Comparison of U S Tax System Vs Switzerland Tax system

U S Tax System Vs Switzerland Tax system – a historical or practical comparison: an intellectual satiety

According to Swiss Tax Conference, Swiss tax system’s development is historical in nature rather than a rational or theoretical one. A humbling statement of the noble body, indeed. With Federal tax administration, 26 Cantons and 2,250 communes venturing to have a pie in the tax collections of the great nation, mostly known in history for its beauty, great role in world wars and its cheese, liquor or beautiful cows, Switzerland, obtained its tax system in Helvetic period (1798 -1803). However, it claims to have formalized it with the foundation of the federal state in 1848. So, let me take you directly to the web site of Swiss Tax Conference Information Committee as under:

https://www.eda.admin.ch/content/dam/countries/countries-content/united-kingdom/en/FTA- swiss-tax-system-48791-2017.pdf

Well, it is a pleasure even to directly quote everything from their web site but for easy understanding and shortened version of things, I just write this article with great candor or pleasure or both.

While Swiss Federal tax system (Confederation) also taxes income, though, mostly, from sources like value added tax, stamp duties, custom duties and special consumption taxes, 26 Cantons (names listed at the end of this article) have their own tax laws, and tax income from income, wealth, inheritance, capital, property gains and others, 2250 Communes thrive communal taxes at their own discretion or tag along with supplements relative to Cantonal basic tax scale.

Let me take you through the evolution of the tax system in Switzerland over the last two centuries.

During 1849-1942

Custom duties, Military Service tax, Taxation of distilled, Spirits, War gains tax, War tax, Federal stamp duties, Extraordinary war tax.

During 1943 on wards till date

Direct Federal tax, Value added tax, Equalization tax, Luxury tax, Withholding tax, New national defence tax, Mineral and automobile tax and lastly Casino tax.

Narrating the evolutionary tax system is intended to educate ourselves about advanced countries” tax systems and stop complaining about our own.

Quoting liberally from the official publication” as already mentioned, the Confederation, the cantons and even the communes levy taxes in Switzerland. However, the right of these public bodies to collect taxes is restricted by the Federal Constitution (Cst). The aim is to distribute fiscal sovereignty in such a way that the three public bodies do not impede one other and that an excessive burden for taxpayers is prevented. Consequently, the Constitution gives the Confederation the right to levy certain taxes and denies the cantons the right to do the same.”

Now that we are aware of the limitation of various bodies in relation to levying of taxes at various levels or substantial areas relevant to their existence, as a vivid reader, let us go into the basics of Swiss tax system.

Basic principles of fiscal sovereignty

Fiscal sovereignty refers to the legal and actual right of a public body to levy taxes. In terms of the arrangement of fiscal sovereignty, Swiss tax law has to abide by the following principles enshrined in the Constitution:

• Principle of equality before the law;
• Principle of economic freedom;
• Principle of guarantee of ownership;
• Principle of freedom of religion and conscience;
• Prohibition of inter-cantonal double taxation;
• Prohibition of unjustified tax benefits.

Ample explanation of above principles is not relevant for our discussion since they are self- explanatory in nature.

What, people have the say in levying of taxes?

Let us be honest that we have never had a situation in the tax system of most of the nations, we have discussed so far, where people have any say in levying of taxes. But no more, in case of Swiss tax system, as amplified by quotation from their publication:

“Aside from the unique feature that the Confederation, the cantons and the communes all levy taxes, the Swiss tax system also sets itself apart by letting citizens decide for themselves which taxes may be levied on them. This is because the state can impose only those obligations on them – including taxes – that are provided for in the Constitution and laws, and constitutional amendments automatically have to be subject to a popular vote (mandatory referendum) at both the federal and cantonal level.

 Only a few cantons have a mandatory referendum also for the revision of laws. In the other cantons, the optional referendum generally applies, although in some cantons the mandatory or optional referendum applies depending on the type of legislative amendment in question.

 In most cases, the people also have a say when setting tax rates, tax scales and tax coefficients.”

Let us delve directly a simple case of taxes levied by different agencies in the income of a simpleton.

