Swiss vote on multinational tax perks in Feb referendum

ZURICH: US medical implant maker Zimmer Biomet’s 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. 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 lowtax 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. 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.