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Innovation Hubs: Enablers & Barriers
Presentations, September 16, 2016
Innovation Seminar
Menlo Park, CA
Simran KaushalPartner, International TaxServices, PwC
&
Uwe CarlInternational Tax Director, PwC
www.pwc.com
September 2015
BEPS Discussion
PwC 4
Recap on BEPS
• OECD action plan launched in July 2013 backed by G20 to address Base Erosion and Profit Shifting
BEPS tax planning strategies use mismatches in tax rules to make profits non-taxable. Or they shift profits to locations where there is little or no real activity but the taxes are low; this results in little or no overall corporate tax
• Growing perception that governments lose substantial corporate tax revenue because of BEPS
• Public concern about whether particular companies or groups are paying their ‘fair share’ of tax
• BEPS project launched in July 2013 with ambitious schedule for completing reports on 15 Action Items by December 2015
• Governments have moved early due to the public and economic pressures
PwC 5
BEPS Action Plan – Focus on Substance
Preamble to Action Plan
“Fundamental changes are needed to effectively prevent double non-taxation, as well as cases of no or low taxation
…that artificially segregate taxable income from the activities that generate it”
“A realignment of taxation and relevant substance is needed to restore the intended effects and benefits of international
standards…”
… in the context of treaties and transfer pricing
PwC 6
OECD BEPS action plan - Timing
July 2013
Release of Action Plan
with 15 separate actions split over 2014 and 2015
G20 Finance Ministers
sign of on actions:1 Digital economy 2 Hy brid mismatches 5 Harmful taxation (phase 1)6 Treaty abuse8 TP Intangibles (phase 1)1 3 Country by country
reporting and transfer pricing documentation 1 5 Multilateral instrument (phase 1)
September 2014 October – December 2014
December 2015
G20 sign of on actions:
4 Base erosion, interest / financial payments (phase 2)
5 Harmful taxation (phase 3)
1 5 Multilateral instrument
(phase 2)
September 2015
G20 sign of on actions:
3 Strengthen CFC
4 Base erosion, interest / financial payments
(phase 1)
5 Harmful taxation (phase 2)
7 Permanent establishment av oidance
8 TP Intangibles (phase 2)9 TP v alue creation /
risk and capital
1 0 TP value creation / high risk transactions 1 1 Methodology/data on BEPS
1 2 Disclosure of aggressive planning
1 4 Dispute mechanisms
Release of Discussion
Drafts re:1 VAT B2C Guidelines4 Interest Deductions5 PE Status6 Treaty abuse8-1 0 Low value adding services; Risk, recharacterization;Com modity transactions;
Profit splits;1 4 Dispute resolution
PwC 7
Typical MNC Structure
Parent / TopCo
Principal Low tax Finco
HoldCo
IP Co
Local OpCos
• Som e substance
• Possible use of treaty
network
• T ax holiday or APA
• Lim ited return
• Possible hy brid entity
• Lim ited substance
• No or low tax
• cost plus or commissionaire
• Hy brid instruments
• Base erosion planning
• Use of preferential regimes
• Use of treaty network
• Holding functions
• Repatriation planning
• Place of top m anagement
• R&D activities
PwC 8
BEPS Impact Assessment
BEPS
Holding andrepatriation
Permanentestablishment
Operatingmodel
Transparencyand disclosure
Financing Intellectualproperty
PwC 9
Innovation Incentives and Related Considerations
Knowledge discovery (R&D)
• Credits on incremental or total R&D
• Super deductions• Refund provisions
Commercialization
• Patent boxes• Exemptions on
international royalty income
• Lower taxes on income from R&D projects
New Products, Services and
Processes
• Corporate income tax reductions or exemptions
• Tax holidays
Front-end Incentives Back-end Incentives
Considerations:
• Substance first approach: Where do you have substance today? How do the 2014 Deliverables impact your substance?
