August 2021 / Switzerland

24 Agosto 2021

Switzerland/European Union – Does Switzerland Really Need a Tonnage Tax?

While tonnage taxes are not new to Europe, it is odd to see such a tax regime proposed for a landlocked country not known as a seafaring nation. Nonetheless, some have suggested that Switzerland adopt a tonnage tax. Peter von Burg and Matthias Gartenmann dissect the recently proposed Swiss tonnage tax and discuss whether it complies with the Constitution and, if so, whether it makes for good tax policy.

Introduction

In February 2021, the Swiss Federal Council released the Federal Act on the Tonnage Tax on Maritime Ships (the Tonnage Tax Act) for consultations. While the tonnage tax is not new to Europe, Switzerland has never had one. Nonetheless, the tonnage tax has been discussed in Swiss political circles for several years. The advantage of such a taxation scheme is that the tonnage tax is an internationally accepted tax and is also already applied in the European Union. It is also a way of creating a level playing field and preventing Swiss maritime shipping companies from relocating to other countries with lower tax burdens. Reservations were expressed about the constitutionality of the tonnage tax, in particular by a Swiss tax law professor.

In the following, the authors will outline how the tonnage tax works and provide their thoughts on whether it is constitutional and, if so, whether it makes for prudent Swiss tax policy.

What is the Tonnage Tax?

The tonnage tax is an instrument for maritime shipping and is intended to treat certain activities in the shipping industry differently to other economic activities for tax purposes. Until now, Swiss tax law did not include any special provisions for maritime shipping. In contrast to the regular profit tax, where in principle the profit actually generated according to accounts serves as the basis of assessment, the tonnage tax would be calculated on a flat-rate basis, irrespective of the actual profit. Thus, the tonnage tax could, in theory, produce a lower tax liability for ships subject to the tax.

The proposed tonnage tax would set an assessment basis determined using the so-called net tonnage. This net tonnage reflects the cargo volume of a maritime ship, as defined in the International Convention on Tonnage Measurement of Ships from 1969, which came into force for Switzerland in July 1982. The net tonnage is then multiplied by a staggered tax rate and the corresponding days of operation.

The Tonnage Tax Act stipulates the following flat rates per operating day based on the net tonnage (NT) of the ship:

  • per 100 NT up to 1,000 NT: CHF 1.09;
  • per further 100 NT up to 10,000 NT: CHF 0.80;
  • per further 100 NT up to 25,000 NT: CHF 0.52; and
  • per each additional 100 NT above 25,000 NT: CHF 0.26.

For ships whose engine system meets certain ecological requirements and is also a low-emission ship, the tax may be reduced by as much as 20%.

Once the tonnage tax is calculated, the result is added to the ordinary or taxable net profit and taxed together at the applicable profit tax rate. In Switzerland, tax rates vary from state to state. For example, the effective tax rate in Zurich is about 20%, while in Zug the effective tax rate is closer to 12%. These rates include a federal rate of 8.5%, as well as a communal profit tax.

The proposed tonnage tax would be voluntary, with ship owners entitled to elect into the regime for each ship for a 10-year period. If a company chooses to exit the regime early, it must wait six years before it can again elect into the regime. In addition, the tonnage tax may only be levied on a seagoing vessel owned by a taxable person if at least 60 percent of the tonnage of the fleet operated by that person is registered in the register of Swiss seagoing vessels or in the register of a member state of the European Economic Area.

Constitutionality and Thoughts on the Tonnage Tax

As stated above, concerns have been raised about the constitutionality of the tonnage tax. According to prevailing constitutional doctrine, the government must identify an explicit legal basis in the Swiss Federal Constitution in order to be able to levy taxes. The Constitution does contain such authority, as it grants the government the power to levy a direct tax of up to 8.5% on the net profit of legal entities. In levying those taxes, however, the Constitution requires the government to respect the principles of generality and uniformity of taxation, as well as the principle of taxation according to economic ability. The proposed tonnage tax may run afoul of these principles, as it treats income from maritime shipping more favourably than income from other economic activities.

But that does not end the discussion. For even if the tonnage tax were to violate these principles, it might still be allowed under the Constitution, depending on how the tax is interpreted. Arguably, the tax could be justified by the government’s desire to pursue economic goals that transcend mere taxation, such as the promotion of Swiss maritime shipping. To that point, some contend that a tonnage tax could be permitted if the Constitution contains a corresponding non-tax authorization, and argue that constitutional articles on foreign economic policy, structural policy and environmental protection provide the requisite authority.

In the authors’ opinion, all companies in Switzerland should be taxed equally. Because the Constitution requires uniformity in taxation, we believe that this principle should only be derogated from for very important reasons. While it is clear that tax policy should always promote the attractiveness of a country as a business location, that promotion should not come at any price.

It should be lost on no one that Switzerland is not located on the sea and is not known as a seafaring nation. In fact, very few ships currently sail the oceans under the Swiss flag. To hammer the point home even further, Switzerland only recently cancelled guarantees for ships in the event that a shipping company gets into difficulties.

To add to the problems in adopting a preferential tax regime, Switzerland has only recently emerged from unpleasant disputes in the area of taxation. The government should, therefore, think carefully about whether a particular industry is entitled to special tax treatment. To that end, the authors question why maritime ships in particular should not be taxed in the same way as other companies. Taken to its logical extreme, any industry could argue for special, preferential tax treatment, arguing that it is special and important for Switzerland and the national economy. Rather than bow to these kinds of special, parochial interests, Switzerland should instead focus on industries that have a strong and sustainable connection to Switzerland. The promotion should not be based solely on tax incentives.

Finally, it may be wise to wait and also take into consideration the current developments at the OECD, including the proposal for a global corporate income tax with a minimum rate of at least 15%.

In summary, while the introduction of a tonnage tax may seem like a good idea at first glance, on balance the authors do not believe it would worthwhile for Switzerland to pursue.

16 Agosto 2021

Tax Treaty Between India and Switzerland – MFN Clause on Dividends Activated

On 13 August 2021, the Swiss Federal Tax Administration published a clarification, announcing that the conditions for the activation of the most favoured nation (MFN) clause contained in the amending protocol, signed on 30 August 2010, to the India - Switzerland Income Tax Treaty (1994) have been met.

The MFN clause should apply as of 1 January 2021. If India does not apply the clause on a reciprocal basis, Switzerland will apply the reduced rate from 1 January 2023.

Currently, the treaty provides for a 10% withholding tax on dividends.

The MFN clause of article 11 of the 2010 protocol provides that this rate will be reduced when India afterwards signs a new treaty with another OECD Member States providing for a lower rate.