by Matthew Allen in Zurich, swissinfo.ch 
April 3, 2014 – 11:00

 

Low Swiss cantonal tax rates have proved a magnet for multinational firms in the past few decades. But international pressure to reform tax practices, combined with a perceived Swiss intolerance of foreigners, have recently tarnished the reputation of ‘Location Switzerland’.

Weatherford only moved its HQ from Bermuda to Zug in 2008, but the company now feels it can enjoy better value in Switzerland’s main European rival for attracting foreign firms – Ireland.

“Our incorporation under Irish law will strengthen Weatherford’s steady course allowing us to operate at the lowest possible cost,” the company said in a April 4 statement.

Providing shareholders agree with the move, Weatherford  will follow internet multinational Yahoo that upped sticks from Rolle, canton Vaud, to Ireland last year.

Stagnating rates

Only the day before Weatherford’s move was announced, KPMG was highlighting the problems Switzerland is currently facing. The boom years of corporate tax cuts appear to be over in Switzerland, while levies on the highest-paid individuals are on the rise, the international accountancy firm said.

KPMG found that corporate tax rates have decreased only fractionally in Switzerland this year compared with a 4.07% fall since 2005. The average cantonal rate for companies now stands at 17.92% compared with 18.01% last year.

And things look set to get worse with the European Union forcing Swiss cantons to soon abandon their “uncompetitive” policy of levying lower rates on the foreign-sourced income of multinationals stationed within their borders.

Complying with new taxation standards is proving a real headache for cantons – such as Zug, Geneva and Vaud – which rely heavily on income from foreign holding companies or headquarters.

In December, the government came up with broad ideas on how to spread the pain of tax reform while keeping foreign firms in Switzerland. These included tax breaks on patents (so-called IP boxes) and the abolition of corporate stamp duty.

More detailed plans are expected to emerge in the next few weeks, but finding a solution that fits the different requirements of individual cantons is looking extremely hard. Geneva, in particular, would find little value in IP boxes, according to KPMG, while the canton has ruled out a Neuchâtel-style general reduction in rates for both domestic and foreign firms as too costly.

Local company concerns

To add to the cantons’ woes, the OECD and the G20 league of most influential nations in the world are also closing in on multinationals which exploit loopholes in current rules to shift profits from high-tax countries to those with lower rates, such as Switzerland.

This particular pressure is not focused purely on Switzerland. Countries such as Ireland and the Netherlands are every bit as much under the global microscope on this issue.

But firms have reportedly become jittery about tax uncertainty and a recent Swiss vote to restrict the number of EU workers coming into the country. Losing tax breaks is one thing, but losing access to the cream of international talent might be a step too far, according to the Swiss media that regularly runs rumours of firms downsizing or moving away.

It also appears that even home-grown companies can be disgruntled at high corporate taxes, which can vary enormously from canton to canton. Thierry Stern, chairman of luxury watchmaker Patek Philippe, told Le Temps newspaper that the company might leave its canton Vaud home because of “suffocating” taxes.

Cantons in the red

Layered on top of the growing list of problems is the parlous state of most cantonal finances last year. Many cantons are talking about tax hikes and cuts in services to plug the holes left in budgets by diminishing tax returns and increases in expenditure.

Red figures in cantonal balance sheets may also explain why income tax rates for high earners have increased fractionally for the second year in a row – to 33.86%.

Peter Hegglin, director of the Cantonal Conference of Tax Directors, bemoaned the fact that cantons have recently been forced into taking over the funding of hospitals and other expenses from the federal government.

Added to a slight drop in tax revenues, thanks to stagnant economic conditions, this is the reason that many cantons are struggling to make ends meet. But Hegglin also admitted that cantons may have contributed in part to their own problems by overplaying their hand in slashing taxes in the boom years.

“The general policy of cutting taxes went a bit too far in recent years, and some will have to be raised again,” he told swissinfo.ch.