Large corporations often shift their profits to tax havens. This is now set to change. For Switzerland, the global minimum tax is not necessarily advantageous, as economics professor Florian Scheuer explains.

Facebook, Amazon and Apple earn billions all globally - but many tax coffers see relatively little of this. If the major industrialized countries have their way, that is soon set to change: The Finance Ministers of the G7 nations have agreed on a global minimum tax for large corporations. The level: 15 percent. Switzerland is also affected by this as an important locational advantage is lost. Many cantons would have to raise their taxes. Prof. Florian Scheuer from the University of Zurich explains in an interview with "blue News" whether an exodus of large companies is to now be feared and how Switzerland can counteract this.

This interview was conducted by Andreas Fischer and originally published in blue News on 8 June 2021.

With a few days' distance and after the first outcry: How big are the effects of a global minimum tax on Switzerland really?

Florian Scheuer: It is certainly disadvantageous for Switzerland at first. It's been clear for some time that the OECD, the G7 and other organizations like the International Monetary Fund (IMF) have been pushing for increased coordination on corporate taxes. That this coordination is now actually coming is not entirely surprising, especially with the new administration in the U.S. stepping up its involvement.

What are the concrete disadvantages for Switzerland?

Florian Scheuer: The package now adopted has two central elements. The first is the global minimum tax on profits, which will restrict the tax competition from which Switzerland has benefited for years. More important, however, is the second provision, namely that large multinationals should be taxed based on their turnover - in the countries where they generate the turnover and not necessarily in the country where they have their headquarters.

This is detrimental to the tax revenues of Switzerland, which as a small country has only a small market and has traditionally been very competitive in attracting corporate headquarters. Switzerland cannot simply ensure that it suddenly becomes a larger market. The beneficiaries are countries like the U.S. and the big European economies like Germany and France.

The corporate tax rate varies from canton to canton in Switzerland. Would it even be possible for the federal government to enforce a national minimum tax rate?

As a rule, the cantons have their own tax-making competence. On the other hand, with a harmonized corporate tax, the federal government could absorb the difference to the minimum tax rate, which would meet international conditions, but would of course undermine intercantonal tax competition.

There were immediate fears from business associations that companies would move out of Switzerland: Are these justified?

Companies can no longer save taxes by placing their headquarters in a low-tax country, as was previously the case. They are now taxed where they sell their products. So, in tax terms, it becomes less relevant where they are headquartered. More attention is now being paid to other factors that facilitate an economically favorable headquarters. For example, labor costs, and they are quite high in Switzerland. But it is unlikely that all large companies will move out of Switzerland, because there are of course many other advantages here.

What would they be?

There are many highly qualified and specialized employees in Switzerland. Furthermore, there are location clusters: pharmaceutical companies, for example, like to locate to areas where there are already other pharmaceutical companies. So it's now a matter of maintaining such agglomerations. But as I said, the tax advantages are now of course reduced. Tax competition also has certain positive effects, because it ensures discipline in fiscal policy. In recent years, however, it has become clear that some countries have gone too far in reducing corporate taxes and attracting companies at the expense of other countries. Globally, this has led to an ineffective race to the bottom with unfair results.

There are already first discussions about how to compensate for the loss of tax benefits in order to keep Switzerland an attractive location ...

There is indeed a big debate looming. The G7 have just reached a broad agreement on the principle of a minimum tax and the partial recalculation of the tax burden on the basis of turnover. The focus now, however, will increasingly be on the details.

For example?

There is the question of the specific tax base, i.e.: What exactly counts as part of a company's profit? In Switzerland, for example, research expenses may be deducted from profits under the patent box regime. If there is no coordination on such mechanisms - which are completely independent of the tax rate, but effectively reduce the tax burden - then we will soon see new tax competition.

How can such a new tax competition be avoided?

In the coming weeks and months, it will be a matter of how the OECD, in particular, coordinates the concrete calculation of the tax base. During this process, Switzerland may even have the opportunity to include exemptions such as the patent box. This would be advantageous in terms of the location, because there are many research-intensive companies here.

Won't such exceptions water down the idea behind a global minimum tax?

Such regulations would apply to all countries, thereby enabling genuine location competition. However: Switzerland would be able to decide for itself what is optimal. Nevertheless, Switzerland would no longer be able to prevent subsidiaries of Swiss companies from being taxed in other countries at the minimum tax rate. In this respect, it is already an effective set of instruments that will certainly reduce tax competition and which cannot so easily be circumvented by "creative" definitions of corporate profits in tax havens such as Ireland.

Originally, minimum taxation was intended to prevent large tech corporations such as Google, Facebook and Amazon from evading taxes. Why are other industries now also affected?

Most big tech companies are based in the USA. For years, European countries such as Germany and France have complained that these companies generate huge revenues and profits in their countries without paying taxes where the profits are generated. However, the U.S. government did not want its companies to be additionally taxed in Europe. The current solution is a classic package. The U.S. in particular benefits from minimum taxation because the shifting of profits to other countries is no longer as easy. Simultaneously, there has been a move toward revenue-based taxation to get the Europeans on board as well.

Will all countries stick to this new agreement?

What happens to countries that do not levy the minimum tax rate has not yet been clarified. Concrete sanctions have yet to be negotiated. In the most extreme case, countries that do not levy the minimum tax could no longer be allowed to sell products. However, we have seen exactly what could happen in the case of data exchange with banks. In that instance, the U.S. insisted on the exchange of information, otherwise Swiss financial institutions would no longer have been able to do business on U.S. territory. Following this announcement, banking confidentiality was adjusted relatively quickly.

Only 38 countries are members of the OECD: What impact do the organization's decisions have on other countries?

Non-members are not bound by this agreement, of course. But the OECD has a kind of role model effect: Historically, its resolutions have also been implemented relatively quickly in other countries. Developing countries in particular have a strong interest in the reforms, especially countries like China, India, Brazil with their huge markets. They are among the most important trading partners of companies affected by the minimum tax.

So there is no reason to fear that companies will suddenly all emigrate to Panama?

On the contrary, these incentives have actually been reduced by the reforms. Under the revenue-based tax system, companies pay their taxes where they generate their revenues, regardless of where they are located. And the companies cannot simply claim that they generate all their sales in Panama.