• In near term, location decisions should emphasize flexibility
• Look for opportunities to combine incentives with other beneficial regime elements
(interest deductions, treaty regime, IP amortization, R&D credits)
PwC 10
Unilateral Measures since 2014
Interest deductibility
• Austria
• Finland• Italy
• Norway
• Poland
• Russia
• Korea• Australia
• South Africa
• Uganda
Harmful tax practices /
General anti abuse rule
• Poland
• Chile• China
• India
StrengthenCFC rules
• Poland• Russia
• Spain• Brazil
• Chile• China
• India• Korea
Hybridmismatches
• EU directives• Germany
• Poland• Spain
• Mexico
• Australia• Japan
• Singapore• South Africa
• UK
Artificial avoidance of PE /
Recharacterisation• UK
PwC 11
The Big Picture Takeaway
• Huge system adjustments for transfer pricing documentation / transparency agenda
• Increased focus on conduct as test of transfer pricing
• Materially wider permanent establishment risk and challenges
• Treaty access constrained
• Possible impact of interest proposals
• Significant rise in controversy / dispute expected
• The biggest issue – the impact on behaviour of the tax authorities globally
PwC 12
BEPS - What should Companies Do?
1) Review
2) Determine
3) Quantify
4) Monitor
5) Develop
6) Continue
12
PwC 13
PwC Contacts
Simran KaushalInternational Tax PartnerTel: (408) [email protected]
Uwe CarlInternational Tax DirectorTel: (408) [email protected]
Frank WeidemaPartner, Weidema van Tol
Innovation Hubs: Enablers & BarriersSwiss Corporate Tax Reform III
Frank Weidema
September 16, 2015
15
AGENDA
I. Background
II. Corporate Tax Reform III – Summary
III. Swiss Patent Box
IV. R&D Incentives
V. Other Measures
VI. Miscellaneous
VII. Conclusions
VIII. Q&A
16
I.
BACKGROUND
17
I. BACKGROUND
• Following the financial crisis, the EU, the G20 and the OECD have focused on the elimination ofsituations of non/low taxation and of shifting of mobile income to low tax jurisdictions.
• Switzerland agreed with the EU that it will abolish its cantonal holding company / mixed company /domiciliary company, Swiss principal and finance branch regimes.
• The Swiss constitution prohibits Switzerland to be in a budget deficit position. Switzerlandtherefore does not need to increase its taxes.
• The Swiss federal government submitted on June 5, 2015 a package to Swiss parliament
containing the draft text for legislative changes plus explanatory commentary.
18
II.
CORPORATE TAX REFORM III -
SUMMARY
19
II. SUMMARY
SUMMARY OF PROPOSED MEASURES PER THE JUNE 5, 2015 LAW PROPOSAL
CANTONAL
• Previously existing cantonal tax regimes will be replaced with a cantonal patent box regime• Additionally a cantonal super deductionon R&D expenditures is introduced
• Reductionof cantonal corporate income tax rates• Reductionof cantonal net wealth tax (“NWT”) rates• Privileged release of hidden reserves in the case of a change of tax status
FEDERAL
• Abolition of the 1% capital duty (“Emissionsabgaben”) on capital increases• Extension of the foreign tax credit system to Swiss permanent establishments
FEDERAL + CANTONAL
• Step-up-in-basis for company migrations into Switzerland• Adjustments to partial taxation procedure (funding) – not discussed further
20
III.
SWISS PATENT BOX
21
III. SWISS PATENT BOX
• Effective TaxRate: 8-10% (e.g., canton of Nidwalden: 8.9%).
• The Swiss Patent Box is mandatory for all cantons.
• Only Swiss resident taxpayers qualify (e.g., AG, GmbH).
• The box is limited to income from patents and comparable intellectual property rights. Trade marksor trade names do not benefit.
• OECD Modified Nexus Approach: Regime is limited to entities which carry out the R&D inSwitzerland. There has to be a nexus to the R&D expenses incurred by the Swiss taxpayer and
the income generated with it. Therefore, only if substantial R&D activities are carried out inSwitzerland will the Swiss Patent Box be applicable.
• An uplift with a maximum of 30% is granted for related qualifying foreign R&D expenses (e.g. IPacquisition costs).
22
III. SWISS PATENT BOX (Continued)
• Qualifying patent income is calculated using the residual profit method, i.e., all income is reducedby:
i. Financing income; ii. Non-patent related income from manufacturing, trading, services, etc.;
iii. Income from other intangibles (e.g., trademarks); and iv. Income from other functions – not patent related.
The net qualifying patent income is subsequently multiplied with the quotient of authorized costsplus a 30% uplift divided by the total qualifying costs.
• The maximumexemption from cantonal tax is 90%.
• No tax relief for Swiss federal income tax.
• The Swiss Patent Box regime is likely to be subject to future change since the OECD continues tomodify the regime.
23
IV.
