Innovation tax breaks “key to attracting companies”

Lacking raw materials or a large domestic market, Switzerland relies on innovation Keystone

Industry lobby groups are calling on lawmakers to bolster business innovation as they debate corporate tax reforms aimed at retaining Switzerland’s status as a location for multinationals.

Parliament is currently looking at a government recommendation to replace Switzerland’s current, and controversial, cantonal corporate tax system – that grants favourable rates for profits earned abroad – with patent boxes and tax breaks for innovation activity.

The Swiss Business Federation (economiesuisse) has teamed up with the Swiss-American Chamber of Commerce, the SME Association and consultancy firm KPMG to produce a study that highlights the importance of an innovation-friendly environment for companies based in Switzerland.

Nearly three quarters of the 700 Swiss and international firms based in Switzerland that were surveyed said that tax breaks were an important factor in deciding where to set up their research and development facilities.

But only a quarter of these companies have actually built new R&D centres in Switzerland in the last five years. The majority of firms opted to set up such facilities abroad.

The study concludes that a number of factors may have led to this phenomenon. These include the long-running Swiss row with the European Union over corporate tax practices, uncertainty over Switzerland’s new tax regime, business unfriendly referendums, such as an initiative to curb the inflow of foreign workers and the strong franc.

Introducing new tax laws that favour innovative practice could help persuade 95% of the surveyed companies to keep their current R&D facilities in Switzerland.

“Patent boxes”

The government introduced such proposals in June, which included the creation of ‘patent boxes’ that give tax breaks on income derived from intellectual property royalties. The government also recommended giving cantons the power to grant breaks on R&D expenditure.

But the government advice to parliament was to allow companies to enjoy cantonal tax breaks on either patent royalties or research costs – not both together at the same time.

Stefan Kuhn, head of corporate tax at KPMG Switzerland, said this would be a mistake because current international opposition to corporate tax breaks threatens to limit the effectiveness of patent boxes.

“The way that the current regulatory climate is headed, the scope of patent boxes could well end up being restricted,” he told swissinfo.ch. “We recommend that cantons be given the opportunity to offer tax incentives to both patent royalties and R&D expenditure.”

Switzerland’s new corporate tax system is scheduled to be introduced at the start of 2017, but could be delayed if an opposing referendum is launched.