January 30, 2017 / 7:13 AM / 8 months ago

Swiss vote on multinational tax perks in February referendum

A Swiss flag is pictured in front of the Federal Palace (Bundeshaus) is pictured in Bern, Switzerland, January 16, 2017. Picture taken on January 16, 2017. REUTERS/Denis Balibouse

ZURICH (Reuters) - U.S. medical implant maker Zimmer Biomet’s (ZBH.N) decision on a potential $40 million investment in its Swiss factory has been put on hold until the outcome of a referendum next month on tax reform.

A long-standing tax break that has attracted thousands of companies to Switzerland is set to go and the issue for Zimmer and some 24,000 international firms is how the new regime will stack up against other low-tax jurisdictions.

That's not immediately clear as Switzerland's 26 regions, or cantons, set their business taxes. Consultants KPMG reckon the average Swiss corporate rate will be about 14 percent after the reform, above Ireland's 12.5 percent, but lower in some cantons. (Graphic on tax rates: tmsnrt.rs/2kdi2Ow)

Switzerland has been in the European Union’s firing line for years because cantons have a special tax status for foreign companies that means some pay virtually no tax over an effective federal tax of 7.8 percent.

The country agreed with Brussels in 2014 to abolish this status as it allows some foreign firms to pay far lower tax on overseas earnings, an attractive perk for multinationals looking to lower tax bills.

Most Swiss recognize the country needs tax reform to avoid being blacklisted as a low-tax pariah, but the new measures proposed to help companies offset the loss of the special status breaks have created deep divisions.

Companies will get tax breaks on research and development (R&D) in Switzerland, profits from patents developed there and deductions for excess company equity.

In addition, many cantons say they will also reduce corporate tax rates for all companies to reduce the fiscal burden and dissuade multinationals from leaving.

Zug, for example, taxes special status firms at 8 percent to 11 percent and ordinary companies at 14.6 percent. After the reforms, it plans to tax all companies at 12 percent.

TOO GENEROUS

The No campaign comes from a coalition including the Social Democrat Party, Greens, trade unions and church leaders, as well as some from right-leaning parties that back the proposals.

They say the reforms overall will lead to lower tax revenue, and fear the public will bear the brunt through cuts in public services or higher personal taxes.

The federal government has pledged to give cantons an extra 1.1 billion Swiss francs ($1.1 billion) to help cover expected budget shortfalls.

But critics say the new tax breaks would punch a 3 billion franc hole in budgets. They estimate that in Zurich, citizens would face a 14 percent increase in income tax to cover an expected annual shortfall of 223 million francs.

“No one is disputing that there is a need for reform, but with this proposal ordinary people are financing the big companies who are taking record dividends out of Switzerland,” said Swiss lawmaker Jacqueline Badran.

After parliament approved the measures last year, critics gathered the 50,000 signatures needed to trigger the Feb. 12 referendum, which can overturn the parliamentary vote.

Those backing the government say the reforms strike a balance between abolishing the tax breaks criticized by Brussels and new measures that will keep Switzerland competitive.

“We believe the tax legislation proposed is a good solution for Switzerland. We would basically see very little impact. Our tax rate would stay relatively stable. We’re hoping for a positive outcome,” said Joe Jimenez, chief executive officer of pharmaceutical giant Novartis (NOVN.S).

UNCERTAINTY

Luigi Sorrentino, manager of Zimmer Biomet’s Winterthur site, which is also its European headquarters, reckons the U.S. firm would be more likely to expand its hip and spine implant factory if the public backs the reform and ends the uncertainty.

But if voters send the proposals back to the drawing board, other locations may become more attractive.

Global and local tax competition

“We have investment plans to install new products and transfer new business to this site but we are waiting to see what happens,” said Sorrentino. “We have 30 sites around the world and we are competing with them for investment dollars.”

After the financial crisis the Organization for Economic Co-operation and Development (OECD) came up with an action plan to tackle so-called base erosion and profit shifting - where multinationals book profits in low-tax jurisdictions from revenue earned elsewhere.

The OECD estimates $100 billion to $240 billion of tax is lost each year through such schemes.

The EU has investigated tax structures used by Amazon (AMZN.O) and a Fiat (FCAU.N) subsidiary in Luxembourg, as well as Starbucks (SBUX.O) in the Netherlands and it ordered Ireland to recover $14 billion from Apple (AAPL.O).

In Switzerland, companies pay a cantonal tax on top of the federal tax. Overall, corporate rates range from 12 percent to 24 percent depending on the canton, with Lucerne the lowest and Geneva the highest.

But for foreign firms with sizable overseas sales, the special status tax break for so-called holding, domiciliary or mixed companies means their tax rates range from just 7.8 percent to 12 percent.

For some companies benefiting from special status, the reforms still look appealing.

Slideshow (7 Images)

“We would love to have any benefits from increasing investment, or having investment in R&D. Switzerland is our HQ and most important R&D center,” said Bracken Darrell, chief executive of Logitech (LOGN.S), which makes products such as computer mice and wireless switches controlling lighting.

HIGH STAKES

The stakes are high for Switzerland, already coming to terms with the end its long-cherished tradition of banking secrecy. If multinationals pull out, Switzerland’s economy could suffer.

The changes also come at a time U.S. President Donald Trump is considering slashing corporate taxes and Britain is making noises about cutting its rates when it leaves the EU.

The government says special status firms employ 150,000 people and contribute half of federal corporate taxes. It argues that bringing taxes into line with international norms would make Switzerland more attractive, securing jobs and prosperity.

According to research institute BAK Basel Economics, if 3,000 of the most mobile international companies - those with a headquarters, management or commodity trading business - were to leave, the fallout would be significant.

It estimates Swiss gross domestic product would shrink by 5.6 percent in the short term and 175,000 jobs would go, and the long-term fallout would be more significant as global tax competition increases.

Peter Uebelhart, head of tax at KPMG Switzerland, however, argues, that a tax system that complies with international standards would encourage firms to stay.

Pollsters say the outcome of the referendum is too close to call and many voters say they are confused by the issues.

“I don’t really understand it, I don’t think the politicians do either, I think hardly anyone does,” said Daniel Schiesser, a language teacher from Zurich.

“The supporters say hundreds of companies will leave, but that’s pure guess work and ignores the other advantages of them being in Switzerland. The opponents say a counter proposal can be introduced in two years, but that’s doubtful.”

In Zug, the vote is being watched very closely. The canton is home to 1,800 special status companies which contribute nearly a third of its tax revenue.

“If the reforms are rejected nobody knows what will happen ... nobody has a plan B,” said Heinz Taennler, Zug’s finance director. “There is very real risk that some companies could leave Zug, which would be very damaging.”

($1 = 0.9999 Swiss francs)

Additional reporting by Angelika Gruber and John Miller; editing by David Clarke

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