Quoting an example given in the booklet itself, let us understand the actual situation:

“To illustrate, consider the following example. A single taxpayer living in the city of Zurich has a gross earned income of CHF 50,000.

 Based on the statutory tax scale, the basic income tax is CHF 1,405.

 The canton collects 100% of this basic tax, the commune of Zurich 119% (communal tax).

The parish collects church tax of 10% of the basic cantonal tax amount.

Basic tax according to the scale CHF 1,405.00

 Tax coefficient (multiple) Canton of Zurich: 100% CHF 1,405.00

 Commune of Zurich: 119% CHF 1,671.95

 (Roman Catholic) parish: 10% CHF 140.50

 Personal tax CHF 24.00

 Total income tax CHF 3,241.45

 Tax burden in percent 6,48.”

Now, the details of an individual tax.

Federal tax:

Taxes on income and other direct taxes

• Direct federal tax

 – on the income of individuals

 – on the profits of legal entities

• Federal casino tax
• Military service exemption tax

Consumption taxes and other indirect taxes

• Value added tax
• Federal withholding tax
• Federal stamp duties
• Tobacco tax
• Beer tax
• Mineral oil tax
• Automobile tax
• Tax on spirits
• Customs duties

Income tax for individuals

Let us look at facts from official publication to be followed by our discussion:

“Individuals who are permanent or temporary residents in Switzerland are subject to unlimited tax liability. Tax residence is deemed to exist in the case of a stay in Switzerland (irrespective of a temporary interruption) if a person

• spends at least 30 days in Switzerland and is gainfully employed or
• spends at least 90 days in Switzerland and is not gainfully employed. Moreover, individuals without tax domicile or residence in Switzerland are subject to limited tax liability if there is an economic relationship between the individual and certain tax objects (e.g. landed property, permanent establishment) located in Switzerland.

According to the principle of family taxation, the family forms an economic unit. Consequently, the incomes of spouses living in a legally and effectively intact marriage are aggregated for tax purposes irrespective of the marital property regime (art. 9 para. 1 DFTA).

The same system has been applied by analogy to registered partnerships since 1 January 2007 (art. 9 para. 1bis DFTA).

This principle of joint assessment of spouses or registered partners ceases to apply if they no longer live together.

 In this case, there is a separate assessment regardless of whether or not the separation was decreed by a court. Actual separation is sufficient.

The income of minors – with the exception of earned income, for which the child is taxed independently – is added to that of the holder of parental responsibility.

 Dft (income tax) is levied on the total income, for example:

• Income from salaried employment and secondary activities (including long-service awards, tips, etc.);
• Income earned on a self-employed basis (including capital gains from the sale of business assets);
• Income from pension schemes (lump-sum benefit and annuities from 1st and 2nd pillar);
• Revenue from movable and immovable property;
• Other income (e.g. winnings of over CHF 1,000 in lotteries and similar undertakings).

Expenses incurred in order to earn the income, e.g. professional expenses, are generally deductible from gross income.

Furthermore, general deductions (e.g. deductions for insurance contributions, AHV/IV/EO/ALV premiums and contributions, contributions to occupational funds and tied private pension schemes, private debt interest up to a certain amount, as well as a deduction in the event of both spouses earning an income) and social deductions (e.g. for children, married couples and persons in need of support) are permitted.

 The dft (income tax) scales for the income of individuals are progressive.

The term “progressive” means that the tax rates increase as the taxpayer’s income increases, i.e. they are not proportional. Effective since 1 January 2011, dft has been levied on the income of individuals based on three scales:

• a basic scale for single persons,
• a scale for married persons and
• a parental scale.

The scale for married persons takes into account the limited financial capacity of a household with several individuals relative to a single-person household. Taxpayers who live together with children or persons in need of support in the same household and who take care of most of their upkeep are taxed according to the parental scale.

This is comprised of the scale for married persons and an additional deduction of CHF 251 from the tax amount for each child and each person in need of support.

Because tax amounts of less than CHF 25 are not collected (collection minimum), tax collection for the 2016 tax period commences with a taxable income of CHF 30,800 for married persons and single parent families, and respectively CHF 17,800 for all other taxpayers. The statutory maximum dft rate is 11.5% (art. 128 para. 1 lit. a Cst).

