Cracks showing in business oasis Switzerland

There are not many empty flats left in Swiss cities Keystone

A shortage of affordable homes and international schools, along with a prolonged row over tax, threatens to weaken Switzerland’s magnetic pull for foreign firms.

Lured by low tax rates and a high standard of living, a steady stream of overseas companies have set up operations in Switzerland in recent years. But there are signs of growing discontent from new arrivals.

Top of the grumble list is the astronomic rise in house prices in Geneva, Zurich and Zug – a trend that has already priced many locals out of the market, and threatens to do the same for foreign workers.

“The new Eldorado has become even more of a magnet and there is a risk that this could result in a social crisis,” Emmanuel Fragnière of Geneva’s HEG School of Business Administration told swissinfo.ch earlier this month.
 
“Politicians are very happy to collect the new taxes, but they need a coherent policy to promote the location that takes into account structural difficulties.”

Problems are also showing up in Zug and in Rolle, situated between Geneva and Lausanne.

Noise control

“No one imagined what would happen with so many people from outside Switzerland coming here to work,” Rolle Social Democrat politician Patrick Bréchon told swissinfo.ch.

“They are not really creating local jobs. The housing market is like a jungle. House prices have shot up unbelievably and infrastructure – transport, roads and schools – is really behind.”

Local complaints have also been matched with anecdotal evidence of foreign workers finding it tough going in their newly adopted country. The British magazine, the Economist, interviewed newcomers complaining of boredom and a lack of places in international schools.

“You need muscle to get kids in international schools,” said one financier named only as Alex. “Otherwise it’s a Swiss school, where your kids will find it hard to settle.”

Others experienced problems adapting to stricter Swiss regulations on noise and refuse collection than they were used to at home.

Geneva-based relocation expert Francois Micheloud acknowledged that the huge influx of foreign firms and workers had created some structural problems, made worse by slow planning and construction rules.

Tax uncertainty

But he firmly believed that solutions could be found to ease the pressures, such as developing rural areas north of Lausanne or in canton Vaud.

“We are not like Monaco – a small piece of rock where you cannot build any more,” he told swissinfo.ch. “Bottlenecks will be resolved by companies spreading out to areas that are still within reach of Geneva airport.”

Switzerland’s vaunted tax competitiveness is also coming under sustained pressure from the European Union. The Swiss authorities have made noises that the corporate tax system could be revamped to meet some EU demands, but nobody knows how this could be done.

“Companies interested in relocation to Switzerland should know what the tax rules will be like in future,” tax expert Stephan Kuhn of Ernst & Young told swissinfo.ch. “They would not come to Switzerland if the tax system is unpredictable and subject to major increases.”

British-based companies, on the other hand, received a boost from Wednesday’s budget announcement that tax rates would be cut by two per cent in the next three years, a full percentage point more than previously thought.

Incentives remain

This prompted advertising giant WPP to consider relocating its tax base back to Britain from Ireland, where it had recently moved.

In a recent interview in the British Observer newspaper, the chief executive of pharmaceutical giant GlaxoSmithKline, Andrew Witty, chided British firms for heading to cheaper tax regimes, saying they had broken their bond with society.

“We could go, in theory, anywhere for a low tax rate. But first of all, how do you know that country isn’t going to change its tax rate in ten minutes?” he said.

However, Britain’s new 23 per cent rate would still be higher than the Swiss burden. Depending on where a company is based, combined effective federal and cantonal rates vary between 24.5 and 14 per cent.

Francois Micheloud is convinced that the relocation of foreign firms to Switzerland will continue “for many years to come”.

“The incentives for companies to come to Switzerland remain the same as before: competitive tax rates, excellent transport links, a central European location, access to a highly skilled work force, clusters of business competence and flexible labour laws,” he told swissinfo.ch.

“And Switzerland is still a delightful place in which to live.”

Location Switzerland

Low corporate tax rates, a high quality of life, a highly skilled workforce, excellent infrastructure, a central location and a well established financial centre are among the reasons that Switzerland is a magnet for foreign firms.

Many foreign companies have set up headquarters or other operations in Switzerland in recent years, including Google, Philip Morris, Caterpillar, Chiquita, Ebay and Dow Chemicals.

The numbers have been recently boosted by the arrival of reinsurance companies escaping a United States tax crackdown on the Caribbean islands and commodities firms.

Raw materials traders such as Transocean, Rosneft and Bashneft have either moved operations in the past few months or are said to be considering such a move.

According to Ernst & Young, Neuchatel has the highest effective combined cantonal and federal corporate tax rate of 24.5%. Voters were due to have decided on slashing those rates in half next month, but the process has been delayed by a court order.

The lowest effective tax rate is in Appenzell Inner Rhodes (14%), while many cantons are thought to be considering moves to lower their rates further.

Cantons also award tax breaks on the foreign derived earnings of many firms – a strategy that the EU claims is anti-competitive.

An ongoing row between Switzerland and the EU remains unresolved, although Switzerland has said it may cede some ground on the issue.

One potential way around the problem would be for cantons to scrap the distinction between foreign and domestic derived earnings, but make up for this by lowering the tax rate across the board. Neuchâtel was planning such a move.