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International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
Welcome to our webcast!
Background of the Corporate Tax Reform III
Dispatch with legislative draft June 5, 2015
What has changed since September 22, 2014
Disclosure rules for hidden reserves and transitional measures (Step-up)
Innovation: Patent box and R&D input incentives
Other measures
Abolished measures
Outlook and our position
Your contacts
2© 2015 KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
Background of Corporate Tax Reform III
Debate with EU on Swiss tax regimes since 2005
2007: ring fencing criticized, violation of Free Trade Agreement
EU Code of Conduct for Business Taxation
2012: Dialogue with EU started
2013: Reports on Corporate Tax Reform III
Willingness to discontinue 5 tax regimes
at Cantonal level: holding, domicile and mixed company regimes
at Federal level: principal company regime
Swiss finance branch regime
New measures in compliance with OECD principles
No retaliatory measures by EU member states
22 September 2014: Legislative draft of Corporate Tax Reform III
5 June 2015: Dispatch of Corporate Tax Reform III with draft legislation
3© 2015 KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
June 2015: Dispatch of Corporate Tax Reform III (1/2)
Increasing international acceptance of Swiss
Corporate Tax legislation
Further development of the
competitiveness of Switzerland as an
attractive business location
Securing of adequate tax revenues
to finance public activities
Goals of the Reform
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International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
June 2015: Dispatch on Corporate Tax Reform III (2/2)
Draft at a glance
Introduction of new rules regarding specific income
generated out of mobile activities
Reduction of Cantonal corporate income tax rates
Reduction of specific tax burdens to further increase
the competitiveness of Switzerland as a business location
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International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
What has changed since 22 September, 2014
High level comparison
Legislative draft of 22 September 2014
License Box
Abolishment of Cantonal tax statuses, principal
company taxation practice and finance branch regime
Step-up Disclosure rules for hidden reserves
Patent Box
R&D input incentives
No NID
Reduced number of further measuresSeveral further measures
Notional Interest Deduction (NID)
Abolishment of Cantonal tax statuses, principal
company taxation practice and finance branch regime
Dispatch of 5 June 2015
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International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
Transitional measure (art. 78g THA) Migration into Switzerland (art. 24b THA)
Where does the transitional measure apply?
For companies currently benefiting of the holding regime,
the mixed company or the domiciliary company regime –
NOT for Principal regimes (see migration into Switzerland).
The introduction of the measure is mandatory for all
Cantons.
How does it work?
Hidden reserves on assets or in particular goodwill shall be
evaluated (best practice) and confirmed by tax authorities
by means of a ruling.
Over a period of max. 5 years the determined step up will
be taxed at a “special” reduced tax rate.
Optional for the tax payers.
Simplified example
Based on an a valuation performed and in accordance with
best practice the goodwill and any other hidden reserves of
Company A amount to 500.
The company’s profits in 2020 onwards amount to 110 p.a.
10 of the company’s profits will be taxed at the ordinary
cantonal/communal tax rate of 6% (“Basket A”) whereas
100 could be allocated to the “special” tax rate (“Basket B”)
and taxed at 2% (subject to discussion with tax authorities).
Over the 5 year period not more than 500 can be allocated
to “Basket B”.
No DTA needs to be accounted for!
The transitional step up mechanism will allow companies currently benefiting of a special tax regime
to be taxed at a similar rate for the 5 years after the law enters into force.
Two differently applied Step Up Mechanisms
What is considered as a migration into Switzerland?
Any transfer of functions, risks, business units and alike
is considered as a migration into Switzerland.
How does it work?
Should the book value of the transferred assets / goodwill
be lower than its fair market value, the tax payer can
apply for a tax neutral step up in basis.
The step up value can be amortized for tax purposes
according to the general amortization rules; goodwill can
be amortized over 10 years.
This step up mechanism shall also apply for Principal
regimes.
Simplified example
The B Group is centralizing its global procurement
functions and risks in Switzerland.
The aggregated value of the functions and risks
transferred to Switzerland is higher than the sum of the
individually valued functions and risks and therefore there
is a difference between book and fair market value, for
which a tax neutral step up can be applied for (e.g. 100).
The companies profits going forward amount to 40 p.a.
Over a period of 10 years the company can amortize
additional 10, i.e. the taxable profit amounts to 30 p.a.
A DTA needs to be accounted for in year 1.
