Legislators have been asked to boost research and development with tax breaks to stop innovation centres leaving Switzerland.
Switzerland ranks surprisingly low for the level of tax breaks and other support for corporate R&D compared with other countries. Most research by Swiss companies is carried out abroad, with more firms threatening to join this trend.
One reason for the outflow of innovation is to locate research closer to key export markets. But firms are also aware of better tax deals being offered by countries such as France, Britain, the United States, Japan and South Korea.
In the light of companies being hit by difficult economic conditions and the strong franc, a new report has urged the government to rethink the tax system, particularly for small and medium-sized enterprises (SMEs).
Some 60 per cent of 40+ large firms surveyed by the report’s authors said they intended to direct more of their R&D resources abroad in future.
“More companies are telling us that their long term strategy is likely to involve spending more of their R&D budgets outside of Switzerland,” Jörg Walker, head of tax at business consultancy firm KPMG Switzerland, told swissinfo.ch.
Give us a break!
KPMG published a study on Tuesday looking at the issue along with St Gallen University and the Swiss-American Chamber of Commerce.
The report revealed that Swiss firms spend SFr12 billion ($15.2 billion) a year on domestic R&D compared with SFr15.8 billion in centres located abroad.
And while Switzerland is internationally ranked sixth by its share of gross domestic product (GDP) spent on domestic R&D (2.2 per cent), it is a lowly 28th in a global league table of helpful tax systems.
France, for example, awards tax credits of up to 30 per cent on R&D expenditure and reductions on personnel costs for staff working in this department.
Last week the Swiss government decided to hand out SFr2 billion ($2.54 billion) to struggling companies in the export and tourism sectors. Given the government’s recent generosity, Jörg Walker believes that the introduction of R&D tax breaks should follow suit.
“Such a system would avoid the market distorting disadvantages associated with subsidising only certain sectors,” Walker said. “It would also greatly benefit SMEs that at present find it difficult to raise funds to set up efficient R&D operations.”
Attract foreign innovation
The consortium recommends a style of tax breaks and financial incentives similar to Britain. It has called for a 170 per cent tax deduction for all R&D up to a value of SFr10 million and 130 per cent after this limit has been breached.
To put it another way, the report recommends that R&D should attract tax credits of between 30 and 70 per cent for the companies that conduct these activities.
Large companies should be allowed to carry these credits forward to following years while smaller firms and start-ups should be paid in cash.
“The system can be manipulated to limit the amount of lost tax revenues,” Walker told swissinfo.ch. “But it would only stop the outflow of domestic R&D and attract foreign activity if it was worth between SFr500 million and SFr1 billion annually.”
At present, there are no federal tax breaks to reward research, but canton Nidwalden recently introduced credits for the end products – patented innovations.
The Swiss parliament is currently debating a whole range of corporate tax reforms – the third such package to be discussed in recent years.
Part of the debate revolves around the European Union’s dislike of cantonal corporate tax competition, that differentiates between domestic and foreign earnings.
Canton Neuchâtel restructured its corporate tax system in June, bringing down rates across the board rather than single out foreign earnings for special treatment.
The move has been widely regarded as an answer to EU complaints, and Walker is convinced that the suggested R&D tax credits would work in the same way.
“With so much talk in parliament of how to tackle the EU question, we believe this system would comply with their demands,” he told swissinfo.ch.
Urs Furrer, a tax specialist with the Swiss business federation, economiesuisse, is broadly in favour of the R&D tax proposals because they avoid singling out specific sectors for subsidies.
“This proposal should be seen in the context of the broader corporate tax reform III currently going through parliament,” he told swissinfo.ch. “This [R&D] measure would not solve all the corporate tax issues, but could be one part of the puzzle.”
“Tax competition with other countries is intensifying,” he added.
“Switzerland has decreased its corporate tax rates in the last few years, but not at the same speed as many other Organisation for Economic Co-operation and Development (OECD) countries.”
Swiss firms are credited with being some of the most innovative in the world.
The EU’s Innovation scoreboard this year ranked Switzerland in first place as did last year’s World Economic Forum Global Competitiveness Report.
Switzerland was also fourth in the IMD business school’s 2010 World Competitiveness Scoreboard.
Domestic spending by Swiss firms on R&D stands at around SFr12 billion annually, representing 2.2% of GDP.
Only Israel (nearly 4%), Sweden, Finland, Japan and South Korea (around 2.5%) spend more on innovation.
Switzerland leads the way with the number of patents filed per million residents each year (120), followed by Japan (118).
Some 70% of Swiss corporate R&D is concentrated in large companies with a significant capital base and more money to spend than SMEs.end of infobox