Swiss gain from offshore company reshuffle

How long will the sun shine on Bermudan based firms? Keystone

Switzerland has benefited from a United States clampdown on tax havens by attracting a string of companies from Bermuda and the Cayman Islands.

Weatherford International starts trading on the Swiss stock exchange on Wednesday after moving operations from Bermuda and Houston last year. Besides tax breaks, Switzerland’s strengths in insurance and commodities are a strong magnet.

Small offshore islands, such as Bermuda and the Caymans, have been the first tax havens targeted in a vigorous crackdown by US President Barack Obama. Many firms have set up operations in offshore havens to avoid high corporate taxes on overseas profits that are repatriated to the US.

Obama’s legislative assault was supposed to repatriate tax revenues to the US, but the early response from companies has been to relocate to Europe. Switzerland and Ireland have been the most popular destinations for setting up new domiciles.

Switzerland’s low corporate tax regime was a compelling reason for Tyco Electronics, the world’s largest supplier of electronic connectors, to announce last year that it would reincorporate its business from Bermuda to Schaffhausen.

As a member state of the Organisation for Economic Co-operation and Development (OECD) and having negotiated double taxation treaties with the world’s major economies, Switzerland has greater defences against the US tax haven crackdown.

Into the frying pan

“The US has made it clear that it will take a less favourable view of companies located in tax havens,” Richard Murphy of the watchdog group Tax Research UK told swissinfo.ch. “But Switzerland has a quite different scope than Bermuda because it has double taxation treaties that comply with OECD standards.”

Murphy added that Republican gains in the US mid-term elections may hamper Obama’s tax haven crusade for the time being. He believes the change in the political landscape will slow, but not necessarily stop the clampdown.

“These companies have jumped out of the fire [Bermuda, Cayman Islands] into the frying pan [Switzerland],” he said.

But other firms have also been attracted by Switzerland’s traditional strength in insurance and its growing competency in the commodities sector.

Weatherford plies its trade in the oil and gas industries, specialising in drilling, pumps, elevators and a range of other services for exploration. Its move to Switzerland mirrors that of offshore drilling company Transocean, which incorporated its operations from the Cayman islands to Switzerland two years ago.

El Dorado

Emmanuel Fragniere, a professor specialising in the commodities industry at the HEG university in Fribourg, believes the well established, and still escalating build up of commodities experts in Geneva and Zug also played a part in the relocation decisions.

“Geneva is the new El Dorado for qualified workers in the commodities industry,” he told swissinfo.ch. “If you have a long term strategy then you need access to a highly skilled workforce and all the supporting structures, such as legal services.”

Fragniere also believes that the recent US political turmoil could play into Switzerland’s hands. This month’s Republican gains in the House of Representatives and Senate were preceded by a high profile campaign from the rightwing Tea Party political movement.

“Companies are suddenly faced with the prospect of populist politics interfering with stable, professional governance,” he said. “By contrast, Switzerland is a haven of political and financial stability.”

Insurance boom

The political and regulatory pressures being placed on Bermuda have also weakened its traditional attraction as a base for global reinsurance companies. Allied World announced last month that it would relocate its domicile from Bermuda to Zurich.

The ACE Group will also move some operations away from the Cayman Islands and Bermuda to Zurich.

British registered Amlin Re said earlier this year that it will transfer the running of its Bermuda-based services to Zurich. Catlin Group will set up a Zurich branch to internally underwrite its Bermudan business activities.

Two years ago, Paris Re announced it would merge its Bermudan operations with its Swiss based branch.

While some insurers intend to retain their existing services based in Bermuda, observers believe that turning them into subsidiaries of Swiss based operations will sidestep US levies thanks to Switzerland’s tax treaties.

Business location Switzerland

A KPMG survey of international corporate tax found that, despite the economic downturn, the average top rate had fallen from 25.44% in 2009 to 24.99% this year.

However, indirect taxation, such as VAT, has risen from 15.41% to 15.61%.

Switzerland has for years sought to attract global firms by offering competitively low corporate tax rates.

Swiss cantons that set their own rates compete to attract European headquarters or holding companies within their borders. Smaller cantons, such as Zug or Schwyz, have been particularly successful with their campaigns.

A recent international comparison of corporate tax rates showed levies of between 12.5% and 24.5% depending on which canton a company is located in. Obwalden and Appenzell Outer Rhodes offered the lowest rate and Geneva charged firms the most.

The mean 18.8% rate of all cantons compares to 40% in the US, 33% in France, 29.4% in Germany, 28% in Britain, 17% in Singapore and 12.5% in Ireland.

Several multinational firms, such as food manufacturer Kraft, Ebay, Procter & Gamble, Microsoft, Dow Chemicals and Google have set up or have been expanding operations in Switzerland in the past few years.

However, Switzerland’s system of tax competition – effectively undercutting the rates of neighbouring countries – has drawn criticism from the European Union.

The EU considers the practice to be in violation of a 1972 free trade agreement signed between the European bloc and Switzerland. The Swiss have denied this is the case, but the row rumbles on despite a lull in proceedings in the last 18 months.