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International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
Corporate Tax Reform III: Facilitating innovation in an organization’s value chain, promoting Switzerland
ProcurementOperational
excellence
Logistics &
DistributionProduction R&D Marketing Sales
Primary activities
Innovation is key for developed economies
Centralization of business models and high value add
activities
Continuous trend of innovation friendly tax regimes
Maintain competitive advantage
OECD-BEPS (Action 5!)
What is driving the international tax landscape
Simplified overview value chain “innovation” driven organization
100%
Profitability
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International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
Matching the international tax standard for promoting innovation
Basic research
Proof of concept
development
release
enhancements
Potential input incentive
Potential output incentive
Input incentive: primarily linked to the cost structure of an organization.
Output incentive: focus on the commercial benefits from the exploitation of R&D.
The combination of input - and output incentives are common practice in competing jurisdictions and may further strengthen the
competitive position of the Cantons in the (inter)national tax landscape.
lifecycle
innovation
11© 2015 KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of independent firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
The June 5, 2015 proposal for a patent box
Key
Features
Key features of the patent box
Qualifying income concerns patented income AND income generated through similar IP rights
Application of Modified Nexus Approach
Application at Cantonal level (mandatory for all Cantons) and legal form neutral
Exemption system (net income based), relief at the discretion of Canton but caped at 90%
Entry into patent box shall be tax neutral for companies that currently qualify for the mixed company regime
For companies who are currently ordinary taxed the R&D expenses prior entry into the box are capitalized for tax
purposes and subject to ordinary taxation. However, they can be amortized again within the box.
Combined effective tax rate (Federal, Cantonal, Municipality) to be targeted at the internationally accepted standard of
10%
Modified Nexus Approach (Action 5 OECD BEPS)
The Nexus Approach requires tax benefits to be directly connected to the R&D expenditure (targeting a proportionate
approach)
The Modified Nexus Approach allows for an up-lift of 30% of qualifying expenditure stemming from related-party
outsourced R&D expenses and IP acquisition expenses
The rationale is to reflect that companies’ benefits under existing IP regimes may be significantly reduced because they
hold IP in different entities than those that actually incur R&D expenditures, or they incurred significant IP acquisition
costs
Further guidance from the OECD is expected in June 2015 regarding the practical implementation constraints of the
Approach (track and trace of the qualifying expenditures, guidance by the FHTP), countering inappropriate use of
grandfathering rules, and detailed guidance on what will be a qualifying asset
Modified
Nexus
Approach
(Action 5
OECD
BEPS)
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International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
The June 5, 2015 proposal for a patent box
Total profit
-/- non-box income
-/- routine activity related income
-/- commercial IP
Patent box qualifying income
30% (max.) uplift qualifying expenditure (related party outsourcing and acquisition costs)
Qualifying expenditure incurred to develop
IP asset
---------------------------------------------------
Overall expenditure incurred to develop IP
asset
X overall Income from IP
asset= eligible IP income for
the Patent box
Modified nexus
Residual income approach applying the modified nexus concept
Year -2 Year -1 Year 0 Year 1 Year 2 Year 3
R&D Cost 120 at entry Patent income pa 90 / total income pa 100
Total costs to develop IP
Total qualifying costs to develop Patent
Modified Nexus Impact max uplift (30%)
160
120
36
Total Profit Year 1*
-/- non-qualifying income
Patent box income (incl. amort.)*
100
-10
90
* incl. amortization of Patent which stays in the box based on
current understanding of the proposal.
