International Financial Statistics database.

Against the 21 most important trading partners.

Against the 10 most important trading partners and based on relative consumer prices.

Table A15.

Switzerland: Balance of Payments

(In billions of Swiss francs)

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Source: Swiss National Bank.
Table A16.

Switzerland: Volumes and Values of Merchandise Trade 1/

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Source: Swiss Institute for Business Cycle Research; data tape.

On a national accounts basis.

Value divided by volume.

Export unit value divided by import unit value.

Table A17.

Switzerland: Composition of Foreign Trade

(In billions of Swiss francs, current prices)

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Source: Die Volkswirtschaft.

  • Benetti, D., Y. Flückiger, and J. Ramirez, 1995, “Effets des Différences de Réglementation du Marché du Travail sur les Décisions de Délocalisation: les Cas du Commerce de Détail a Genève,” Wirtschaftliche Auswirkungen des EWR-Neins, Band 3, Strukturberichterstattung, Zürich.

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  • Centre for European Policy Studies, 1989, “Indirect Tax Harmonization in the European Community,” (Louvain-la-Neuve: Centre for European Studies).

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  • Commission of the European Communities, 1998, “Proposal for a Council Directive to Ensure a Minimum of Effective Taxation of Savings Income in the Form of Interest Payments Within the Community,” COM 295 (Brussels).

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  • Duss, Richard, and R. Bird, 1979, “Switzerland’s Tax Jungle,” Canadian Tax Journal, pp. 46–67.

  • Federal Finance Administration, 1998, Auswirkungen der Europäischen Währungsunion auf die Bundessteuern, (Bern: Federal Finance Administration).

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  • Federal Tax Administration, 1998, Federal, Cantonal and Communal Taxes: An Outline of the Swiss System of Taxation (Bern).

  • International Monetary Fund, 1998, Switzerland—Selected Issues and Statistical Appendix, IMF Staff Country Report No. 98/43 (Washington: International Monetary Fund).

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  • King, M. A., and Don Fullerton, 1984, The Taxation of Income From Capital: A Comparative Study of the United States, the United Kingdom, Sweden and West Germany (The University of Chicago Press).

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  • Mendoza, Enrique, Assaf Razin, and Linda Tesar, 1994, “Effective Tax Rates in Macroeconomics Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption,” Journal of Monetary Economics, No. 34, pp. 297–323.

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  • OECD, 1998, The OECD Revenue Statistics (Paris: OECD).

  • OECD, 1998, The OECD Tax Data Base (Paris: OECD).

  • OECD, 1997, Economic Surveys: Switzerland (Paris: OECD).

  • OECD, 1991, Taxing Profits in a Global Economy: Domestic and International Issues (Paris: OECD).

  • Öffentliche Finanzen der Schweiz, 1996 (Bern: Bundesamt für Statistik).

  • Statistisches Jahrbuch der Schweiz, 1998 (Bern: Bundesamt für Statistik).

  • Weber, L., 1992, “Les Finances Publiques d’un État Fédératif: la Suisse,” Economica Paris et Genève.

  • World Trade Organization, 1996, “Trade Policy Review: Switzerland” (Geneva).

  • Zarin-Nejadan, M., 1997, “Die Besteuerung der KMU in der Schweiz,” Die Volkswirtschaft (February).

27

Prepared by Catriona Purfield.

29

In Switzerland, what is included in the social security statistics is only part of what is included in the statistics of other countries such as Germany. Contributions to the funded occupational pension system and the health care insurance funds in Switzerland are excluded from the data on general government because these funds are operated within the private sector. For example, the pension system in Switzerland comprises three pillars: first, the compulsory contributions to the state operated federal old age (AHV) and disability (IV) insurance funds; second, obligatory contributions to privatized occupation pension schemes; and third, optional contributions to private benefit schemes to facilitate personal savings for old age. To account for the exclusion of mandatory contributions to the private pillars of the social security system from the official tax statistics, developments in tax revenues are separated from developments in the overall tax burden (inclusive of contributions to the public social security system).

30

However, the empirical evidence for Switzerland suggests that tax-induced migrations are small (see Weber, 1992). This may reflect the fact that language differences in Switzerland combined with other psychological and social factors impose considerable costs on those who move between cantons.

31

This methodology is described in Appendix I.

32

At the beginning of 1999, the standard VAT rate increased by 1 percentage point from 6.5 percent to 7.5 percent. There are two reduced VAT rates. A 2.3 percent rate (2 percent until end-1998) applies to agricultural goods, for example, food and beverages; cattle, poultry and fish; seeds, living plants and cut flowers; grain, fodder, fertilizer, and other agricultural inputs. Medicine, printed matter, and communications also qualify for this lower VAT rate. A special rate of 3.5 percent (3 percent until end-1998) applies to the hotel and lodging industry.

33

However, the level and trend in the capital tax burden should be interpreted with caution because of the possible impact of transfer pricing on Swiss corporate tax revenues and the national account measure of the operating surplus.

34

In the area of indirect taxation there is no overlap between the taxes levied by the three levels of government. However, in the area of direct taxation, sovereignty lies primarily with the cantons and secondarily with the Confederation. In 1996, the direct income taxes collected by the Confederation accounted for one quarter of the total direct tax revenues. Some direct taxes, such as the federal military service tax and withholding tax on interest income, are levied only by the Confederation.

