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TAX NEWS - JUNE 2010

Swiss Cantons Ratchet Up Tax Breaks as Europe Fights Deficits

by Carolyn Bandel and Dylan Griffiths, 02 June 2022 -- Schaffhausen, the northernmost part of Switzerland, used tax breaks to lure Tyco Electronics Ltd. from Bermuda to a new base on the River Rhine as Swiss cantons offer a tonic to European austerity.

The agreement gives the world's biggest maker of electronic connectors, whose top managers sit in Pennsylvania, a discount on the canton's 16 percent corporate tax rate for 10 years, said Schaffhausen Executive Vice President of International Affairs Marcus Cajacob. The exact terms are confidential, he said.

"It makes Schaffhausen attractive," said Priska Roesli, a senior director in Tyco's finance department, which nestles between mural-clad houses and a 16th century fortress. "It is such a small canton, you have access to the authorities."

Schaffhausen, the size of the New York City borough of Queens, is one of 26 Swiss cantons offering tax deals to attract hedge funds, biotechnology firms and Internet entrepreneurs, and companies fleeing tax havens such as the Cayman Islands that are encountering international pressure. The practice threatens to undermine efforts by countries seeking to tame budget deficits that ballooned in the wake of the global financial crisis.

"Low corporate taxes will help Switzerland attract business, but it's also creating tension as European governments seek revenue to plug their fiscal deficits." said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin.

Switzerland reported a fiscal surplus last year, and cantons from Zurich to Schwyz are lowering taxes.


Tax Rates

"There is still a clear downward trend in taxation," said Martin Eichler, head of research at BakBasel, an economic consulting firm in Basel, Switzerland. "There is pressure to be attractive to companies and the cantons are saying that if we have to save somewhere, then it won't be on tax."

Swiss corporate tax rates, including a federal rate of 8.5 percent, range from 11.8 percent in the town of Pfaeffikon in Schwyz to 24.2 percent in Geneva, according to tax consultant Mattig-Suter & Partner. That compares with a corporate tax rate of 28 percent in the U.K. and 35 percent in the U.S.

Vaud, running east along the lake from Geneva to Montreux, persuaded Shire Plc to set up an office last month with the help of tax relief on its corporate rate of 23.5 percent, said Eric Maire, the canton's senior project director for economic promotion. That follows the March decision of Ineos Group Holdings Plc to relocate from its U.K. base.

"We have a very promising pipeline and two big successes already this year," Maire said. "Vaud has the necessary budget and cash flows to ensure that taxes won't be increased."


Potential Opportunities

Shire, the drugmaker that shifted its base to Ireland from the U.K. two years ago to reduce taxes, will employ about 100 people at the new office in Eysins, Switzerland. Location, the ability to find and retain talented workers, and the quality of life made Vaud attractive, said company spokesman Matt Cabrey.

"Switzerland does provide Shire with potential opportunities to benefit from a tax environment that is considered favorable when compared with other regions of the world where Shire has a significant presence," Cabrey said. He declined to comment on specific tax implications of the Eysins office.

Thousands of companies bolster earnings by attributing income to subsidiaries in countries with lower tax rates, legally cutting their costs with a technique known as transfer pricing.

Ineos, the world's third-largest chemicals company, said in March it aims to save about 450 million euros ($547 million) in tax over four years by moving to Vaud.


Tax Rulings

Companies relocating to Switzerland negotiate through accounting and law firms to obtain a tax ruling from cantons, which make offers with the expectation that new arrivals will create jobs.

"You come here to enjoy quality of life and low taxes but in return you must help develop new industries and hire new people," said Brice Thionnet, a Geneva-based lawyer who specializes in corporate and tax structuring at Baker & McKenzie.

Tax breaks under an "auxiliary company regime" have helped Geneva attract oil and commodity trading companies, Thionnet said. One third of the world's petroleum is traded through the city, cantonal figures show.

Geneva targets companies that create "high-value jobs" and invest in research and development activities as the canton competes with centers such as Dubai and Singapore, according to Daniel Loeffler, director of the Geneva Economic Development Office. One job in a multinational company will create about 2.6 local jobs, he said.


Infrastructure Advantage

"Compared to some other cantons in Switzerland, we are a little bit more expensive in terms of tax, but have much more to offer in the way of infrastructure and 40 percent of the population are foreigners, making it easier to integrate," Loeffler said.

Tax holidays, an exemption on paying cantonal taxes, are only offered to companies that bring new industries to the canton, something that doesn't apply to hedge funds, he said.

Tax increases in the U.K. played a "key role" in persuading firms such as BlueCrest Capital Management and Brevan Howard Asset Management LLP to shift part of their London-based operations to Geneva, said Loeffler.

Smaller cantons want to emulate Zug, which used a tax rate of 15.8 percent to more than double its number of registered companies to 29,134 since 1990. The canton is home to miner Xstrata Plc and Transocean Ltd., the world's largest offshore oil and gas driller.


Competitive Tax Rate

"We made the move to maintain a competitive corporate tax rate," said Guy Cantwell, a spokesman for Transocean, which moved to Zug from the Cayman Islands in December 2008. "Switzerland has one of the best tax treaties and tax set-ups in the world."

The owner of the Deepwater Horizon rig that exploded in the Gulf of Mexico listed on the Swiss stock exchange in April and expects its tax rate to be between 15 percent and 17 percent this year, after taking into account the estimated $200 million cost increase projected for the incident.

That compares with an average of about 20 percent between 2005 and 2007, according to Bjorn Thoresen, an Oslo-based analyst with First Securities. For such a big company, that difference is "not negligible," he said.

The 2004 Jobs Act made it costly for U.S. companies to relocate to overseas domiciles, and President Barack Obama's administration is clamping down on tax havens, spurring an exodus of companies such as Tyco and Transocean from jurisdictions that don't have full tax treaties with the U.S., said Larry Kemm, a partner at law firm Sharp Kemm PA in Tampa, Florida.


Closing Tax Loophole

"It's gone a significant way to closing that loophole, but some U.S. legislators would like to go further and try to tax some of the companies that have moved to non-U.S. locations," said Kemm.

Under legislation proposed by Senator Lloyd Doggett on May 18, companies would be taxed in the U.S. if their management and control is exercised primarily in the U.S.

While most Transocean executives, including CEO Steven Newman, relocated to an office close to Geneva airport, Tyco's chief is still in Berwyn, Pennsylvania, and the company only has about 30 people in Schaffhausen out of a 78,000-strong workforce.

Tyco Electronics was spun off from Tyco International Ltd. in 2007 after former executives of the world's biggest maker of security systems overstated the company's income by $5.8 billion under ex-CEO L. Dennis Kozlowski.


Tax War

Tax holidays are a global concern because they distort investment flows at a time when the European Union has pledged almost $1 trillion to backstop Greece and other debt-ridden states, said John Christensen, director of the Tax Justice Network, a London-based tax lobbying group.

"It's a tax war that involves beggaring neighboring states," he said. "It's deeply abusive because it doesn't create many jobs as the headquarters activity mainly remains elsewhere."

That may not convince Schaffhausen, which slashed its tax rate by half in 2008 to build on the 2,500 jobs created over the past 13 years. Last month, the canton persuaded Garmin Ltd., the biggest maker of portable navigation devices in the U.S., to relocate its base from the Cayman Islands.

Next, it plans a new hotel for executives who take the 43- minute train ride from Zurich airport.

"The car salesmen of Schaffhausen have had golden times," said Cajacob, sitting in his office two miles upriver from Europe's largest waterfall. "Now everyone from restaurateurs to real estate agents is set to benefit."
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