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Corporate Tax Reform III –DispatchoftheFederal Council

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Webcast 9 June 2015

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Corporate Tax Reform III –DispatchoftheFederal Council

  1. 1. Corporate Tax Reform III – Dispatch of the Federal Council Webcast 9 June 2015
  2. 2. 1© 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. 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
  3. 3. 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. Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your 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
  4. 4. 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. Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your 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
  5. 5. 4© 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. Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your 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
  6. 6. 5© 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. Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your 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
  7. 7. Disclosure rules for hidden reserves and transitional measures
  8. 8. 7© 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. Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your 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.
  9. 9. Innovation: Patent box and R&D input incentives
  10. 10. 9© 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. Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your contacts CorporateTax Reform III: Facilitating innovation in an organization’s value chain, promoting Switzerland Procurement Operational excellence Logistics & Distribution Production 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
  11. 11. 10© 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. Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your 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
  12. 12. 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. Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your 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)
  13. 13. 12© 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. Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your 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
  14. 14. 13© 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. Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your contacts CorporateTax 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
  15. 15. Other measures
  16. 16. 15© 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. 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 Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your 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
  17. 17. Abolished measures
  18. 18. 17© 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. Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your 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
  19. 19. 18© 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. Focus on NID (1/2) Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your 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
  20. 20. 19© 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. Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your 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)
  21. 21. Outlook and our position
  22. 22. 21© 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. Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your 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.
  23. 23. 22© 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. Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your 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
  24. 24. 23© 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. Background Draft June 5, 2015 Key differences Step-up Innovation Other measures Abolished measures KPMG’s position Your contacts Your contacts ► Please direct any inquiries to CH-FMctr3@kpmg.com Peter Uebelhart Managing Partner Tax Tel: +41 58 249 42 24 E-Mail Stefan Kuhn Partner Head of Corporate Tax Tel: +41 58 249 54 14 E-Mail Hans Mies Director Corporate Tax Tel: +41 58 249 59 41 E-Mail Olivier Eichenberger Senior Manager Corporate Tax Tel: +41 58 249 41 67 E-Mail

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