14 May 2008
To the outsider, Switzerland looks like an anomaly: a country of fewer than eight million inhabitants with four different official languages, three of which it shares with its much larger neighbours, doggedly insisting on its independence while completely surrounded by another political entity, the European Union, which at almost 460 million people is more than 60 times larger.
However, for such a small place, Switzerland punches considerably above its weight. It is, for example, Andrin Waldburger, Leader, Tax and Legal Services for PricewaterhouseCoopers Switzerland says, the ninth-largest territory, business-wise, within PwC globally.
“For a small economy, Switzerland has a lot to offer to the outside world, because we have a lot of strong, well-known companies located in Switzerland,” Mr Waldburger says, citing Nestlé, Novartis, Roche, UBS and ABB, to name just five. The Swiss economy is doing well right now: unemployment is less than half the EU average, labour costs are modest because of lower benefit levels, real GDP growth is well above that of the EU, and interest rates and inflation are both low – all attractions as far as foreign investors are concerned. Today it is estimated that about 10 percent of Swiss GDP is generated directly or indirectly by foreign companies while, more importantly for the Swiss, foreign-owned companies contribute about one quarter of all economic growth.
Being outside the EU also gives Switzerland a big advantage in being able to set its own tax regime without having to bother about the pressures within the European Community for harmonising tax levels and against giving special treatment to anyone. Indeed, Switzerland’s federal set-up, with the 26 individual cantons setting their own tax levels alongside federal taxes, means that the cantons themselves can and do compete in offering tax breaks to foreign investors and corporations – something that is viewed with scepticism by the EU Commission right now, as it accuses the Swiss of breaking a 1972 free trade agreement. The tax regimes like in the cantons Zug and Schwyz in central Switzerland, which give tax reductions for foreign business, distort trade between Switzerland and the EU, and therefore contravene the trade agreement, the EU says.
Not surprisingly the Swiss, who have fought to maintain their independence for eight centuries or so, firmly reject any EU ‘meddling’ in what the cantons get up to. The fight is not so much about the ‘unfair competition’ of the tax laws, however, Mr Waldburger suggests: it is more to do with Switzerland’s general attractiveness to companies wishing to escape from the restrictions that EU law imposes, while still being allowed, under the bilateral agreements Switzerland has signed with the EU, to trade more-or-less freely with the rest of Europe and its 460 million inhabitants. Having a little bit less pressure from the European Court of Justice and also from the EU gives you more freedom and more flexibility to a certain extent.
Overall, the Swiss tax regime is attractive enough that the country has become a by-word for the place the internationally famous rich go to make their homes to escape high taxes in their own countries, from Ingvar Kamprad, the founder of Ikea, the Swedish furniture store chain, to Phil Collins, the rock singer. Direct income taxes vary between cantons, from 21 to 45 percent. However, under certain circumstances (i.e. no gainful activity in Switzerland) individuals can obtain a deal with the cantonal tax authorities to pay a lump sum tax based on the total costs of living spent in Switzerland (or five times the yearly rent paid). Value-added tax is 7.6 percent, only just over half the minimum rate of 15 percent in the EU.
Federal corporation taxes are 8.5 percent of profits, but cantons and municipalities may slap on another 15 to 27 percent, meaning other countries such as Ireland are getting to be more attractive. Indeed, in 2005 Switzerland lost a competition with Ireland for the siting of a new €820m manufacturing plant, to employ more than 1,000 staff, by the world’s largest biotech firm, the American company Amgen, despite Amgen’s European HQ being in Switzerland, because the Irish government offered better tax breaks. (As Amgen has just announced, it is postponing the development of the new Irish plant, though; the Swiss may not now be feeling too upset.) All the same, one survey found 510 foreign companies started operations in Switzerland in 2005, and the country’s share of European foreign direct investment doubled compared to 2004.
Thus despite competition from other countries, foreign investors into Switzerland “can still benefit from a very favourable tax regime,” says Mr Waldburger, “and the tax competition among the different cantons gives investors a lot of opportunities to come up with a better deal – in some cantons individual taxation is still very low and therefore wealthy people and well-paid people can benefit from a very mild tax climate still. In the canton of Obwalden we have currently an ordinary effective corporate tax rate which is comparable to that in Ireland, of only 13.1 percent.” He continues: “So Switzerland is still attractive, even without taking issues into consideration such as holding company status, mixed company status and all these kinds of status which are a little bit under scrutiny from the European Union now.” The 2005 bilateral agreement with the EU, “especially with the savings agreement, Article 15, helped a lot for Switzerland to become even more competitive.”
Switzerland, Mr Waldburger says, “is still a very attractive place to site your corporate headquarters. You have well-skilled people, good communications; we can offer a similar or better tax regime than Ireland.” It is not just the tax regime, of course: Mr Waldburger points out that the latest Mercer Human Resource Consulting survey on the world’s top 100 most ‘livable’ cities still puts Zurich at number one with Geneva number two (Dublin is 27, London 39 and New York 48). “The living standard is very high and we hear from investors several times it’s much more convenient to live in the Geneva area or the Zurich area rather than being in Ireland, for instance. This is normally the deciding factor if you can more-or-less offer the same tax status as Ireland or some other competitors.”
