To Stay Attractive, Plan B on Corporate Taxes Need to be Drawn Up by Switzerland

After voters rejected its bid to reform corporate taxation to keep the country internationally competitive, the Swiss government must come up with a new plan and figure out how to limit economic fallout.

The government will have to concoct a Plan B to prevent their moving abroad because Switzerland needs to end its current practice of giving thousands of multinationals tax breaks. A drop in tax revenue and economic growth would be stunted by their departure.

After a strong currency-induced slowdown in economic growth and at a time when countries such as the U.S. are seeking to gain a competitive edge with their own business tax reductions, the government is at pains to find a solution. Having already bowed to international pressure and scrapped banking secrecy after a crackdown on tax evasion by other countries is Switzerland, which has succeeded in attracting big global corporations like Procter & Gamble Co. and Caterpillar Inc.

“Lots of uncertainty about the future has arisen, and there’s concern about reactions by the OECD and the EU, because there’s the risk of a blacklisting of the current regime — this will force international companies to think about alternatives,” said Andreas Staubli, managing partner at PricewaterhouseCoopers AG in Zurich. “What will happen first is that new investment decisions will be made in favor of a place other than Switzerland.”

With rates rising to more than 20 percent, the rates to which holding and domiciliary companies are subjected get reset at the level of domestic firms by scrapping the current system without a replacement. Yet, since the Organization for Economic Cooperation and Development (OECD), which is clamping down on tax loopholes, sticking with the current regime could eventually land Switzerland in hot water with the OECD.

“It’s still in the interest of Switzerland to have a competitive tax regime,” said Christian Stiefel, director of SwissHoldings, which represents the multinationals. “It’s to be expected that cantons will do what they can to stay competitive, it just may cost them a bit more than it would have.”

According to consultancy BAK Basel, a 5.6 percent drop in potential economic output, equivalent to 34 billion ($34 billion) francs, would be the result of the short term impact of highly mobile companies leaving Switzerland.

According to the regional business association GGBa, already posting a slight decline last year is the Bottom of Form

number of companies moving to the cantons of Bern, Freiburg, Vaud, Neuchatel, Geneva and Valais. A delay is already being caused in businesses’ investment decisions by rcent developments such as Brexit, political situation in the U.S., Switzerland’s tussling over European Union immigration quotas and the strong franc.

“Swiss companies need the certainty that the way they are taxed is internationally accepted,” said Swiss Textiles, which represents 200 local companies. Tax measures to foster innovation would help the sector, which produces cloth for haute couture designers as well as protective gear for workmen, it said.

The deadline of implementing the reform was 2019 and a working group will convene soon to figure out the way forward since that deadline now won’t be met, said Finance Minister Ueli Maurer. The government could in theory present parliament with a draft bill by the end of 2017 he said even though he didn’t spell out what the Plan B might consist of.

“There’s without a doubt international pressure,” Maurer said. “There’s a real danger of companies in Switzerland being subject to double taxation.”

(Adapted from Bloomberg)

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Categories: Economy & Finance

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