Roche Urges New Plan as Swiss Tax Vote Seen Slowing Investment

  • Voters rejected tax reform that appealed to multinationals
  • Country needs new plan to ensure competitiveness, Roche says

Switzerland’s decision to shoot down a planned corporate tax reform is likely to mean years of uncertainty for international companies such as Caterpillar Inc., putting future investments at risk and raising the prospect that some businesses may flee elsewhere, according to executives.

With the clear defeat of the government’s plan in Sunday’s referendum, companies including Roche Holding AG and Caterpillar urged Swiss politicians to formulate a new proposal to maintain the country’s appeal as a business-friendly location.

“This creates massive uncertainty,” Martin Naville, chief executive officer of the Swiss-American Chamber of Commerce, said in a phone interview. “Nobody will be investing in the coming years because they don’t know what’s going to come after.”

The referendum’s outcome is bad news for Switzerland at a time when its economy is struggling with a strong currency and countries such as the U.K. and the U.S. threaten to cut business taxes to gain an edge. The government will start work on a new plan, Finance Minister Ueli Maurer said, though in the best case it will be the end of this year before a new bill is ready.

As it stands now, cantons offer lower tax rates for international companies than domestic businesses, helping to lure multinationals such as Caterpillar and Procter & Gamble Co. to the country. Those special tax breaks are due to be scrapped under international pressure. To head off a surge in tax rates for foreign businesses, the government proposed a plan that would have allowed cantons to cut rates across the board and companies to deduct income resulting from patents and research and development activities.

For a QuickTake explainer on Switzerland’s corporate tax reform, click here.

Voters rejected it Sunday 59 percent to 41 percent out of concern it would have strained the public purse and increased the burden on individual taxpayers.

The country needs a competitive tax situation to make it attractive for investment, according to Basel-based drugmaker Roche Holding AG, the third-largest Swiss company by revenue.

“Roche regrets the rejection of the tax reform,” Nicolas Dunant, the company’s head of media relations, said in an e-mail. “Now a new proposal needs to be developed with the goal of providing planning security as well as maintaining an internationally competitive environment for corporations in Switzerland.” The vote doesn’t have an immediate impact on Roche, which employs 14,400 people in Switzerland, he said.

‘Delicate Situation’

Multinationals generated around 12 percent of economic output and 9 percent of employment in Switzerland in 2015, according to consultancy BAK Basel. Overall, they employ some 150,000 people. Some cantons have a larger presence of multinationals than others. In Geneva, they account for 76,000 jobs and 43 percent of gross domestic product.

“Multinational companies are in a delicate situation,” Francois Longchamp, the head of the Geneva cantonal government, said in a phone interview. “Some of them have to make decisions on re-investments.”

Some companies will consider alternatives, which could range from moving a marketing department or a manufacturing plant outside of Switzerland to leaving the country altogether, said Naville of the chamber of commerce.

Multinationals in certain industries, for example commodity trading, could go quickly if they ever decided to move out, Naville said. Commodity traders “can pull the plug on Friday and start working Monday from somewhere else,” he said. It would take much longer for companies with manufacturing sites or R&D operations in Switzerland to make a similar decision, he said.

Oil Traders

Geneva over the years lured some of the biggest independent oil traders, including Vitol Group, Trafigura Group, Gunvor Group Ltd. and Mercuria Energy Group Ltd.

With no tax reform, multinational companies risk being subject to double taxation in the long term.

Caterpillar, the U.S. maker of construction equipment, supports adapting Swiss tax law to new international standards, the company said. Its Geneva office is the headquarters for Europe, Africa and the Middle East, employing about 400 people.

Caterpillar faced U.S. congressional hearings in 2014 after a Senate report found the company saved $2.4 billion in U.S. taxes by moving profits from its parts business to Switzerland, where it paid tax rates as low as 4 percent. The company said the move was a legal and appropriate way to cut expenses. The Internal Revenue Service later sought tax increases and penalties of about $1 billion.

“Though this vote creates additional uncertainty in a challenging business environment, we remain confident that Switzerland and the cantons will find a consensus allowing to pass a new federal tax law that will support innovation and employment,” said Erik De Leye, a Brussels-based spokesman for Caterpillar.

Compromise Seen

To be sure, the vote outcome doesn’t mean multinational companies will automatically start paying higher taxes. The current regime will stay in place until at least 2019. The Swiss Trading and Shipping Association, which represents commodity traders and shippers, expects a compromise to be adopted by then, since companies need legal and fiscal security, said Stephane Graber, the group’s secretary general.

“The vote outcome doesn’t send a good message to the multinationals,” Jacques Jeannerat, executive director of the Geneva Chamber of Commerce, said in a phone interview.“But right now, I would ask them to wait and see.”