According to the tax rate applicable for the fiscal year 2016, this is reached in case of a taxable income of CHF 895,900 for married persons and single parent families or respectively or CHF 755,200 for all other taxpayers.

The scales are applied directly for calculating the tax amount. Therefore, there is no tax coefficient.”

Explanation:

• Unless one has an income of CHF 30,800 for married persons or CHF 17,800 for all other tax payers, tax is not applied.
• Maximum income tax rate is 11.5%.”

Let us turn our intention to other legal entities like Corporations, Associated companies or Associations or Foundations.

Since the language used in official publications are direct, simple and with an intention to reach out to the reader or tax payer even from foreign country, I am again quoting from official publication.

“Profit tax for legal entities Legal entities headquartered or effectively managed in Switzerland are generally liable to tax. A distinction is made between two categories of legal entities:

• Corporations, i.e. stock corporations (Aktiengesellschaften),
• Partnerships limited by shares (Kommanditaktienge sellschaften),
• Limited Liability Companies (GmbHs), as well as cooperatives;
• Associations, Foundations and other legal entities (public and ecclesiastical corporations and institutions, as well as collective investment schemes with direct real estate ownership).

The gross revenue from dft on the profits of legal entities amounted to approximately CHF 10.6 billion (including cantons’ share) in 2016. Corporations and cooperatives These companies pay a tax on net profit. There is no federal capital tax.

The tax rate of the dft is proportional and amounts to 8.5% of net profit. No tax coefficient is applied.

The tax paid is deductible, reducing the effective tax rate. Associated companies, i.e. corporations or cooperatives that have a stake of at least 10% in the share capital or at least 10% in profits and reserves of other companies or which have an interest in such capital with a market value of at least CHF 1 million, benefit from a tax reduction based on the relationship between the net revenue from these financial interests and total net profit.

This participation deduction is granted in order to prevent multiple taxation via profit tax.

Associations, foundations and other legal entities Associations, Foundations, public and ecclesiastical entities and institutions are generally subject to profit or income tax at the federal level with a proportional tax rate of 4.25% of net profit, provided they are not tax exempt due to their charitable, social or similar purpose.

The same applies for collective investment schemes with direct real estate ownership. The profit is not taxed unless it amounts to CHF 5,000 or more.

Value added tax

“VAT was introduced on 1st January, 1995. The change in system from turnover tax to value added tax was due largely to the establishment of VAT in all EU member states. The completely revised Federal Act on Value Added Tax of 12th June ,2009 came into force on 1st January, 2010. It contains numerous simplifications relative to the previous law and is generally more user-friendly.

As VAT is intended to be borne by consumers, it is generally passed on to them by inclusion in the retail price or is added separately on the invoice.”

The normal rate is 8% and it may go down as much as 2.5% in case of items like foodstuff, poultry, living plants, grains, medicines, magazines/newspapers, radio services or TV services.

The withholding tax which takes place without relevance to the tax levied on the individual and refunded later through tax return is as under”

The tax rate is

• 35% for moveable capital revenue and lottery winnings;
• 15% for life annuities and pensions;
• 8% for other insurance benefits.

Let me introduce you to customs duties prevalent in Switzerland.

“General In the case of customs duties, the taxable event consists of crossing the customs border with goods.

A customs debt also arises when goods are not used and are instead re-exported, for example. In terms of tax law, customs duties are thus an economic transaction tax.

According to art. 133 Cst, the Confederation can levy customs duties and other duties on the cross-border movement of goods.

The specifics are set out in the customs tariff (appendix to the CTA).

The rates are almost exclusively based on weight (e.g. CHF X per 100 kg gross).

The revenue from customs duties goes into the federal coffers and amounted to approximately CHF 1.13 billion in 2016.”

 26 Cantonal taxes

Now our attention would be directed towards Cantonal duties about which detailed coverage has been made at the beginning of this article.

