Going Home

President Obama wants more American corporations to start paying taxes at home. That will have far-reaching consequences for Switzerland. If the U.S. Congress approves this change, 650 American companies will probably have to reconsider their location.

The current tax code, Obama said, is “full of corporate loopholes that make it perfectly legal for companies to avoid paying their fair share.” The fact that the words “tax evasion,” “tax havens ”and “Switzerland” were also mentioned in the same speech helped to increase his statement’s impact.

Obama wants to change tax laws that allow corporations to pay taxes on profits earned in those countries where they operate instead of into the U.S. Treasury. The change is expected to add 210 billion dollars to the battered U.S. Treasury over the next ten years. “It is the wrong idea, at the wrong time, for the wrong reasons,” said John Castellani, president of the Business Roundtable, an amalgamation of CEOs of some of the largest U.S. companies, which are being targeted by Obama.

Although the law would not come into effect until 2011 and a great deal of political opposition to it is already expected, it would be a mistake to dismiss Obama’s announcement simply as populist rhetoric. It’s precisely in Switzerland that the latest attack on bank secrecy was most felt. This president isn’t one to make empty campaign promises; he wants to fulfill them as well.

There are 650 American firms with a presence in Switzerland, employing more than 120,000 people directly or indirectly, and according to estimates by the Swiss-American Chamber of Commerce and the Boston Consulting Group, they account for up to 5 percent of the total Swiss GDP.

In addition to this, there are significant tax revenues. In the Schaffhausen canton, which was recently successful in luring Tyco International to the Rhine, American companies make up more than 10 percent of the tax base. As early as December, Tyco reacted like other companies that suspected changes coming with the Obama administration and they moved their operation from Bermuda. The United States does not have a two-tier tax agreement with the Caribbean island – unlike the one they have with Switzerland, where Tyco apparently felt safer from the reach of American tax authorities.

Those who promote Switzerland as a good location for business prefer not to emphasize its relatively low corporate tax rate as a major factor in corporate decisions. There is, however, a great deal of anger in the Development Economic Western Switzerland (DEWS) organization over this decision. DEWS says it will begin emphasizing other, “softer” factors in their Swiss location sales pitch, such as central location, access to a highly qualified labor market and a high standard of living. Willi Meier, head of the Greater Zurich Area Chamber of Commerce which has responsibility for location marketing over a seven-canton area, remains convinced that American corporations have an affinity for Swiss labor law and an emotional preference for Switzerland in general.

But it’s also a fact, according to tax experts, that were it not for the relatively low tax rate on corporate earnings, Switzerland wouldn’t even be in the running as a preferred business location. A sudden change in American tax law probably wouldn’t cause all American corporations to relocate overnight; many of them have operated in Switzerland for years, have research and development operations here (IBM and Google, for example) or direct their European operations from here, as is the case with Procter & Gamble, which employs 2,700 workers.

Nonetheless, Jörg Walker, tax advisor to KPMG* says, “The announced change in tax law could have an enormous effect on U.S. corporations operating in Switzerland.” If American companies in the future have to pay taxes in America, their decisions about a European central location will depend on other criteria. Manufacturers of consumer goods, for example, would likely choose to relocate to countries that contain their largest markets. Decreasing tax revenues, losses of qualified personnel and a resultant economic decline in areas affected are the possible ramifications for Switzerland.

But Obama is still walking a tightrope that could easily become counterproductive. “If the U.S. government takes away a corporation’s option to be more competitive by having lower taxes, they run the risk of a mass emigration of companies from the United States to foreign locations,” says Walker.

Obama is scoring points with Americans, at least temporarily, using the motto “Buffalo instead of Bangalore.” This is where Martin Neville of the Swiss-American Chamber of Commerce says he sees the real root of Obama’s tactics: “Over the coming year, if Obama makes a few wealthy individuals and corporations pay up, next year he’ll have an easier time selling U.S. citizens on the necessity of raising their taxes as well.”

*Translator’s Note: KPMG is a major audit, tax and advisory firm in Switzerland.