BASEL: Switzerland is to amend its “too big to fail” legislation to reduce the tax burden on certain banks.
The Swiss Federal Council has asked the Federal Department of Finance to prepare a draft consultation paper on amending the participation deduction provisions in the TBTF legislation. It said that the proposed reform would “prevent the tax burden of the top holdings of systemically important banks from rising with the issuance of contingent convertibles (CoCos), write-off bonds, and bail-in bonds.”
The Federal Council has proposed that interest payments for CoCos, write-off bonds, and bail-in bonds should not be taken into account when calculating the participation deduction.
Under the current rules, the deduction is reduced because interest for CoCos, write-off bonds, and bail-in bonds is treated as a financing expense. The Federal Council explained: “This reduction in the participation [deduction] is system-related in the current law, i.e. all interest on debt capital leads to a reduction in gross participation revenue for all corporations and cooperatives. This can result in a higher tax burden being incurred for participation revenue at federal and cantonal level in terms of profit tax at the top holding level of a banking group that has issued CoCos, write-off bonds, or bail-in bonds.”
The Federal Council added that certain banks are obliged under supervisory law to issue such financial instruments, and that the issuance must take place via the banking group’s top holding established in Switzerland. This can “lead to an additional system-related profit tax burden of several hundred million francs per year for the issuers concerned [and] … is associated with a reduction in capital, which is inconsistent with the aim of the TBTF regulations,” it said.
According to the Federal Council, the proposed reform “would ensure that banks’ accumulation of capital would progress more quickly, which is in line with the aim of the TBTF legislation.”