35

The communes collect a percentage of the tax that is paid to the cantons.

36

In 1999, the cantons of Zurich and Thurgau are expected to adopt a current-year assessment and collection system for cantonal income taxes.

37

See Chapter II of the IMF Staff Country Report No. 98/43 for Switzerland.

38

This is because contributions to the first and second pillar of the social security system, as well as contributions to the tied-saving schemes of the third pillar are fully deductible for tax purposes.

39

Swiss tax laws are based on the principle that the income and wealth of a family represents an economic unit so that the income and wealth of all family members are aggregated. For both Confederation and cantonal taxes, two different tax scales apply: a lower one for married couples living together and a higher one for other taxpayers.

40

For foreign corporations, only that part of the profit which is generated in, and that part of its capital that is located in, Switzerland is taxable.

42

See King and Fullerton (1984) and Appendix II for a description of this methodology.

43

The prevailing rate of interest is taken to be the rate of return on a government bond. As in other studies, including those of the OECD, this rate is assumed to be 5 percent.

44

The figures reported in Table III-3 are derived using the weights reported for Switzerland by the OECD (1991): buildings, 26 percent; machinery, 40 percent; inventories, 34 percent; retained earnings, 40 percent; new equity, 0 percent; and debt, 60 percent.

45

No issuance stamp duty is imposed on mergers, changes in legal structure, or on the transfer of shares of two or more corporations into holding companies. The corporate tax reform of 1997 reintroduced a stamp duty on certain life insurance policies. However, the stamp tax does not apply to insurance policies that form part of pension schemes.

46

The duty is levied at a rate of 0.12 percent on debentures issued by resident debtors, 0.06 percent on bank-issued medium-term notes, and 0.06 percent on money market paper.

47

The United Kingdom and Ireland also levy such taxes.

48

See Auswirkungen der Europàischen Wâhrungsunion auf die Bundessteuern (1998).

49

The taxation of capital gains in other countries increases the tax burden on securities. While capital gains are not taxed in Switzerland, interest and dividend payments are subject to an internationally high withholding tax of 35 percent.

50

A recent EU directive on cross-border interest payments (see COM 295, 1998), proposes that a withholding tax be collected on interest payments to nonresidents by the payment agent (be it the original debtor or a financial intermediary). Nonresidents could choose to pay the withholding tax in the country of residence only if proof of the country of residence is provided. For EU members that do not impose withholding taxes, it is proposed that information on nonresident interest earnings be given to the country where the interest income recipient is resident for tax purposes.

51

Recipients of the interest and dividend income who are resident in Switzerland can request a refund of the withholding tax as long as this income was fully declared for income and capital taxation purposes. For nonresidents, the withholding tax represents the final charge; relief is possible only if a double taxation convention exists between Switzerland and the country of residence.

52

This law came into force on January 1, 1993. The cantons are obliged to adjust their legislation to the StHG by 2001.

53

Most of the cantonal tax laws contain rates that show only the basic amount of tax. This amount has to be multiplied by an annual multiple to obtain the final amount of tax due. For example, the following multiples apply in the canton of Zurich: 108 percent for canton taxes, 130 percent for commune taxes, and 11 percent for parish taxes.

54

This law came into force on January 1,1995.

55

According to the WTO (1996), prices in Switzerland exceeded the EU average by almost 50 percent. The share of Swiss households carrying out cross-border purchases is reported by Benetti, Flückiger, and Ramirez (1995) to have risen from 30 percent to 42 percent between 1990 and 1994. Cross-border expenditures were estimated at SwF 1.5 billion in 1994 (0.4 percent of GDP).

57

See OECD (1991), Taxing Profits in a Global Economy.

Same Series

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Cover IMF Staff Country Reports
Switzerland: Selected Issues and Statistical Appendix
Author:
International Monetary Fund
Volume/Issue:
Volume 1999: Issue 030
Publisher:
International Monetary Fund
ISBN:
9781451807165
ISSN:
1934-7685
Pages:
88
DOI:
https://doi.org/10.5089/9781451807165.002
  • Figure III-1.
    View in gallery
    Figure III-1.

    Switzerland: Change in Tax Burden, 1970-96

    (In percent)

  • Figure III-2.
    View in gallery
    Figure III-2.

    Switzerland: Effective Tax Burden on Consumption, Labor Income, and Capital Income, 1984-95

  • Figure III-3.
    View in gallery
    Figure III-3.

    Switzerland: Statutory and Effective Average Tax Rates on Consumption and Personal Income

    (In percent)

  • Figure III-4.
    View in gallery
    Figure III-4.

    Switzerland: Company Taxation in the Canton of Zug, 1998

Figure III-1.

Switzerland: Change in Tax Burden, 1970-96

(In percent)
Figure III-2.

Switzerland: Effective Tax Burden on Consumption, Labor Income, and Capital Income, 1984-95
Figure III-3.

Switzerland: Statutory and Effective Average Tax Rates on Consumption and Personal Income

(In percent)
Figure III-4.

Switzerland: Company Taxation in the Canton of Zug, 1998