What the Swiss Vote on Taxes Means for Multinationals

(Bloomberg) -- Switzerland is trying to hold on to its appeal as an attractive place for companies. In a May 19 referendum, voters will decide whether to accept or reject a new corporate tax regime to replace the special tax breaks that multinational companies now enjoy. A “Yes” vote would ensure the country is in line with international rules on corporate tax dodging. A “No” vote would force officials back to the drawing board for yet another plan to prevent international companies from picking up and leaving Switzerland.

1. What’s at stake for companies in Switzerland?

Switzerland has committed to scrapping the preferential tax rates it currently gives to thousands of multinationals (set up with the legal status of holding and domiciliary companies) because they aren’t in line with Organization for Economic Cooperation and Development rules. On its own, the move would spark an exodus because multinationals would have to pay the same tax rate as local companies, which in Geneva is as high as 24.16%. So the government is proposing new ways for companies lower their tax bill -- for example deductions for income from patents or for spending on research and development. Some Swiss cantons have reduced their headline tax rates for companies, and others are likely to follow suit.

2. Why are multinationals so important to Switzerland?

They generate a quarter of Switzerland’s jobs and a third of its economic output, along with about half of federal government’s corporate tax revenue, according to a study by McKinsey and industry group SwissHoldings.

3. Didn’t the Swiss already vote on corporate tax reform?

They did. A measure was put up for a vote in 2017 but failed due to concerns it would lead to a higher tax burden for individuals and cuts to public services. The plan B -- now due for the plebiscite -- is somewhat less generous to companies than its predecessor. To sweeten the deal for the electorate, the proposal includes a supplementary, annual 2 billion-franc ($2 billion) payment by the government, employers and employees to the state pension fund.

4. Will taxes on multinational corporations rise?

Possibly. The rates multinational companies are charged in Switzerland aren’t generally disclosed and they can be negotiated on an individual basis with the Swiss canton where a firm is based. But even with the expected across-the-board reductions, there’s a chance that the headline rate charged by cantons may be a bit higher than what some international firms have been paying. Geneva currently has the highest ordinary corporate tax rate but plans to slash that to 13.99% if local voters approve of the change on May 19. That’s still much lower than neighboring France, Italy or Germany.

5. What do supporters of the tax reform say?

The multi-party government and businesses say the proposed reform is necessary, given that Switzerland has committed to scrapping its current practice and that it risks losing out to other countries as a domicile for multinationals if it doesn’t go ahead with the reform. Swissmem, the association of mechanical and engineering companies, backs the measure and says that encouraging research through tax breaks is good for the country. Even so, the government expects that in the short term, there will be a drop in tax income of about 2 billion francs a year. It says that a failure to pass the reform will be even more costly, and that in the medium to long term those losses can be recouped.

6. What do opponents say?

Their argument is the same as it was two years ago: It will cause a shortfall in tax revenue that will affect public services like daycare centers for children, care for senior citizens or the quality of education. The Green Party dubbed it a billion-franc “scam” that will mean the middle class pays for multinationals’ tax breaks. However, the Social Democrats, who were against the reform two years ago, have dropped their opposition thanks in part to the additional pension fund payment.

7. Why is this up for a vote at all?

Switzerland’s system of direct democracy allows any national law to be challenged if opponents collect 50,000 signatures from eligible voters within 100 days of its passage. If that’s achieved, the electorate gets to say “Yes” or “No” in a referendum. The result is binding. It seems likely voters will back the tax revamp, with the most recent poll for public broadcaster SRG showing support at 59%.

The Reference Shelf

• A QuickTake explainer on Switzerland’s people power.
• A PwC fact sheet on the proposal
• A government Q&A on the reform

To contact the reporter on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Melissa Pozsgay, Jan Dahinten

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