The Swiss government must come up with a new plan and figure out how to limit economic fallout after voters rejected its bid to reform corporate taxation to keep the country internationally competitive. Because Switzerland needs to end its current practice of giving thousands of multinationals tax breaks, the government will have to concoct a Plan B to prevent their moving abroad. Their departure would cause a drop in tax revenue and stunt economic growth.
The government is at pains to find a solution at a time when countries such as the US are seeking to gain a competitive edge with their own business tax reductions and after a strong currency-induced slowdown in economic growth. Switzerland, which has succeeded in attracting big global corporations like Procter & Gamble Co. and Caterpillar Inc., already bowed to international pressure and scrapped banking secrecy after a crackdown on tax evasion by other countries.
â€œLots of uncertainty about the future has arisen, and thereâ€™s concern about reactions by the OECD and the EU, because thereâ€™s the risk of a blacklisting of the current regime â€” this will force international companies to think about alternatives,â€ said Andreas Staubli, managing partner at PricewaterhouseCoopers AG in Zurich. â€œWhat will happen first is that new investment decisions will be made in favor of a place other than Switzerland.â€
Scrapping the current system without a replacement would mean the rates to which holding and domiciliary companies are subjected get reset at the level of domestic firms, which can be more than 20 percent. Yet sticking with the current regime could eventually land Switzerland in hot water with the Organization for Economic Cooperation and Development, which is clamping down on tax loopholes.
While there is no black list currently in the works, Switzerland is under â€œ a little bit of pressureâ€ to dismantle its current regime in two yearsâ€™ time, Pascal Saint-Amans, director of OECDâ€™s Centre for Tax Policy and Administration, told newspaper Le Temps.
â€œItâ€™s still in the interest of Switzerland to have a competitive tax regime,â€ said Christian Stiefel, director of SwissHoldings, which represents the multinationals. â€œItâ€™s to be expected that cantons will do what they can to stay competitive, it just may cost them a bit more than it would have.â€
The short-term impact of highly mobile companies leaving Switzerland would be a 5.6 percent drop in potential economic output, equivalent to 34 billion ($34 billion) francs, according to consultancy BAK Basel.
The number of companies moving to the cantons of Bern, Freiburg, Vaud, Neuchatel, Geneva and Valais already posted a slight decline last year, according to the regional business association GGBa. Recent developments such as Brexit, the political situation in the US, Switzerlandâ€™s tussling over European Union immigration quotas and the strong franc were already causing a delay in businessesâ€™ investment decisions, it said on February 7.