Philippe Kenel

No to the popular ballot initiative “End Tax Privileges for Millionaires (abolishing lump-sum tax regimes)”!

Philippe Kenel, doctor of jurisprudence, attorney-at-law in Lausanne, Geneva and Brussels, Python & Peter

On 30 November 2014, the Swiss people are to vote on a ballot initiative launched by the left with the purpose of outlawing “tax privileges” granted to natural persons, namely expense-based tax regimes.

By way of introduction it is worth recalling that the Swiss Parliament, when enacting the Federal Act on Expense-Based Tax Regimes of 28 September 2012, already significantly tightened the conditions of such regimes. On the one hand, the cantons are subject to the obligation to determine the minimum expenditure threshold for municipal and cantonal taxes, whereby the corresponding figure for the federal tax has been set at CHF 400,000. On the other hand, the expenditure amount can no longer be less than five times the rental value of the property in which the taxpayer tax resides, but rather seven-times. Finally, the cantons have the obligation to tax, in one way or another, the wealth of the taxpayer. These new provisions will apply starting 1 January 2016 for new arrivals, and as of 1 January 2021 for those already subject to the tax on 31 December 2015.

Generally speaking, the ballot initiative “End Tax Privileges for Millionaires (abolishing lump-sum tax regimes)” should be rejected for the following reasons:

1. This initiative forms part of a more general set of policies by the left, particularly Swiss socialists, which consist of attacking the wealthier inhabitants of our country under the pretext of “fiscal justice”. This movement seeks to re-mould Swiss society with the designs of French-style socialism. The ballot initiative addressed in this article is one among others that seeks to impose an inheritance tax of 20% on any estates in excess of CHF 2 million. Should one of these ballot initiatives succeed, Switzerland may have to face a slew of other initiatives all pointing in the same direction.

2. It is of utmost importance that the citizens of Switzerland are aware that this ballot initiative is not just about expense-based tax regimes. Rather, its goal is to abolish all “tax privileges” granted to natural persons. The introduction of this totally vague concept into our legal order will completely destabilise the Swiss tax system. It would call into question both federal and cantonal rules. It is highly likely that it would ban cantonal tax shields, 2nd pillar buy-backs, certain tax deductions as well as the particularly favourable tax rates found in a number of German-speaking cantons.

3. In light of the above, this ballot initiative is not merely a matter of concern for those cantons where persons subject to expense-based tax regimes reside, but rather for Switzerland as a whole.

Expense-based tax regimes should not be abolished for the following reasons:

1. All states seek, in the context of economic promotion initiatives, to attract profitable businesses and wealthy private persons. Expense-based taxation is an economic promotion instrument that has proven its worth. Switzerland is surrounded by competing nations that are doing the same thing and which often have more favourable tax regimes. One example is the “non-domiciled resident” scheme in the United Kingdom, subject to which individuals not only benefit from a similar regime to that under lump-sum taxation, but are also allowed to pursue a remunerative occupation on British soil, something that those benefitting from lump-sum taxation regimes in Switzerland are not able to do.

2. This form of tax is perfectly suited to the federalist system we have in Switzerland, because it grants cantons the freedom to adopt or decline it.

3. Lump-sum tax schemes generate three important types of tax. On the one hand, the amount paid in tax on expenses is important for all public entities. In 2012, this amounted to some CHF 700 million. Although it is difficult to calculate the exact amount, this will exceed CHF 1 billion once the new provisions set out in the Federal Act on Expense-Based Tax Regimes of 28 September 2012 have entered into force. On the other hand, lump-sum taxpayers who die in Switzerland often pay a significant amount in inheritance tax. By way of example, in 2008, this amounted to CHF 195 million for the canton of Geneva. Finally, lump-sum taxpayers pay VAT on significant expenses incurred in Switzerland.

4. According to studies cited by the Federal Council, the annual expenditure of these taxpayers on consumer items in Switzerland is estimated to be CHF 1.4 billion, to which CHF 900 million must be added from the real estate sector.

5. Lump-sum taxpayers generate between 22,000 and 30,000 jobs per year.

6. In light of the disappearance of banking secrecy and the fact that Switzerland has not liberalised its financial services sector, it is very important for the banks and for maintaining employment levels in the banking sector that wealthy foreign nationals continue to reside in Switzerland. By abandoning lump-sum tax regimes, the banking world would be deprived of one of its last client bases that it can service and contact directly.

7. This type of taxpayer, by way of foundations or donations, makes a significant contribution in support of Swiss social and cultural activities.

8. This form of tax is easy to administer and requires little in the way of administrative manpower, meaning it is not overly expensive for the state.

9. Given that persons paying expense-based tax pay a fixed amount in taxes irrespective of their earnings, the CHF 700 million – soon to be one billion – in taxes are amounts that are guaranteed and on which the public entities can count without regard to economic conditions.

10. The conditions to which expense-based tax regimes are subject were already strongly tightened by parliament in 2012. This tightening is in fact a counter-proposal to this ballot initiative, which is already in force.

11. Contrary to established wisdom, lump-sum taxpayers do not just pay expense-based tax. They often also pay lots of taxes abroad and in Switzerland, in the context of a comparative calculation known as the control calculation.

12. Many foreign residents subject to expense-based tax regimes will leave Switzerland if the ballot initiative succeeds and there will not be any more new arrivals.

13. By adopting the ballot initiative “against mass immigration” on 9 February 2014, the Swiss people showed that they wish to favour more selective immigration policies. This is, by definition, the case with respect to those persons only paying expense-based taxes and who contribute considerably to the state and to society, while at the same time, representing only a minor burden.

The erroneous arguments primarily being advocated by those behind the ballot initiative are as follows:

1. They argue that the system of expense-based tax regimes runs contrary to the principle of equality and the ability to contribute. This is totally wrong to the extent that, contrary to a person paying regular taxes, lump-sum taxpayers may not pursue a remunerative occupation in Switzerland and are thus deprived of an important income stream. As a result, the situation in which these two types of taxpayers find themselves is not comparable.

2. Contrary to the line of argument taken by those behind the initiative, expense-based tax regimes are not completely incompatible with European tax systems. The European Union has absolutely no competency in the matter of taxation of natural persons. The proof of this is the fact that our main competitors, namely Belgium, the United Kingdom, Luxembourg and Portugal, are all EU Member States.

3. The fact that taxpayers leave their countries to settle in Switzerland or elsewhere is no fault whatsoever of the host country. Rather this is due to maladministration and the imposition of unreasonable taxes by the governments of the countries in question. The fault does not lie with the countries where such persons flock to, but rather those that such taxpayers abandon.

4. The idyllic notion that wealthy people will move to Switzerland anyway, particularly the western part of Switzerland, even in the absence of an expense-based tax regime, is completely wrong. Criteria such as quality of life only enter into consideration when it comes to choosing among countries that are on the short list of those that are fiscally attractive. Without expense-based tax regimes, Switzerland would not even make this list.

For various reasons set out above, it is imperative that the right and the centre mobilise against the ballot initiative “End Tax Privileges for Millionaires (abolishing lump-sum tax regimes)” Should this ballot initiative succeed, wealthy foreign nationals will leave our country and never come back. It will fall upon the remaining taxpayers, namely the middle class, to fill the fiscal shortfall left by those who have departed.