The country’s appeal, Mr Waldburger says, is bringing in investors from less traditional countries: “We have a lot of investors from Russia coming over; the most recent example – who is always in the press – being Victor Vekselberg [the Russian aluminium magnate, who is known for his collection of diamond-studded Fabergé eggs, worth upwards of £2.5bn, and who now lives in Zurich]. The Russians are all over the place in Switzerland. We have some Chinese companies also – the Chinese are investing now into Switzerland; emerging markets economies with the most wealthy people are heavily investing into Switzerland.
“They are putting their money into some interesting and attractive companies – Vekselberg, for instance, he has invested in Sulzer, OC Oerlikon, Ascom [the telecommunications company]; all these are really truly Swiss-branded corporations and they clearly believe there is much more potential. They are investing in Swiss companies because they strongly believe that, because of other big names such as Nestlé, Roche, and Novartis, Swiss branding and technology is one of the key success factors in business.”
With the last referendum on the subject giving 70 percent of the votes against Switzerland joining the EU, the country looks to keep its economic independence for some years yet. “There are plenty of people, from business, from academia, who will tell you it’s a major advantage, in fact, for Switzerland to not be part of the EU,” Mr Waldburger says. “Take the cases from the European Court of Justice in the tax area, for example, about consolidated tax returns, where you have to take a loss from one territory home to your own tax base. If you do not have a consolidated tax return, and if you can play with different tax returns in different companies, and offset one profit against another loss – this is definitely a major advantage. Having all these different regulations coming up for which you have to harmonise your tax base and your tax rate, it gives all the member states of the EU a hard time. It’s quite obvious that not having these pressures from Brussels is to a certain extent a good argument for staying outside.”
Another big advantage for private investors looking at Switzerland rather than the EU, Mr Waldburger says, is the comparative flexibility of the Swiss tax authorities, their willingness to grant advance rulings that give investors the security of knowing that there are no nasty tax surprises lurking over the horizon: “We have still a lot of privileges in doing some really competitive tax planning. One important aspect is that you can still get binding private letter rulings from the authorities so you know exactly what your tax charge in the future will be. You have the freedom to plan, and that stability is very important. We have a very well-established private letter ruling practice; if you have concluded a tax agreement in Switzerland you know you are within the law and you can plan the future quite well.”
Foreign investors need to look around carefully before they come in to Switzerland, because of the cantonal set-up, Mr Waldburger says: “Investors should compare the different locations within Switzerland – tax competition between the 26 cantons is an important factor, and an advantage for the foreign investor. Then they should take a close look at the infrastructure available in the various regions, and go for pre-arrival meetings with the cantons taken into consideration. You have to conclude this in advance; it gives you a much better situation where one canton is in competition with another.
There are no transfer pricing regulations in Switzerland, but the tax authorities recognise that deals have to be struck by companies with other tax regimes, and are willing to accommodate these. Mr Waldburger says: “If you have an APA process with, let’s say, the United States, you can clear it with the Federal Tax Administration in Switzerland in advance. So if there is something coming up afterwards during a tax audit done by a tax inspector you are safe on the Swiss side because you cleared the APA concluded in the United States, or somewhere else, with the Federal Tax Administration.”
Switzerland does have its disadvantages: “I think one disadvantage is that we still have an annual wealth tax to pay by corporations and individuals. This is reduced in the meantime quite substantially and accountants are reducing it much more but this has to be something to be considered,” Mr Waldburger says. Another ostensible problem is the 35 percent withholding tax nominally payable on dividends. You can get relief at source or at least a full refund under the bilateral agreement concluded with the EU or the double taxation treaties, or if you are a taxpayer in Switzerland it’s full relief without any physical payment to the authorities,” Mr Waldburger says. “But at first glance the 35 percent compared to the rates from foreign countries seems to be very high.”
“It’s been there for about 50 years, and has stayed because we could always offer full relief, or a full refund, or at least partial relief under a double taxation treaty to, for instance, five percent. It hasn’t mattered so far. With the bilateral savings agreement with the European Union, with our double taxation agreements, I think we are now in a very competitive situation.”
The last bilateral agreement almost foundered on the issue of Switzerland’s famous banking secrecy regulations, with the UK in particular pressing hard for the Swiss to open their doors to investigators far wider than they do at present, when only strong evidence of tax fraud gains admission. The financial services side sees the banking secrecy as vital to its continuing success. But overall, he says, the 2005 agreement settled Switzerland down as a good place for foreign investors: “We always had a very good tax climate, and by lowering taxes even more and having freedom and flexibility in the tax system these are our jokers in the race – as long as we do not give up on some very crucial aspects which are very favourable to us, we do not have a lot of concerns that we are falling behind in the tax competition.