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Cantons dangle juicier tax carrots for firms

Ikea set up headquarters in Lucerne Keystone

Competition among Swiss cantons to induce foreign companies to relocate with the carrot of low tax rates is heating up once again, with Lucerne leading the charge.

This content was published on July 23, 2010 - 08:28

Lucerne’s decision to slash corporate profit taxes in the next two years has raised the hackles of some neighbouring cantons and could draw unwanted attention from the European Union.

The EU has fiercely criticised the tax inducements offered by Swiss cantons as being uncompetitive and in violation of a trade treaty between the two parties. But as EU and Swiss negotiators meet again, cantons are showing no signs of backtracking.

At present, companies pay an average 23 per cent combined local, cantonal and federal taxes on their profits depending on where they are situated in Lucerne. In two years time the burden will be reduced to 15 per cent.

“It is not our goal to be the cheapest canton for companies, but we want to be more competitive,” Paul Furrer, a member of canton Lucerne’s tax department, told swissinfo.ch.

Situated in central Switzerland, Lucerne is surrounded by cantons that have stolen a march by slashing corporate tax rates. Zug is well established as a location for the European headquarters of international firms, while Schwyz, Nidwalden and Obwalden also offer better incentives.

Top of flop

Lucerne’s first task is to keep hold of existing international companies, such as commodities trader Trafigura and then to attract new global firms to the canton. The canton’s tax chief Felix Muff has been quoted as labeling the new policy “Top or Flop”.

Lucerne’s actions would not directly impact on the main thrust of the EU’s argument, but the continued race by cantons to draw international firms away from less competitive countries could add fuel to the fire.

The EU is more concerned about tax breaks offered to shell companies set up in Switzerland as little more than a postal address in order to avoid higher taxes in other countries. This is one item of a long agenda currently being discussed at a high level as both parties seek to establish solid ground for future bilateral relations.

Such practices have also drawn fire from international pressure group Tax justice Network, that has repeatedly called for the abolition of corporate tax “evasion” by booking profits through Switzerland.

This is achieved by establishing a shell – or ”mixed” – company that has a Swiss address but no staff in Switzerland and earns the majority of its profits abroad. Cantons such as Zug have specialised in offering tailor-made tax deals with such entities and Lucerne is now mulling over whether to engage in such arrangements.

Tax sinking

But Swiss tax legal expert Christian Martin Gutekunst believes that the grey area of “post box” companies might simply die a natural death thanks to an ongoing global drive by many countries to reduce corporate tax rates.

“Corporate tax rates are now becoming so attractive that there is less need to have such special taxation arrangements anymore,” he told swissinfo.ch.

Research from tax consultants KPMG has shown that EU countries have reduced corporate tax rates on average by 12 per cent since 1999, compared to six per cent in Switzerland. Firms pay less for tax on their profits in Ireland and many eastern European countries than in Switzerland.

The KPMG report, released in October of last year, also showed that the rate of tax decreases has slowed down during the economic crisis. But Swiss cantons do not appear to be following this trend, with Zug and Obwalden planning to follow Lucerne’s lead in further reducing corporate tax rates.

Jostling elbows

The continued jostling has also created a few sparks as elbows clash in the rush to attract prized international firms.

Cantons contribute to a central fund that is distributed to each year to less well off cantons to prevent too great a disparity in wealth. Zug has questioned whether Lucerne should be allowed to fund preliminary losses from its pending corporate tax reductions by dipping into the central fund.

But Paul Furrer dismissed such criticism, pointing out that Zug had once been a beneficiary of the fund until it too had found wealth from attracting international companies by slashing corporate tax rates.

“Zug should be glad that one day we will not have to take funds out of the vehicle,” Furrer told swissinfo.ch. “They should applaud other cantons that are trying to improve their finances in the same way that they did 20 years ago.”

Matthew Allen, swissinfo.ch

Global corporate tax rates

Tax consultancy firm KMPG released their annual global survey of corporate taxation rates in October of last year.

It showed that global corporate tax rates had reduced by 7% between 1999 and 2009 with EU countries slashing their tax by 12% on average and Switzerland by 6%.
Guernsey and the Isle of Man top the table with zero taxes on company profits.

These British islands are followed by Montenegro (9%), and a group of countries – Bulgaria, Cyprus, Serbia, Albania and Bosnia & Herzegovina – on 10%.

The comparative list cites Zurich as being representative of Switzerland – with a corporate tax rate of 21.2%. Using this formula, Switzerland is in 15th place on the corporate tax competitive league.

However, several other cantons boast lower tax rates. Appenzell Outer Rhodes and Obwalden are the most competitive with 12.7% (local, cantonal and federal rates combined), followed by Appenzell Inner Rhodes at 14.2%.

Other cantons have been less keen on following this trend, some relying on other features to entice foreign firms, such as thriving city centres or proximity to touristic areas.

Geneva offers a relatively expensive rate of 24.2%, Vaud 23.5% and Zurich 21.2%.

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