Taxing times for multinational magnet Switzerland

Google's Zurich research centre has grown at a rapid pace since setting up in Switzerland Keystone

The number of foreign firms setting up shop in Switzerland remained stable last year despite the strong franc and continued doubts about future tax policy. But the picture differs from region to region and appears less rosy when taking a longer view.

Some 265 overseas companies established a physical presence in Switzerland in 2016, creating 1,005 new jobs – not much of a change compared to the 264 firms and 1,082 jobs in 2015, but a far cry from the 379 companies and 2,431 jobs attracted in 2010.

Overall numbers of foreign entrants may be falling because of the strong franc, weak global economic growth putting companies off major investments and political uncertainties abroad, not least in the United States. But some parts of Switzerland are being hit harder than others, a situation that may well be exacerbated by Swiss voters deciding to reject corporate tax reforms in February.

Regional discrepancies

The Greater Zurich AreaExternal link – comprising financial centre Zurich, fintech valley Zug, Schaffhausen and other central and eastern cantons – saw 101 new firms (up from 93 in 2015) promising 1,500 jobs within five years. The pharmaceutical and medtech belt around Basel welcomed 36 companies (up more than 50% from 2015) which want to fill 600 positions by the end of 2019.

However, multinationals have recently appeared less keen on the region stretching westward from Bern to Geneva, Valais and Vaud. This traditional hotspot for international business saw new entrants dip slightly year-on-year to 42, about half the number attracted to the region in 2014.

“Too much is made of how many companies we attract or the number of jobs they create as soon as they arrive,” says Thomas Bohn, executive director of the Greater Geneva Bern AreaExternal link business promotion agency.

“What really matters is the potential they have to be successful and really grow whilst they are here,” he adds, citing Google as an example. The company began operations in Zurich with three or four people and now employs about 2,000.

Although Bern and the western Swiss cantons still have many attractive attributes for companies, they are more affected by the corporate tax chaos exacerbated by February’s referendum. No cantons may continue taxing the overseas earnings of foreign firms at a reduced rate, since this was ruled unfair by the European Union.

A high proportion of firms receiving tax breaks (which contribute half, or CHF4.3 billion, of all federal corporate tax receipts) happen to be based in Geneva, Vaud and Valais. These cantons will have to make the greatest adjustments to integrate the new tax code when it inevitably arrives, perhaps as soon as 2019.

Keeping perspective

Bohn puts a brave face on the problem, arguing that firms from high tax countries, such as Brazil, are not so bothered by the fine details of Switzerland’s corporate tax changes. He also points out that US firms have their attention focused on the Trump administration’s threats to tear up the domestic corporate tax system, including the possibility of introducing new import duties.

“Hardly any firm that I talk to in the US knows that Swiss voters recently rejected corporate tax reforms,” he told swissinfo.ch. “They are more concerned about the prospect of tax changes at home. If a pharmaceutical company produces a medicine in Switzerland, it wants to know if it will be facing a new import tax when it is sold on the US market.”

The likes of Google, Unilever, Japan Tobacco International and, more recently, Chinese firms have set up regional headquarters in Switzerland for a range of reasons besides low taxes. These include a business quality label, a strong economy, stable governance, first class education and training systems as well as highly skilled workers. There are also an abundance of soft factors like low crime rates, efficient infrastructure and a high quality of living.

However, taxes still play a prominent role, leading to the strong competition among cantons and countries to set competitive rates.

Other countries – notably Ireland, the Netherlands, Belgium and Luxembourg – are also under international scrutiny for the way they run their tax systems. But none are having to revise their corporate tax code to the same degree as Switzerland.