Gerold Bührer: Switzerland – An interesting business location

The global mobility of capital, goods and services has risen dramatically over the past years. Nowadays, the ad­­d­­ed-value chain of companies is spread round the globe. They optimize the varying labour cost, investment, taxation and other conditions. Division of labour and specialization are on the rise. Clus­­ters are being formed. Similar company func­­tions are grouped around the same location, and labour-intensive parts of the production process are transferred via foreign suppliers or direct investments.

The increasing mobility of capital and labour (or knowledge) intensifies the competition between national economies. In view of this, the role of politics influencing the structural conditions of a location is growing in importance.
The goal is to optimize the struc­­tural conditions for a location to be able to assert itself. However, the appropriate strategy varies depending on a country’s comparative advantage. If the ob­­jective is either to prevent that in­­dustry and service branches leave or to obtain that new businesses settle, it is important to possess relative lo­­cation advantages.


Switzerland: traditionally an attractive business location

Business location decisions depend on a variety of factors. Switzerland lacks raw materials and has a small domestic market as well as difficult geographic topographic and conditions. Under such circumstances, a fa­­­­vourable tax environment is of the utmost importance. However, many other fac­­tors influence the decision when it comes to the quality of a lo­­ca­­­tion, such as the availability of skilled la­­bour, legal security with clearly de­­fined ownership and liability rights, so­­cial cohesion, an efficient transpor­­ta­­tion system, a performing education­­al system, effective government, a liberal foreign trade policy, the low cost of capital, few trade hurdles, fa­­vourable exchange rate relations, in­­ternationally interlinked companies, and a balanced mix of econo­­mic sectors.
Looking at how tax policy has developed over the past years, Switzerland has reached an overall favourable po­­sition. On a federal level, the first business tax reform of 1998 strengthened it as a holding company location, in particular. Ten years later, the second business tax reform was drafted. It was directed at small and me­­dium-sized enterprises. Worthy of par­­ticular mention is that the double tax­­ation of dividend income has been alleviated for qualified shareholders. Accom­­pa­­nied by numerous cantonal reforms in the areas of profit and capital gains taxes as well as wealth and income taxes, Switzerland has thus strengthened its position as an attractive location for businesses. With a total profit tax burden of currently less than 15 per cent, the most attractive of the Swiss locations frequently rank at the top in worldwide comparisons.

However, location advantages are ex­­posed to erosion. National tax systems are affected by intensifying in­­ter­­na­­ti­­on­­al capital flows and the glob­alization of the financial markets. In particular, the development of corporate tax ra­tes is impressive. While, for example, the average corporate tax rate in the 1980s was near 49 per cent in the OECD, it has now come down to about 28 per cent.

This is no different even when taking into ac­­count the various tax bases that tax rates use.


Multilateral initiatives – The answer to tax competition?

The dynamic development begs the ques­­tion as to how to react to the challenges. At its summit in Freira (Por­­tu­­gal) in 1997, the EU took the initiative to identify harmful tax practices. Although the definition of harmful tax competition is still being debated, the EU de­­cided to create a level playing field in the area of corporate taxation through a code of conduct. In order to achieve stability of the tax agree­ments inside the EU, non-EU countries such as Swit­­zerland are also being urged to conform to the conduct guidelines.

A more or less marked distrust of the effects of tax competition is in the back­­ground. It is assumed that lowering tax rates is the expression of a ruinous race to lowering taxes. It is interesting, however, that tax revenues have risen sharply in Switzerland since 1970, despite falling corporate tax rates. While the GDP has risen by 2.9 per cent yearly on average, tax revenues have risen by an aver­­age 14.5 per cent and corporate tax re­­ve­­nues by 15.3 per cent on average. Even when considering just the last ten years, it is essentially the same picture:
The tax revenue in general and the corporate tax revenue in particular increased both in relation to the GDP as in relation to the total income.

Since the ruinous effects of tax competition have not been visible so far, Swit­­zerland had better not consider negotiating its attractive cantonal tax regimes. After all, the cantonal tax re­­gimes are comparable with the tax models of smaller national economies inside and outside of Europe, which apply re­­duced taxation to mobile capital gains in particular. In the end, the goal is to pre­­vent double taxation.


Actively modelling tax competition through tax policy

If you stand for tax competition, you should also compare yourself with the com­­­­pe­­ti­­tion. The trends in tax policy are clearly do­­cu­­men­­ted. The corporate tax rates are falling. Even personal income taxation has tended towards relief for some time now. The trend towards a growing gap between labour and capital income taxation is much stronger in small countries, which depend strongly on the developments in the international part of their economies, due to small domestic markets. Switzerland cannot escape this. With the taxation competence being decentralized, the different cantons have more or less strong needs for action.
Currently, the Swiss profit tax rates hover between 12.5 and 31.7 per cent.

Another trend is towards freeing the tax system of stamp duties. Particularly the stock issuance tax hinders the de­­velop­ment of the capital markets and raises the cost of acquiring capital for companies. In addition, it is a very mobile tax base: Large firms have the ability to satisfy a part of their financing needs on interna­­tional capital markets that do not impose such a tax. This is also the reason why competitive locations such as Belgium, the Netherlands and Ire­­land abolished the tax on domestic ca­­pital in 2006, and Luxemburg is re­­ducing it to 0.5 per cent in 2008 and planning to abolish it in 2010. According to an EU directive draft, the few member states that still impose a stock issuance tax on domestic capital are to do away with it by 2010.

Furthermore, tax base calculations are be­­coming increasingly more technical. There is a tendency towards more generous solutions when it comes to loss deductions, namely by granting unlimited time periods and taking into ac­­count losses from foreign company locations. The current Swiss regulation limiting loss deductions to a period of seven years is too tight. In numerous other countries, loss deductions are not limited in time.
For groups organized into economic units, the recognition as a group is further gaining in importance. Most OECD countries offer that possibility for do­­mestic groups, and there are even a few that extend it to foreign groups. Den­­mark and France offer possibilities for taking into account losses from foreign group companies; Austria and Italy have created the possibility within the framework of their most recent corporate tax reforms.


Traditionally, Switzerland has been an attractive location for businesses. The most recent tax reforms on the federal and particularly the cantonal level led to a strengthening of this favourable po­­sition. Further relief wi ll be necessary in order to improve Swit­­zerland’s long-term location at­­tractiveness. Swit­­zer­­land is a small and open economy with high capital and labour force mo­­bility. Tax attractiveness of the business location is, thus, critical for the prosperity, job availability and, last but not least, the preservation of our social institutions. However, location advantages are prone to erosion, as the competition keeps learning, too. Particularly the location attractiveness of the new EU member states should continue to increase with growing integration into the EU and rising legal security.

buehrer__0307_08_Latzel-IThe author was born in 1948 and is the president of economiesuisse, an orga­­ni­­zation representing Swiss businesses. He studied economics at the university of Zurich and was first active at the Union Bank of Switzerland. From 1990 to 2000, Bührer worked for the group Georg Fischer AG, last as a man­­ager. Since 2000, he has been an eco­­nomic advisor and member of several boards of directors.