The OECD minimum tax and fancy dress parties

Most of us aren’t particularly interested in tax issues or changes. They often involve complex combinations of percentages and numbers with too many zeroes that only tax experts really understand. All that the lay person tends to care about is whether a change means that they’ll have to pay more or less tax and whether more or less money will be spent on public services as a result.

The international community, acting through the Organisation for Economic Co-operation and Development (OECD), has decided that a single tax rate of 15% is to apply to multinational enterprises from next year. High-tax countries hope that this will make them more attractive to companies that currently prefer to base themselves in low-tax states like Switzerland. Should voters decide in favour of the tax in the upcoming referendum, Switzerland would become more expensive for large corporations because their tax bills would increase. Private taxpayers and SMEs, on the other hand, wouldn’t be affected. Given how the tax project has been designed and Switzerland’s all-round appeal as a business location, we could expect to see more money flowing into the public coffers in the coming years.

The way the OECD minimum tax works is easy to explain. Let’s look at an analogy we’re all familiar with: a fancy dress party. Most of us have learned that it’s generally better to turn up in costume, even if we don’t really enjoy dressing up, because we don’t want to be on the receiving end of barbed comments and dirty looks from everyone else. It’s quite similar with the OECD minimum tax. Being a low-tax country, Switzerland doesn’t really want to participate, but it wouldn’t dare to go it alone because the disadvantages of doing so are too great.

If the Swiss electorate were to vote against adopting the minimum tax, it would be voluntarily giving up extra tax revenue to other countries. This would be rather like making those who turn up to the fancy dress party without a costume pay an entry fee and then sharing the money out among those who did dress up. It is of course up to everyone to decide whether to find a costume or pay the fee. The costume would certainly be the cheaper alternative.

Companies that would be affected by tax hikes usually campaign against them, but in this case they are explicitly welcoming the change. As if this were not strange enough, the very people who would normally champion tax hikes are against this one – in particular because they object to the Swiss Parliament’s plans for dividing up the additional tax revenues between the federal and cantonal governments. However, this division only concerns revenues that would be generated by the planned new tax. If the OECD minimum tax is rejected, there won’t be anything to divide up. The plan is to pass a quarter of the additional revenues to the federal government and three quarters to the cantons. The cantonal revenues would then be shared out via Switzerland’s national financial equalisation system. The Confederation, the cantons, the cities and the communes would all benefit. Again, this is like our party: if everyone has to dress up, they should at least have fun doing so, otherwise there’s a risk that no one will come to the next party at all. This is why all stakeholders need to reach a compromise over the OECD minimum tax that will be beneficial for everyone. Ultimately, it’s up to the voters to decide.