Over the last few weeks, the G7 committee laid out plans to impose a minimum corporate tax rate of 15%. Companies looking to attract investors and minimize their tax burden have been able to find countries willing to give them a lower tax rate; this, in turn, helps the company grow and maintain value. Switzerland is one of the countries that attracts companies to its economy by using competitive tax rates. It is part of what makes Switzerland's economy so strong and competitive. Even though the Swiss government plans to sign on to the agreement for a global minimum tax rate, they are developing a subsidies plan to encourage the larger corporations to stay.
How Governments Use Tax Rates
Governing authorities can use tax rates to improve the economic situation or trajectory. In Switzerland, they have used tax rates to stimulate economic growth and competitiveness in the marketplace with lower rates, making them an enticing option for large, medium, and small-cap companies to exist within. Since Switzerland is looking to accept the terms of the G7 corporate tax rate, they will turn to the usage of subsidies to help offset the required minimum. The minimum tax rate will undoubtedly affect businesses in Switzerland, but the Swiss economy has proven historically to react and adapt to changes in the global economy very well.
Tax Rates in Switzerland
The proof is in the pudding for Switzerland. Despite Switzerland's lower tax rates, the country continues to prove its effectiveness in dealing with its finances as it turned a CHF21 Billion profit in 2020 amidst an economic downturn. This was accomplished while providing substantial economic stimulus plans to support the businesses affected by the financial crisis caused by the ongoing pandemic. The Swiss government has many options for delivering an enticing destination for international trade, private banking, and corporations based in the country. The ability of the Swiss economy to react to changes has been seen time and time again. Despite the daunting pressures of an imposed global minimum corporate tax rate, the Swiss economy looks to be in a good position to remain strong.
Switzerland functions in a similar way to the U.S. when it comes to taxes. The tax rate can vary significantly in the U.S. depending on what state a person or entity resides in and even by township. In Switzerland, there are 26 Cantons, and they all have individual tax rates. Among the lowest is the Canton of Zug. Zug's finance minister has stated that Zug's goal is to continue to be a leading destination for corporations based on their tax rate incentives. But just how low is their tax rate? The answer is at about 12%. This may seem to be just under the global minimum proposed, but this 3% will continue to add up and affect the income that could be used to pay back shareholders and/or improve the company through reinvesting the money for operational purposes. This could lead to companies' performances being affected and the weakening of the companies' ability to raise capital. The effect could see a dip in the markets and slower growth.
The stock markets can be highly effective in building wealth; however, their prices can fluctuate, causing short-term gains or losses. In general, however, true wealth is built over time by reinvestment, causing the progression of a company and individuals. The added tax could slow this progress—not implying a positive or a negative here—the people who will feel the effects of this will be the investors and the businesses. They will have to decrease reinvestment opportunities or pay fewer dividends. These actions may cause investors to value the company's stock price less, as the possibility of return on investment may decrease. The businesses will feel these effects as they may weaken in their ability to raise capital. This, in turn, can slow the growth or even sustainability of a corporation having broader effects on the industry they are intermingled with, causing a weakening of the sector.
The thought behind a minimal corporate tax rate is that corporations need to pay their fair share in taxes. Taxes are, in fact used to bolster the social wellbeing of a population if they are correctly allocated and used for these purposes. Further, a healthier society can lead to a safer and more stable environment that attracts businesses due to their sustainability. A stable society definitely acts as a magnet for corporations looking to establish their headquarters. Therefore, there is a definite responsibility for taxes to be paid to create an attractive environment for people, organizations, and corporations in creating an optimal environment for business, investing, and banking.
Switzerland has long found the middle ground of taking care of its populous and taxing its entities at an optimal rate. The global economy is changing, and Switzerland, as the neutral heart of Europe, is willing to change—to a certain degree—with it. Switzerland's current position of accepting the global corporate tax rate does put outside pressure on the small country. However, Switzerland has been able to—over time—prove resilient in creating an environment that attracts and protects the small but powerful economy. The financial center that is Switzerland seems incredibly determined to remain as effective as ever in leading the world in protecting the privacy of individuals banking in Switzerland. Adopting a global tax rate and providing the subsidies to ensure its economy remains a top-shelf product for individuals, financial institutions, and corporations that call Switzerland their home seem to be the continued future of the little mountain nation.
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