US medical implant maker Zimmer Biomet’s decision on a potential $40 million (€37.4 million) investment in its Swiss factory has been put on hold until the outcome of a referendum next month on tax reform.
A long-standing tax break that has attracted thousands of companies to Switzerland is set to go, and the issue for Zimmer and some 24,000 international firms is how the new regime will stack up against other low-tax jurisdictions.
That's not immediately clear, as Switzerland's 26 regions, or cantons, set their own business taxes. Consultant KPMG reckons that the average Swiss corporate rate will be about 14 per cent after the reform, above Ireland's 12.5 per cent, but lower in some cantons.
Switzerland has been in the European Union’s firing line for years because cantons have a special tax status for foreign companies that means some pay virtually no tax over an effective federal tax of 7.8 per cent.
The country agreed with Brussels in 2014 to abolish this status as it allows some foreign firms to pay far lower tax on overseas earnings, an attractive perk for multinationals looking to lower tax bills.
Most Swiss recognise that the country needs tax reform to avoid being blacklisted as a low-tax pariah state, but the new measures proposed to help companies offset the loss of the special-status breaks have created deep divisions.
Companies will get tax breaks on research and development (R&D) in Switzerland, profits from patents developed there, and deductions for excess company equity. In addition, many cantons say they will also reduce corporate tax rates for all companies to reduce the fiscal burden and dissuade multinationals from leaving.
The canton of Zug, for example, taxes special-status firms at 8-11 per cent and ordinary companies at 14.6 per cent. After the reforms, it plans to tax all companies at 12 per cent.
Too generous
The No campaign in the referendum is rooted in a coalition that includes the Social Democratic Party, the Greens, trade unions, church leaders, and some from right-leaning parties that back the proposals.
The No campaign says that, overall, the reforms will lead to lower tax revenue; it fears the public will bear the brunt through cuts in public services or higher personal taxes.
The federal government has pledged to give cantons an extra 1.1 billion Swiss francs (€1.03 billion) to help cover expected budget shortfalls. But critics say the new tax breaks would punch a hole of three billion Swiss francs in budgets. They estimate that, in Zurich, citizens would face a 14 per cent increase in income tax to cover an expected annual shortfall of 223 million francs.
"No one is disputing that there is a need for reform, but with this proposal ordinary people are financing the big companies who are taking record dividends out of Switzerland," said Swiss lawmaker Jacqueline Badran.
After parliament approved the measures last year, critics gathered the 50,000 signatures needed to trigger the February 12th referendum, which can overturn the parliamentary vote.
Those backing the government on the Yes side say the reforms strike a balance between abolishing the tax breaks criticised by Brussels and new measures that will keep Switzerland competitive.
“We believe the tax legislation proposed is a good solution for Switzerland. We would basically see very little impact. Our tax rate would stay relatively stable. We’re hoping for a positive outcome,” said Joe Jimenez, chief executive of pharmaceutical giant Novartis.
Uncertainty
Luigi Sorrentino, manager of Zimmer Biomet’s site at Winterthur, which is also its European headquarters, reckons the US firm would be more likely to expand its hip and spine implant factory if the public backs the reform and ends the uncertainty.
But if voters send the proposals back to the drawing board, other locations may become more attractive.
“We have investment plans to install new products and transfer new business to this site, but we are waiting to see what happens,” said Mr Sorrentino. “We have 30 sites around the world and we are competing with them for investment dollars.”
After the financial crisis, the Organisation for Economic Co-operation and Development (OECD) came up with an action plan to tackle so-called base erosion and profit shifting, whereby multinationals book profits in low-tax jurisdictions from revenue earned elsewhere.
The OECD estimates that between €95 billion and €225 billion of tax is lost each year through such schemes.
The EU has investigated tax structures used by Amazon and a Fiat subsidiary in Luxembourg, as well as Starbucks in the Netherlands, and it ordered Ireland to recover $14 billion from Apple.
In Switzerland, companies pay a cantonal tax on top of the federal tax. Overall, corporate rates range from 12 per cent to 24 per cent, depending on the canton, with Lucerne the lowest and Geneva the highest.
But for foreign firms with sizeable overseas sales, the special-status tax break for so-called holding, domiciliary or mixed companies means their tax rates range from just 7.8 per cent to 12 per cent.
For some companies benefiting from special status, the reforms still look appealing.
“We would love to have any benefits from increasing investment, or having investment, in R&D. Switzerland is our HQ and most important R&D centre,” said Bracken Darrell, chief executive of Logitech, which makes products such as computer mice and wireless switches that control lighting.
Banking secrecy
The stakes are high for Switzerland, which is already coming to terms with the end of its long-cherished tradition of banking secrecy. If multinationals pull out, Switzerland’s economy could suffer.
The changes also come at a time when US president Donald Trump is considering slashing corporate taxes and Britain is making noises about cutting its rates when it leaves the EU.
The Swiss government says special-status firms employ 150,000 people and contribute half of federal corporate taxes. It argues that bringing taxes into line with international norms would make Switzerland more attractive, securing jobs and prosperity.
According to research institute BAK Basel Economics, if 3,000 of the most mobile international companies – those with a headquarters, management or commodity trading business – were to leave, the fallout would be significant.
It estimates that Swiss gross domestic product would shrink by 5.6 per cent in the short term and that 175,000 jobs would go, and that the long-term fallout would be more significant as global tax competition increases.
Peter Uebelhart, head of tax at KPMG Switzerland, however, argues, that a tax system that complies with international standards would encourage firms to stay.
Pollsters say the outcome of the referendum is too close to call and many voters say they are confused by the issues.
“I don’t really understand it. I don’t think the politicians do either. I think hardly anyone does,” said Daniel Schiesser, a language teacher from Zurich. “The supporters say hundreds of companies will leave, but that’s pure guesswork and ignores the other advantages of them being in Switzerland. The opponents say a counter-proposal can be introduced in two years, but that’s doubtful.”
In Zug, the vote is being watched very closely. The canton is home to 1,800 special-status companies, which contribute nearly a third of its tax revenue.
“If the reforms are rejected, nobody knows what will happen . . . nobody has a plan B,” said Heinz Taennler, Zug’s finance director. “There is a very real risk that some companies could leave Zug, which would be very damaging.”
