Due to the day job I spend a good deal of time in Switzerland and interact with numerous Swiss organizations. Yesterday I had the pleasure (well sort of) to join the Swiss Japanese Chamber of Commerce for a jolly nice lunch while a couple of tax experts from Ernst & Young explained how companies dodge taxes in Europe by moving parts of themselves to Switzerland.
There are some things that irritate me no end about the Swiss, and plenty of things that irritate those who live there, but the nation is in far better shape than its neighbours and shows little sign of letting itself follow them into the economic failure that is the Eurozone. One reason why Switzerland is not in the Eurozone and not an economic basket case (the two are related as you might imagine) is that the Swiss devolve a lot of responsibility down to the individual cantons.
I admit to not fully understanding the relationship between the federal state and the cantons but there is one very clear cantonal responsibility - collecting taxes from businesses - although it seems that there is a federal tax rate and a cantonal one. Moreover, and unlike the way that Franco-German pols want the EU to develop, there is absolutely no harmonization of tax rates amongst them. Corporate tax rates are both lower than those in the EU and variable. There is a further wrinke that cantons can negotiate any rate they like with particular companies thus even a canton with a relatively high nominal tax rate can choose to give (say) a 10 year tax holiday or a 50 year 5% tax rate after negotiation.
The E&Y people put together a nice list of actual tax rates across Europe which I'm copying:
Country
Corporate Tax Rate
Switzerland
8.5%*
Belgium
40.17%
France
34%
Germany
25%
Hungary
16%†
Ireland
12.5%
Italy
37%
Netherlands
35%
Spain
35%
UK
30%
* Official federal rate - cantonal rate on top † It was also noted that other Eastern European countries had tax rates similar to the Hungarian one although I gathered that they were slightly higher (say 18-20%).
Switzerland is not the only country that can negotiate different tax rates for specific companies, Belgium is apparently well known for the same, but it was noted that proposed tax harmonization and other EU diktats could well end these sorts of preferential deals. Switzerland, not being a member of the EU, doesn't have to listen to the people who complain about the unfairness of low tax economies and certainly doesn't need to change its ways to make them happy. What is interesting about the Swiss model is that, since cantons do a lot of the spending, the cantonal tax rates are far more important that the federal ones and thus even small companies without much clout can benefit by moving to a canton that has lots of revenue already. Shockingly to any normal politician or bureaucrat Swiss ones seem to believe that the answer to a budget surplus is not spend more but cut taxes and the result is positively darwinian with lower corporate tax cantons tending to attract more businesses and thus having a larger tax base which leads to still lower tax rates.
Goig back to the European view; the E&Y folk explained that the way to take advantage of Swiss taxation was to move a significant amount of business management into Switzerland. This didn't mean relocating the factories or changing the sales outlets but did imply that supply chain management, marketing and other similar functions be moved there and that the transfer pricing scam trick method be used to move a sufficient amount of the risk and hence the profit to the new Swiss entity. They had nice handy dandy examples where moving even 25% of the gross profit to the Swiss entity dramatically reduced the effective tax rate for a pan-European company.
The fun occurs when the company is structured so that its factories and sales arms within each country are able to recover just cost plus amounts of money with the lions share of the profit (75% or more) being moved to Switzerland. In this case you see the overall effective tax rate declining from (say) 35% to something more like 15% even without any special negotiation with the Swiss tax folks. Naturally the question arises of whether this is counteracted by the generally higher salray costs required to get people in Switzerland and the quick answer is: no. Compared to London, Paris or Brussels Swiss gross wages are not massively higher - higher net wages because of higher cost of living expenses are offset by generally lower personal tax rates and other employer-paid costs - and anyway typically the Swiss company need emply under 100 people out of a workforce that probably numbers thousands so even relocation costs are but a drop in the bucket.
If you want to bet on the Swiss economy remaining healthier than those of its EU neighbours then tax related tricks like this show how Switzerlad seems destined to remain popular for businesses. Only Ireland and Eastern Europe represent a threat and despite the growth of Dublin as a financial centre the Swiss look to have considerable advantages in terms of relevant expertise, not to mention those famous bank accounts and their privacy rules. However if ever an EU finance minister from a major EU nation wants to make his country a more attractive place for business it would seem like cutting the corporate tax rate would be a great idea, after all if it weren't for the tax advantages Switzerland would not be a sensible place for a European operation seeing as it is outside the EU and the Eurozone.
Finally the E&Y folk pointed out that a number of countries (and this applies to the good ole USA too) are getting upset with the transfer pricing trick and want to levy taxes based on income rather than profit. The intent being to try and make sure that manufacturers do not hide the profits they make from runnign their factories. Fortunately this seems unlikely to ever occur in a way that is not easy to circumvent (so all the regulation will do is increase the income of tax advisors), but if it does then the Law of Unintended Consequences suggests that companies will simply close the factories and move them to India or China thereby removing both employment and tax income from the original country.