Swiss Tax Vote Could Make Business Think Again: QuickTake Q&A

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Switzerland’s future as an attractive base for companies hangs in the balance. In a Feb. 12 referendum, Swiss voters will decide whether to accept or reject a government plan to replace the special tax breaks that multinational companies now enjoy. While a ‘Yes’ vote would ring in tax cuts, a ‘No’ vote would force officials to come up with a new plan to prevent companies from moving elsewhere and avoid eventually landing on a blacklist for non-compliance with Organization for Economic Cooperation and Development rules.

1. Why would the Swiss chase away companies?

They’re trying not to. Switzerland has committed to scrapping the preferential tax rates it currently gives to thousands of multinationals (set up with the legal status of holding and domiciliary companies) because they aren’t in line with the OECD’s rules. The referendum is on whether to accept the government’s proposal for replacing the current system. It would introduce tax breaks for income from patents and for research and development activities. Multinationals are important to the Swiss economy: Companies with special status employ some 150,000 people and account for half the R&D spending. The federal government now now gets about half of its corporate earnings tax revenue from multinationals; cantons and municipalities get 20 percent.

2. So taxes on multinational corporations will rise?

Possibly. The changes have been undertaken to comply with the OECD’s bid to establish fair competition on taxation. The rates multinational companies are charged in Switzerland aren’t usually disclosed, but accounting firm KPMG says the 17.8 percent in total federal, cantonal and local tax on profit that those corporations pay on average is less than what they’d incur in the U.S., Japan, France, the U.K. and Germany. Cantons -- which set their own tax rates -- are expected to reduce company levies across the board. The city of Basel, home to drug makers Roche and Novartis, will tax company profits at 13 percent. Most domestic companies in Basel now are charged as much as 22 percent, while holding companies typically pay about 8 percent to 11 percent. By comparison, Ireland’s corporate tax rate is 12.5 percent.

3. What do supporters of the tax reform say?

The multi-party government and businesses say the changes would keep Switzerland attractive as a place for companies. Swissmem, the association of mechanical and engineering companies, says that encouraging more R&D through tax breaks will help make companies more competitive and preserve jobs. Supporters concede that cantons and municipalities will suffer revenue shortfalls, and that the federal government will lose more than 1 billion francs ($1 billion). Yet they say the reform is the least bad option, given that Switzerland has committed to scrapping its current practices and that other countries could lower their taxes to gain an edge. President Donald Trump, for example, has suggested cutting the U.S. corporate tax rate to 15 percent from 35 percent.

4. What do opponents say?

The Social Democratic Party, the second-largest in parliament and one of the sharpest critics of the reform, argues that the government has proposed “opaque tax tricks” that will enrich large shareholders and lawyers. It says the middle class will have to pay higher taxes and will get fewer public services. The party also says the reform will cause a shortfall in revenue of at least 3 billion francs for the federal government, cantons and municipalities combined.

5. How are voters likely to decide?

It’s a dead heat. Support for the reform has declined, and former Finance Minister Eveline Widmer-Schlumpf has criticized it, saying it gives away too much to companies. As of late January, 11 percent of voters were still undecided.

6. What happens if the proposal is rejected?

There’s no official Plan B. Finance Minister Ueli Maurer said the government would need as long as three years to present a new bill to parliament, which could be costlier than the current one. He also warned that rejection could cause companies to invest or move abroad, leading to job losses and a big drop in tax revenue. While Switzerland could eventually land on an OECD black list, that wouldn’t happen immediately, an OECD official said. Still, he said Switzerland shouldn’t be surprised if other countries took countermeasures. In the past, Italy had Switzerland on a black list for its corporate tax practices, which made it harder for Swiss companies to do business there.

7. Why is the reform up for a national vote?

Switzerland’s system of direct democracy allows any national law to be challenged if opponents collect 50,000 signatures from eligible voters within 100 days of its passage. If that’s achieved, the electorate gets to say ‘Yes’ or ‘No’ in a referendum. The result is binding.

8. Have plebiscites caused problems in the past?

Switzerland’s system of people power dates back to the 19th century and voters traditionally have backed free enterprise. Still, a 2008 ballot reducing corporate taxes passed by a narrow margin. Since then, voters have torpedoed the government’s bid to buy new fighter jets and enacted stringent limits on executive pay. They also approved a 2014 initiative requiring quotas for European Union immigrants, which passed despite a hefty government campaign against it.

The Reference Shelf

  • Bloomberg News explains why Switzerland might lose its allure.
  • PwC analyzes Switzerland’s corporate tax reform.
  • The Swiss government says why it’s overhauling company taxation.
  • Bloomberg BNA has a primer on patent boxes, “Europe’s Favorite Tax Toy.”
  • A QuickTake explainer has a short history of Switzerland’s people power.
  • A Bloomberg View columnist calls for fewer Swiss-type referendums.
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