KPMG: Swiss movement17 May 2012
Many leading companies have relocated parts of their business to Switzerland, which is seen as one of Europe’s tax havens. But is there more to this trend than the simple lure of low tax rates? KPMG’s Andreas Müller and Hartwig Hoffmann explain what makes Switzerland such a good place to do business.
Enjoying a strategic location in the heart of Europe, Switzerland is known as a haven for international companies seeking to benefit from low corporate and personal tax rates. With a strong banking industry, it is certainly a country that understands the financial needs of corporate entities, but it also offers a very high standard of living and a well-developed infrastructure to support businesses.
Nevertheless, among all of the advantages of doing business in Switzerland, it is the favourable tax environment that grabs the headlines.
"If you consider big multinational companies looking to realign their supply chain or restructure their business, tax is always an important topic because it is a huge cost of the profit and loss (P&L)," says Andreas Müller, a partner in KPMG's international corporate tax practice. "The shortlist of countries that compete with Switzerland to attract overseas business comprises entirely low-tax countries. Without low tax, Switzerland would not be as competitive as it is now.
"But Switzerland also has a strong domestic base of international businesses, so the infrastructure is set up to do business globally. The pressure to keep tax rates low does not come from politicians, but from domestic industry that wants to be competitive on the international market," he adds.
In the fight to attract big business, however, tax is not the only weapon in Switzerland's arsenal. Its financial strength as an economy is very important and it has near negligible debt compared with other European countries.
"Tax is only one aspect. It is easy to do business in Switzerland. The administrative burden is relatively low, which means low cost of compliance," remarks Hartwig Hoffmann, KPMG's Zürich-based director of international corporate tax.
Switzerland is certainly high in the rankings of any survey that compares how easy it is to do business in countries around the world. Whether it's the annual UBS report or surveys by the World Bank, Switzerland is regularly seen as having a favourable environment for registering property, paying taxes and getting credit.
"If a company wants to relocate its headquarters, Switzerland is also an attractive location for its employees. The crime rate is low, there are international schools and the labour market is another important factor," notes Müller. "We have seen companies in industries such as pharmaceuticals come here because they thought they could recruit very talented people. The labour laws are also very liberal, partly because there is almost full employment."
The employment market provides access to many highly skilled workers, which is one of the reasons why Google selected Zürich as the location for its biggest engineering hub outside the US. Bilateral agreements with the EU also mean that there is no quota on the number of employees that can be hired from EU countries and work permits are relatively easy to organise.
All of these factors are important, but the Swiss tax regime remains the country's most transparent appeal.
The TESCM approach
Smaller businesses may be drawn to Switzerland as a result of the preferential rates of personal tax, while larger businesses benefit from lower corporate taxes. For bigger companies, relocation is also often driven by what KPMG refers to as tax-efficient supply chain management (TESCM).
TESCM is an approach to structuring a business that integrates supply chain design with tax optimisation, which can make a big difference to profitability. The strategy is based on the premise that incorporating tax arbitrage into supply chain structures - often by optimising the location of key supply chain functions, assets and risks - realises more benefits than conventional operational savings alone.
More companies are now looking at TESCM as they alter their business models in response to the economic downturn. They want to minimise effective tax rates across the business, reduce cost, improve the efficiency of their supply chain and, ultimately, increase profits. Relocation to a more favourable environment becomes more feasible and cost-effective when it is part of an overall business model overhaul that is already on the cards.
But TESCM is not just about optimising tax, and is certainly not a tax avoidance strategy. It's about business model optimisation, with tax being just one of many considerations. Moving part of the business to Switzerland, for example, is not about putting an empty shell there for tax purposes; it's about putting a substantive part of a business there.
"The advantages of TESCM stem from projects that change the value chain, although in low-tax jurisdictions the biggest benefit may come from the tax perspective. But it does not mean relocating the whole business - sometimes just a specific element, such as procurement, could be set up in Switzerland," explains Hoffmann.
"Very often the initial idea comes from the business, which may want to centralise procurement or manage the supply chain more efficiently. It could make sense to set up a separate legal entity to do that, which raises the question of where to put it," adds Müller. "This kind of centralisation is now a global trend. It may start with just a small team and then grow; we have seen companies begin in Zurich with only 50 people and now they have 1,700."
In many cases, the benefits could go a long way towards paying for the cost of project implementation or changing the business model. But tax has to be considered in its widest context and the location has to be chosen with care.
Location, location, location
Even within Switzerland there are differences between the country's various cantons, the semi-autonomous regions that make up the federal state. Each canton retains responsibility for issues that affect the public, such as healthcare, law enforcement and, significantly, levying taxes.
"There is huge variation between cantons," Müller confirms. "For example, in some cantons it is easier to find real estate, and income and net wealth tax rates may differ. The local cantonal agencies are generally very supportive in helping businesses and often the smaller the canton is, the more direct access you have to decision-makers."
The cantons of Zürich and Geneva are the main hubs, with Zürich the centre of economic power. These are large regions, so setting up a corporate entity may be more complex, but both have excellent business infrastructure in place. Smaller cantons have quicker processes and attractive tax regimes, but the right choice of location depends on the specifics of a business, its industry and its size.
Cantons that border Zürich, such as Aargau and Appenzell Ausserrhoden, have access to the region's high-quality business infrastructure, so are also attractive to companies. And while larger cantons may sometimes engender more complexity for those setting up a business, there are exceptions to that rule, such as Graubünden (also known as Grisons), which is the largest of all.
"There are no real hurdles to entry into Switzerland from a legal or tax perspective, although there are always practical issues to resolve. Some cantons have a specific service offering to help companies set up an office, get work permits or find schools for their employees' children," says Hoffmann.
Looking beyond tax
There is much to attract businesses to Switzerland's different cantons, and both Hoffmann and Müller advocate that major decisions involving changes to a business model or the relocation of headquarters should not be driven solely by tax considerations - no matter how attractive they may seem - but by a solid business case.
"Complexities such as VAT and customs issues must be considered in detail first. Sometimes the tax issue can be too persuasive," Müller points out.
Hoffmann agrees: "Often moves are led by the financial side of a business, where tax is the aspect that is being looked at - particularly corporate tax. But successful projects are driven from the business end and tax is not the only consideration."
There are many successful examples of large companies relocating their European headquarters or establishing a key division, such as procurement or R&D, in Switzerland. The most successful of these transitions, however, are based on a thorough consideration of the implications of such a move, rather than the desire to simply pay a lower rate of corporate tax.