Switzerland offers a sweet deal to the wealthy foreigners who live there: They can pay a flat fee—called a forfait—to their local canton and avoid paying any income tax. Now that system is coming under attack, and Swiss bankers are concerned that scrapping the forfait will scare off their best clients.
Two of the nation’s 26 cantons have already abandoned the system. Appenzell Ausserrhoden will become the third on Jan. 1, and Basel will follow 12 months later. In October, the Socialist Party—the second-largest of Switzerland’s four major parties—along with the Alternative Left party and two labor unions presented a petition with more than 103,000 signatures to the Swiss Parliament, calling for the “abolition of scandalous tax privileges for foreigners.” The petition may lead to a parliamentary debate by 2015 and a national referendum on the question within 10 months after that.
The Swiss backlash against the forfait comes as a slowing economy highlights the lower tax rates paid by super-rich foreign residents such as billionaire Ikea founder Ingvar Kamprad. The Socialist Party says the tax loophole has turned Geneva into a city of luxury boutiques and housing that only the rich can afford. “It’s an outrage that ordinary people should pay more tax than rich movie stars, singers, and sporting celebrities,” says Romain de Sainte Marie, president of the Geneva Socialist Party. “It’s a form of tax evasion.”
Bankers counter that rich expatriates are important clients who create jobs and stimulate growth. “We need to defend it for our own sakes, as this is a very interesting customer base,” says Gregoire Bordier, president of the Geneva Private Bankers Association. “This system already brings significant revenue to the authorities.” In 2010 the forfait brought in 464.2 million francs ($492.6 million), or 0.9 percent of Switzerland’s total tax revenue, according to Economiesuisse, a business lobbying group. The number of foreigners using the forfait climbed 31 percent in 2010, to 5,445, from 2006, according to figures from a group representing the finance directors of the country’s cantons. They paid an average 122,681 francs of tax in 2010.
The forfait plan was introduced in 1862 by the canton of Vaud to get wealthy British residents to pay for local services. The tax is calculated using an amount at least five times the annual rental value of the individual’s home in Switzerland. The Swiss Parliament voted in September to increase that to seven times annual rent by 2017. Ordinary federal and cantonal tax rates are applied to that rental value, with the exact amount subject to negotiation.
The forfait can result in a tax rate of less than 1 percent for billionaires such as Ikea’s Kamprad, according to the Socialist Party. Top income tax rates in Geneva and Vaud, where Kamprad lives, are more than 45 percent. Kamprad takes advantage of the forfait system, says Per Heggenes, a spokesman for Ikea Foundation, who declined to provide further details. Kamprad, worth $40.6 billion, is the world’s fifth-richest person, according to the Bloomberg Billionaires Index. “While the system is a nice little earner for private bankers and luxury property agents, Geneva is regarded as a parasite by tax authorities around the rest of the world,” says the Socialist Party’s de Sainte Marie.
After Zurich became the first canton to abolish the forfait in 2009, 97 of the 201 beneficiaries of the tax left the canton. About two-thirds of them relocated to other parts of Switzerland. The biggest surprise was that more than half the foreign millionaires, typically among the most mobile and tax-sensitive people, decided to stay in Zurich, says Marius Brülhart, a professor of economics at Lausanne University: “It seems they don’t all run away when you remove their special treatment. The loss in tax receipts from people who moved away was offset by extra tax from those who stayed” and paid higher taxes.
That bump was short-lived. While tax revenue initially increased from those who remained in the canton, says Vincent Simon, an economist at Economiesuisse, that changed when one unidentified super-rich taxpayer departed.