R&D INCENTIVES
24
IV. R&D INCENTIVES
• Cantons can voluntarily introduce R&D incentives in the form of excess R&D deductions for
cantonal / communal purposes on qualifying R&D expenditures.
• Unclear to the extent of allowable super deductions. Speculationabout levels between 150-200%.
• Limited to qualifying costs incurred in Switzerland.
• Deduction is limited to the principal beneficiary of the R&D. The contract R&D service provider willnot be entitled to the deduction.
• Only applies for cantonal tax purposes – not for Swiss federal tax purposes.
25
V.
OTHER MEASURES
26
V. OTHER MEASURES
• Reduction of cantonal tax rates. Current rates vary between 11.48% - 24.16%. Cantons ofSchwyz, Appenzell AR, Nidwalden and Lucerne are expected to be able to maintain their currentlow rates (e.g., Schwyz 12.05%).
• Reduction in cantonal NWT. Some cantons currently already provide reduced taxable basis for
NWT either by way of credit of NWT tax against corporate income tax or by way of exemption ofparticipations (e.g., Schaffhausen provides for exemption for participations).
• Draft bill allows a reduction in NWT with respect to participations and IP. Lobbyists attempt toexpand to inter-company loans / treasury assets.
• Step-up on immigration into Switzerland for Swiss federal and cantonal tax purposes.Difference between FMV on immigration and book value on immigration is to be depreciated in
accordance with published Swiss guidelines. Goodwill can be amortized over 10 years.
• Tax privileged release of hidden reserves within 5 years (lobbyists: 10 years) for cantonal taxpurposes. E.g., transition from cantonal mixed company regime to new ordinary tax regime.Ultimately may result in continuation of privileged regime for maximum 5 years.
27
V. OTHER MEASURES (Continued)
• Abolition of 1% Swiss federal capital duty.
• Extension of foreign tax credit to Swiss permanent establishments.
• Time line: Approval by Swiss parliament expected by mid-2016, entry into effect at the Swiss
direct federal level expected by 1/1/2017 or 1/1/2018 in case of a national referendum, transitionperiod for the cantons to implement the new law is 2 years, effective date of new law either1/1/2019or 1/1/2020 incase of a referendum.
• Not included: Notional interest deduction. However, lobbyists for the large Swiss multinational
corporations (treasury activities) and for the Swiss financial sector (e.g., insurance companies) areattempting to bring this regime back into the law proposal (replacing the 1990 Swiss federalguideline on Swiss finance branches).
• Not included, yet relevant: EU State Aide quest may render certain advance tax rulings in the EU
invalid / not applicable risking refunds plus interest. Switzerland is not part of the EU and shouldnot be subject to the EU State Aide doctrine. So rulings obtained in Switzerland – provided thecantons and the Swiss federal tax administration get their act together – should hold their value.
28
VI.
MISCELLANEOUS
29
VI. MISCELLANEOUS
• The efforts of the EU and OECD to combat Base Erosion and Profit Shifting by multinational
corporations may result in the movement by multinational corporations of employees and resources (“substance”) to locations with a low tax rate. E.g. Google Zurich: 1000+ employees.
• If so, other factors may become important such as quality of life for employees, available local talent pool, infra-structure and most importantly, employment law framework.
• Non-EU citizens require a work and residence permit to be relocated to Switzerland.
• Tax on employment income: either a progressive or a proportional income tax is levied. Federalrate is progressive, highest federal rate is 11,5% (>CHF.895,800). Cantonal taxes vary per canton.
E.g. Zurich is 8,8% in addition to the federal rate, municipal tax is to be added applying a multiplier(Zurich: 0.75-1.24). ETR on highest incomes in city of Zurich City (1.19 multiplier) is approximately35%. In addition is there a cantonal net wealth tax for individuals.
• The Swiss framework for hiring and firing of employees resembles the U.S. system of employment
“at will”. Although this not a tax factor, most American multinational corporations seem to attribute substantial value to this factor when relocating employees to Switzerland.
• E.g., Zurich ranked No. 2 in Mercer’s 2015 Quality of Living index: https://www.imercer.com/uploads/GM/qol2015/h5478qol2015/index.html
• The Swiss educational system is considered to rank No. 8 in the world: http://www.independent.co.uk/news/education/education-news/global-school-rankings-interactive-
map-shows-standards-of-education-across-the-world-10247405.html30
VII.
