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Switzerland plans subsidies to offset G7 corporate tax plan

Swiss-based multinationals such as commodities trader Glencore will receive subsidies and other incentives under plans Switzerland is drawing up to maintain its competitive tax rates, even as the country prepares to sign-up to the G7’s new plan for a global minimum tax on big businesses.

A blooming economy: canton Zug © Keystone / Alexandra Wey

Bern is consulting its cantonal governments – which set their own corporate tax rates – to examine how measures such as research grants, social security deductions and tax credits could create a “toolkit” to offset any changes to headline tax rates, officials told the Financial Times.

The proposed Swiss measures are another sign of how difficult it may prove to implement the G7’s commitment to a global 15 per cent floor on corporation tax. Multinationals based in the Swiss canton of Zug are for example currently taxed locally at just under 12 per cent.

“It is our clear goal that Zug will still rank among the locations with the most advantageous, internationally accepted tax rates in the future,” Heinz Tännler, Zug’s finance minister, told the FT. “Our population has proved again and again that it is aware of the . . . needs of international companies for favourable conditions.”

Despite a population of just 8.5 million, Switzerland is home to some of the world’s biggest multinationals, such as Nestlé, Novartis, Roche and ABB. Currently, 18 of Switzerland’s 26 cantons levy currently less than the 15 per cent minimum proposed by the G7.

The country is the developed world’s most significant jurisdiction for low corporation taxes, with an economy larger than all of Europe’s other low tax countries – such as Ireland, Hungary, Bulgaria and Cyprus – combined.

Economiesuisse, the body that represents Swiss businesses, estimates that as many as 250 Swiss-based companies could be affected by the G7’s proposed new rules.

“There are still many questions open about this agreement,” Christian Frey, deputy head of tax at economiesuisse said. “But Switzerland will certainly be affected more than other countries.” He added: “luckily there is a whole list of things we could do. We are confident we can compensate.”

Many Swiss officials bridle at the suggestion their country is a tax haven, where companies merely park their head offices for tax arbitrage. They point out that many Swiss-based multinationals are of Swiss origin and employ significant local workforces.

Mounting pressure

Still, the G7 initiative, if globally adopted, will be the latest sweeping rule change imposed by the international community on Switzerland. Since the 2008 financial crisis, the country has faced mounting pressure to roll back its stringent banking secrecy laws and tighten up its liberal tax regime.

Although both issues are deeply rooted in the country’s identity, Bern has recently adopted a more outwardly conciliatory attitude towards tax reform, reasoning it has more to gain through compromise than principled obduracy. Last year, a federal act on tax reform came into force bringing national corporate tax rules in line with OECD standards.

Where possible, however, Switzerland has acted domestically to safeguard its successful economic model.

A federal technical working group is researching on how to mitigate tax rises, Frey said. Big businesses are also being consulted in individual cantons on what measures might make a difference to offset higher taxes. Analysts say that among the questions to be resolved are whether subsidies would be compliant with World Trade Organization rules.

Most of the largest Swiss companies based in low-tax cantons contacted by the FT, including Glencore, declined to comment on the G7’s proposed changes. Spokespeople for Roche and Novartis said it was too early to be able to assess the impact of the new rules.

At Nestlé, a spokesperson said that the company already paid taxes in 150 countries around the world, with an effective global rate of 24 per cent – far above the 14 per cent rate charged in the canton of Vaud, where it has its headquarters.

A new international tax framework will need “strong agreement among all countries” to succeed, Nestle added. “It should be consistent, provide certainty . . . and avoid double taxation.”

Attractive business location

Taxes, Frey stressed, were also only one element of what makes Switzerland an attractive business location. “We have an open labour market, a highly skilled labour force, very good education and research institutions and excellent infrastructure,” he said.

Nonetheless, the stakes are high. Corporation tax contributes heavily to both federal and canton revenues. In the canton of Basel City for example, home to 201,000 residents as well as the pharmaceutical companies Roche and Novartis, 20 per cent of government revenues — around CHF600 million ($670 million) annually — come from corporation taxes.

“Big international companies are very important to our canton,” said Sven Michal, secretary-general of the Basel City finance department. “We’re not a place where there are a lot of brass plate companies. The businesses we have here employ a lot of people and they pay a lot of taxes.”

Reform is “unavoidable” he said, but the federal government would have to be clever to help minimise the impact of new changes.

“We’re preparing. The most important message is that we want a reform that will keep employees and revenues here. That’s the goal.”

Additional reporting by Chris Giles in London

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