Expensed qualified R&D expenditure
One-off taxation to benefit from patent box
Annual patent box income: 156/160 x 90 = 88
Exempt patent box income (90% exemption) =
Taxable patent box income (90 -/- 79)
Non-box income
Taxable income year 1:
Taxable income year 2:
120
120
88
79
11
10
141
21
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International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
Corporate Tax Reform III: Facilitating innovation through input incentives
Key
Features
Key features of the envisaged input incentive
Input incentives can be described as tax incentives that are primarily linked to the cost structure of an organization
Super deduction of qualifying R&D costs at Cantonal level at the discretion of the Cantons (no impact on the vertical
compensation)
Super deduction also applied on expenses related to Swiss contract R&D (tax incentive can only be claimed once – usually on the
level of the purchaser of the R&D services)
Not limited to patented IP (potentially broad scope), targeting rather R(esearch) than D(evelopment)
Aimed at the production of intangible assets, targeting the Swiss domestic Principal of R&D activities instead of the Contractor
System to be designed according to principle of (super)deductions (vs. tax credits)
Incentive capped by loss situation (no cash out)
Envisaged implementation in the THA
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International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
Align and complete existing rules
Balance tax burden of income from investments
Optional changes to capital tax
Abolishment of capital issuance duty
Amendment of lump sum tax credit
Reduction of Cantonal Tax Rates
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
Measures to improve Corporate Taxation
Amendm. of partial taxation of participation income
Outside of CTR III: Implementation of a paying agent system for withholding tax purposes
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International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
Abolished measures
Notional Interest Deduction
Tax loss carry forwards
Participation deduction
Capital Gains Tax of privately held securities
Further measures (not yet discussed in the consultation proposal) have been discussed in the
process of drafting the dispatch but are not proposed:
• Tonnage Tax
• Changes to the capital contribution principle
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International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
Focus on NID (1/2)
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
NID on “higher-than-average” equity proposed in the
consultation
No NID on so-called „core capital“, i.e. equity that
exceeds the core capital qualifies as „higher-
than-average“ equity, subject to NID
Definition of core capital and applicable interest
rate:
Proposed calculation of core capital
according to fixed quotas per asset
category (e.g. cash 0% / 15%, third-party
receivables 40%, intangibles 55%,
investments 100%) to be published by
authorities in a Circular Letter
Proposed interest rate: safe harbor rate
published by authorities (e.g. long-term
rate on Federal bonds + 0.5%), in
minimum 2%; no higher rate according to
transfer pricing study accepted
Federal Council refrained from proposing any
NID in the dispatch:
NID was mainly refused by the Cantons in
the consultation (shortfall in tax revenues)
International acceptance was partially
questioned
However, NID is still discussed…
NID is still discussed and may be proposed
again within the parliamentary debate
However, NID will be amended in order to meet
the concerns addressed in the consultation
The following changes are discussed:
No NID on non-business related assets
No NID in connection with intra-group
loans based on group internal sales of
participations or on leveraged dividends
No minimum interest rate but flexibility to
apply a higher arm’s length interest rate
in case of loans to group companies (i.e.
group financing, taxation of an interest
margin)
Especially with respect to the flexibility in the
interest rate it should be possible to offer a
competitive income tax environment for group
financing activities after abolishment of the
Swiss finance branch practice
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International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
Assets Liabilities
100 cash 150 debt
100 third-party receivables
100 IP 250 equity
100 investments
Core equity quota Core equity
15% cash* 15
40% third-party receivables 40
55% IP 55
100% investments 100
210
Core equity (no NID) 210
Equity subject to NID 40
Total equity 250
Equity subject to NID 40
X (assumed) interest rate x 3%
NID 1.2 * Assumption: business related cash; otherwise 100%
Calculation example
Focus on NID (2/2)
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BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
Expected timeline until implementation
c 2019 - …
Publication of
Legislative
Draft
22.09.2014
Decision
Federal Council
Preparation of
Dispatch
April 2015
Law enters
into force
(1.1.2017 if no
referendum)*
Start of
Consultation
Procedure
Implementation into
Cantonal Law*
Publication of
Dispatch
Start of
Parliamentary
Discussions in
Commissions and
Chambers
05.06.2015
Final Decision
Parliament
Start of
Referendum
Period
End of
Consultation
Procedure
31.01.2015
20172016 201820152014
*In case of a referendum and public vote, the entry into force will be delayed by one year.
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International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
Executive summary and our position
Orientation on internationally accepted standards is the appropriate way. CTR
III is targeting future reliability to provide a sustainable solution
We welcome the elements of the Patent box regime, in particular the
broadening of its scope from only patents to patents AND similar IP rights
The disclosure rules for hidden reserves and the transitional step up measures
are important cornerstones of the tax reform
The Reform is a great chance for Switzerland to enhance its competitiveness
as a business location in a sustainable manner
It is now crucial to implement quickly in order to provide legal and investment
security
Unfortunately, currently no new solutions for trading activities are provided.
Reduction in income tax rates may act as a supporting measure
NID should be reintroduced within the parliamentary debate
R&D input incentives are a welcome opportunity and currently not challenged
on an international basis
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International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.
BackgroundDraft
June 5, 2015
Key
differencesStep-up Innovation
Other
measures
Abolished
measures
KPMG’s
positionYour contacts
Your contacts
► Please direct any inquiries to [email protected]
Peter Uebelhart
Managing Partner
Tax
Tel: +41 58 249 42 24
Stefan Kuhn
Partner
Head of Corporate Tax
Tel: +41 58 249 54 14
Hans Mies
Director
Corporate Tax
Tel: +41 58 249 59 41
Olivier Eichenberger
Senior Manager
Corporate Tax
Tel: +41 58 249 41 67