CONCLUSIONS
31
VI. CONCLUSIONS
• Based on its constitutional limits which prohibit running a budget deficit, Switzerland not under any
pressure to increase its taxes. Continues to be a low tax economy, yet not offshore.
• Despite being a sovereign state and not being a member of the EU, Switzerland does not want to
isolate itself and is therefore adapting its corporate tax regime to bring it in line with EU/OECDexpectations.
• It is questionable if the Swiss Patent Box and the R&D deduction will survive long-term EU/OECDscrutiny and may after 5 or 10 years be abolished.
• However, Swiss Corporate Tax Reform III is expected to result in a lasting reduction of the Swiss
corporate income tax rates (e.g., Schwyz 12.05%).
• Expected effective date of introduction 1/1/2019 or 1/1/2020 (in case of referendum)
• Following introduction certain transitory rules (e.g., tax privileged release of hidden reserves) may
effectivelyextend effective date for 5 years.
• Swiss tax rulings should not becomesubject to the EU State Aide initiatives.
• Non-tax factors such as Swiss employment law may make Switzerland an attractive location for
multinational corporates to move resources to Switzerland allowing value-added businessactivities to coincide with the low corporate income tax rates in Switzerland.
32
Philipp StaufferFounder and CEO, Onor
Onor Inc. (derived from Honorable and Meaningful…)
Philipp Stauffer ©
Switzerland (Swiss)
Understated (80%)
Thought Through (90%)
Control (Mine)
Cash (Now)
Custom
Upside
Valley (Melting Pot)
Overstated (80%)
Thought Of (50%)
Open (Everybody’s)
Stock (Future)
Streamlined
Upside + Downside
Philipp Stauffer ©
Understated
Thought Through
Control (Mine)
Cash (Now)
Custom
Upside
Overstated
Thought Of
Open (Everybody’s)
Stock (Future)
Streamlined
Upside + Downside
Quiz: Who is Who?
Philipp Stauffer ©
Understated
Thought Through
Control (Mine)
Cash (Now)
Custom
Upside
Overstated
Thought Of
Open (Everybody’s)
Stock (Future)
Streamlined
Upside + Downside
Real & Humble
Thought Through & Iterate 80%
Open (Collaboration)
Stock (Future) & Survive with Cash
Streamlined
Upside & Downside (Failing is a journey)
Where from here?
How to Win?SwitzerlandSilicon Valley
Philipp Stauffer ©
Oliver Haugen, Senior Project Leader, swissnex Outpost NY
Source: Innovation Union Scoreboard 2013
What we know: Switzerland is an innovation leader
“Top country in the Global
Innovation Index (GII) for the
fourth year in a row.”
Source: Nature, Vol 490, 18 Oct 2012
Where do scientists go?
Switzerland’s innovation and research initiatives
The Commission for Technology
and Innovation (CTI) is Switzerland’s
innovation promotion agency. It
provides consultancy and networking
services and financial resources to help turn scientific research into
economic results.
The Swiss National Science
Foundation (SNSF) is a science
research support organization
mandated by the Swiss Federal
Government, established under private law in 1952. Its National
Research Council is composed of
distinguished researchers who
mostly work at Swiss institutions of
higher education. They assess research proposals submitted to the
SNSF and make funding decisions.
Innovation hubs: Zurich, Lausanne – and Dübendorf
Two main innovation hubs are clustered
around the Federal Institutes of
Technology in Zurich and Lausanne,
linking academic research with industry
R&D and startups.
The Swiss government just approved
the development of a new 170-acre
Innovation Park at Dübendorf, a former
military airfield near Zurich. Swiss parliament voted to guarantee a loan of
CHF 350 million.
The aim is for the results of university
research to be translated into marketable products as quickly as
possible, in partnership with
international companies.
Abroad: swissnex is the world’s first science consulate
M A Go ve rn or De val Pa trick d i scu sse s th e si m ilarit ies b e twe en Switzerla nd a nd M A d ed ica tion to i nno va tion a nd te ch nolo gy d evel op men t.
To forward the innovation profile of
Switzerland abroad, the Swiss
government opened its first science
consulate in 2000 in Boston. The
network has grown to seven cities.
swissnex’s mission: Connect scientists,
researchers, entrepreneurs, policy-
makers, and thought leaders with
inspiring peers and new ideas on either
side of the globe.
swissnexis an initiative of Switzerland’s State Secretariat for Education, Research and Innovation (SERI / SBFI – WBF )
Greater Zurich AreaWhere else?
