Despite the pandemic which has brought a major impact on European countries, Switzerland, and more particularly the canton of Geneva, is less affected. The canton’s GDP development is mainly due to high tax funds from promising economic sectors. However, expenditure and pension fund commitments weigh heavily on the canton’s debt. Geneva must therefore demonstrate a resilient tax system to its taxpayers in order to keep a balanced budget.
High tax funds
The rating agency Standard & Poor’s (S&P) gives the canton of Geneva a score of AA-/Stable/–. This rating is based on an analysis of factual data on the canton’s economic development. This growth is attributable in particular to promising economic sectors, including chemicals, watchmaking and finance, which have shown remarkable resilience in the face of Covid-19.
According to Yves Mirabaud, President of the Geneva Financial Center Foundation, Geneva’s economic dynamism is creating significant wealth, which gives rise to a solid tax base, both for legal entities and individuals. The tax revenues thus declared in Geneva will rise to 7.3 billion francs in 2022, which represents an increase of 462 million francs compared to 2021.
The majority of these tax payments come from a minority of taxpayers. Only 0.5% of companies generate 71% of the profit tax and 1.9% of them pay 90% of the capital tax. As for individuals, 4.2% of taxpayers pay 48% of income tax and 3% pay 81.5% of wealth tax.
Costly expenditure
Yves Mirabaud believes that the budgetary issue is a major one as long as there are difficulties in implementing structural reforms. These aim to reduce spending and future commitments. The State Council’s 2022 budget proposal foresees operating expenses in Geneva of almost 9.5 billion francs. In addition, net expenditure per capita is 89% higher than the average net expenditure in other Swiss cantons. Finally, the reform of the pension plan of the State of Geneva Pension Fund (CPEG), which promotes transitioning from a defined benefit system to a defined contribution system, cannot be easily achieved.
As a result, the canton’s debt has moved up a notch. The rating agency predicts that Geneva’s debt load will reach 17.6 billion francs by the end of 2022. For this canton, which is home to 500,000 inhabitants, this represents a personal debt of around 35,000 francs, breaking records throughout the country.
Maintaining a balanced budget
Geneva strives to maintain a balance between high tax revenues and high expenditure. Thus, Yves Mirabaud indicates that the canton attempts to be resilient towards its taxpayers by using various measures. These include the attractive tax scheme resulting from the reform of corporate taxation (REFA), which proposes a tax rate of 14% on profits. Moreover, it is necessary to carefully implement the tax revolution established at the OECD aiming at introducing a minimum tax rate of 15% for multinationals with an annual turnover of more than 750 million francs.
Furthermore, the tax increase will also affect the above-mentioned sectors that keep the economic fabric of Geneva. The initiative 179 entitled “Against the virus of inequalities… Let’s resist! Let’s resist!” aims at implementing a full double taxation of profit distributions to shareholders. The idea is to first pay the tax on the profit that is generated by the company’s pre-tax results, and then the income tax that is payable on the shareholders’ dividends distribution.
However, any Swiss shareholder who has a shareholding of at least 10% in a company, benefits from decreased double taxation. Following the example of the neighboring canton of Vaud, Geneva currently taxes these profit distributions at a rate of 70%. It is therefore appropriate to reject the Initiative 179 in order not to tax Geneva shareholders in full and to maintain a competitive advantage over other cantons.
Learn more about Mirabaud here: https://www.abps.ch/en/members/mirabaud-cie-sa/