Taxes on income and assets, as well as other direct taxes (for Cantons)

• Income and wealth tax
• Poll or household tax
• Profit and capital tax
• Inheritance and gift tax
• Lottery winnings tax
• Property gains tax
• Real estate tax
• Real estate transfer tax
• Trade tax

Property and expenditure taxes (for Cantons)

• Motor vehicle tax
• Dog tax
• Entertainment tax
• Cantonal stamp duty
• Lottery tax
• Water tax
• Miscellaneous Tax.

For the dog lovers like myself, there is no dog tax if it is used as guide dog or for police services.

In contrast, the communes may levy taxes only to the extent authorized by the cantons (delegated fiscal sovereignty). It is not very complicated from the tax knowledge we have assimilated so far.

Frequently, the communes do levy their taxes in the form of supplements to the cantonal tax (communal tax coefficient), or else they simply get a share of the cantonal tax revenue.

Let me document the taxes that may be levied by 2250 communes for our knowledge.

2250 Communes

Taxes on income and other assets, as well as other direct taxes:

• Income and wealth tax
• Poll or household tax
• Profit and capital tax
• Inheritance and gift tax
• Lottery winnings tax
• Property gains tax
• Real estate tax
• Real estate transfer tax
• Trade tax

To the inquisitive mind inquiring about,

Property and expenditure taxes

• Dog tax
• Entertainment tax
• Miscellaneous tax.

Now comes the most interesting tax which we do not have so far in our country, being a secular one. I would like quote directly as under:

“In almost all cantons, the parishes of the three national churches (Protestant, Roman Catholic and, if represented, the Christian Catholic Church) levy a church tax on their members and usually also on the legal entities subject to tax in the canton.”

Tax burden

To justify the high taxes as read from above article, the justification is given by the Swiss as per their statements given below:

“Because of the differences in cantonal tax laws, the tax burden may vary not only from canton to canton, but also from commune to commune within the same canton.

 Concerning the level of the effective tax burden in the cantons we refer to the document “Tax burden in the cantonal capitals 2015” on the Website of the FTA: www.estv.admin.ch/estv/en/home.html.

-General-tax statistics-specialist information-tax burden.

Customized calculations of income tax can be carried out with the Tax Calculator on the Website of the FTA: www.estv.admin.ch/estv/en/home.html – General – Tax Information-Services – Tax Calculator.

Conclusion

Many people get excited about Switzerland on varied tax reports as tax heaven, or as the most preferred film locations due to natural parks, mountains or man- made facilities to enjoy nature. For an international tax consultant like myself, their tax systems which have been in vogue since 1793, enthused me to study the tax system in details and give in a layman’s language its nuances. It is of interest to know that Swiss people do not prefer English, rather, languages like French, German, Italian or Rumantsch are recognized. This complicated my efforts to get the real tax forms which I could not get or explain in details.

This essay is basically a simple one to take the reader around one of the oldest tax systems in the world with some basic information quoted extensively from their official publication. It is strange their claim of low understanding of English does not match with one of the best Tax publications written in simple and lucid style and produced by Swiss Tax Conference.

 Please do take time to read it which is the best tax publication I have ever read.

To conclude, you may approach a CPA to undertake your tax work, if any, in Switzerland.

Names of 26 Cantons

 AG- Aargau

 AI- Appenzell Innerrhoden

 AR- Appenzell Ausserrhoden, BE- Bern, BL- Basel Landschaft,

 BS- Basel Stadt, FR- Fribourg,

GE- Geneva, GL- Glarus, GR- Graubünden,

 JU- Jura, LU- Lucerne, NE- Neuchâtel,

 NW- Nidwalden, OW -Obwalden,

 SG- St. Gallen, SH- Schaffhausen,

 SO- Solothurn, SZ- Schwyz,

 TG- Thurgau, TI-Ticino,

 UR- Uri, VD- Vaud,

 VS- Valais, ZG -Zug, ZH- Zurich.

Reference

• Swiss tax conference official web site“https://www.eda.admin.ch/content/dam/countries/countries-content/united-kingdom/en/FTA-swiss-tax-system-48791-2017.pdf
• “Tax burden in the cantonal capitals 2015” on the Website of the FTA: estv.admin.ch/estv/en/home.html
• Dft originally known as defence tax but now income tax.
• CST means constitution.
• Some of the words have been directly transplanted since let us learn something new in our reading habits.