The persistently strong franc, the shortage of specialists and Corporate Tax Reform III are the three biggest challenges currently facing the Swiss business community. The overall situation in Switzerland as a business location is characterized by numerous uncertainties which manifest themselves to a different, sometimes vastly different, degree in the individual regions. These insights were revealed by a KPMG survey of ten Cantonal Trade and Industry Associations.
The Swiss business community is anxious. This is largely attributable to the persistently strong franc, an existing or impending shortage of specialists because it has not yet been determined exactly how the mass immigration initiative (MII) will be implemented, as well as the pending Corporate Tax Reform III (CTR III). The steadily growing regulatory burden is just as much a factor of this general anxiety as the unresolved bilateral relationship between Switzerland and the EU. This is the picture painted by a qualitative survey KPMG conducted among ten Trade and Industry Associations in the cantons of Basel, Bern, Geneva, Lucerne, Neuchâtel, St.Gallen/Appenzell, Ticino, Vaud, Zug and Zurich. Their top-ranking representatives spoke out about the biggest business challenges facing their economic regions, political and regulatory frameworks, economic criteria and the specific strengths and weaknesses of their regional economies.
The high external value of the national currency, the shortage of specialists and CTR III are by far the most frequently named challenges faced by regional businesses. When asked about the importance of the various political frameworks, the most dominant issue for respondents is the regulation of Switzerland’s bilateral relationship to the EU and thus to key trading partners. Continued ambiguity as to how the MII will be implemented and an imminent, further shortage in the availability of foreign specialists have triggered enormous uncertainty throughout every economic region. Even today, the quotas approved by the Federal Government can barely meet demand from the cantons. Jobs not only in research and development but also in production and support services are being outsourced to foreign countries, in some cases this has already been happening for some time. In light of this, the respondents feel it’s even more important that the political framework be structured in such a way that all of the key elements of the value chain are retained in Switzerland. In that context, they attach great importance to much more flexible rules regarding the logging of working hours and the newly-adopted Federal regulation is under fire in every region.
The importance of low standard tax rates differs by region. Generally speaking, all Trade and Industry Associations consider a moderate tax burden important for legal entities and individuals, yet always in combination with additional factors that play a supporting role in a location’s attractiveness. Opinions on the new tax instruments to be introduced through CTR III vary depending on the canton’s economic structure. The new instruments are receiving a particularly warm welcome in Basel, Geneva and Neuchâtel, especially those aimed at promoting research and development.
Some respondents still hold out hope that a reduction of standard tax rates within the scope of CTR III will offset the elimination of past tax incentives and could potentially motivate businesses to stay in Switzerland. Business representatives in Bern and Zurich, on the other hand, are worried that CTR III could further exacerbate intercantonal tax competition since these larger cantons have a relatively small tax base from status companies and a significant reduction of standard tax rates would be accompanied by a large number of bandwagon effects. Zug fears that national fiscal equalization (NFE) will prompt further greed on the part of recipient cantons if they are forced into making substantial tax cuts. While Lucerne advises against premature hikes in the standard corporate tax rates in the current situation, cuts have been planned in Geneva for some time now and are already a reality in Neuchâtel and Vaud.
Continuously optimized, intact transportation infrastructures are essential to the attractiveness of every region. While largely urban cantons are more focused on resolving capacity bottlenecks, the larger, more rural cantons mainly want to shorten travel times within their cantons and better integrate those areas located along the periphery. Nearly all respondents cite concrete projects aimed at strengthening regional infrastructures both in public and private transportation. Apart from a potential through station and a freeway bypass in Lucerne, no concrete needs were articulated in Central Switzerland.
Looking ahead to future business challenges, two responses were common across Switzerland: One was the meteoric transformation toward a knowledge-based society and pressure to be innovative, the other was the ever-increasing digitization of practically all aspects of business and life which is currently being referred to under terms like Industry 4.0 or FinTech.
When it comes to how they assess today’s biggest challenges, the results of the survey reveal a consensus among the Cantonal Trade and Industry Associations. Nevertheless, their responses also illuminate some interesting regional differences:
Basel Stadt/Basel Landschaft
With its life sciences industry, the economic area of Basel has an actual “leading sector” with the declared objective of preserving the entire value chain – from R&D to production to marketing. To achieve this goal, the availability of qualified professionals from neighboring countries must be safeguarded; in fact, the success of the entire economic region hinges upon it. The business community in the two cantons of Basel calls for the overcoming of cantonal and national borders so that it can advocate its interests as a single business location both in the Federal Capital of Bern and abroad. Traditionally an extremely internationally focused, open economic area, Basel calls for additional free trade agreements.
One of the greatest economic challenges in the Bern region is the high fiscal burden on individuals which is why the business community has long been calling for not only lower corporate tax rates for businesses but also a substantial reduction in income tax rates. Past tax instruments have helped attract new companies to the region and would need to be compensated for if ever eliminated. So far, outsourcing in Bern’s business community has mainly impacted the area of production while R&D has largely been spared. The new spatial planning law has led to a scarcity of space and thus limited development opportunities for both the canton and businesses. Management of the road network, particularly within the City of Bern, is considered unsatisfactory and bottlenecks in the national road network (Murifeld, Grauholz) and the railroad network (train capacities from the Oberland region) need to be resolved. Greater efficiency is expected of administrative bodies, particularly those in civil engineering.
Due to its special geographic location and its heavy dependence on exports, Geneva’s main focus as a business location is not only directed toward the EU but just as strongly toward the USA and the Far East, specifically China. Recently called into question for political reasons, Geneva’s open-mindedness will be put to the test in connection with MII implementation if the urgently required foreign specialists grow even scarcer. Digitalization in general and Industry 4.0 in particular represent huge challenges for Geneva’s business community. Accordingly, forward-looking industries like biotechnology and genetic engineering will need to be promoted more heavily. The canton of Geneva’s planned reduction of its standard corporate tax rate to 13% within the scope of CTR III translated to a factual increase for companies that had previously enjoyed tax privileges (and are eminently important to Geneva) as well as a substantial decline in tax income for the canton. Geneva’s business community sees a need for improvement in terms of infrastructures, as well (transit across Geneva, less traffic congestion at the Swiss-French border, where possible increased capacities on the A1 freeway and underground train station).
In the Lucerne region there is a certain need for action in terms of creating affordable office space, particularly for enterprises just getting settled, due to shortages caused by strong economic growth. The extremely heterogeneous mix of companies and large number of SMEs have helped considerably to mitigate the impact of the franc’s sudden appreciation. The business community hopes for further free trade agreements and would like to see more intense cooperation with other cantons in Central Switzerland with an eye to exploiting additional synergies and presenting a united front to the rest of the world. Additional municipal amalgamations are not taboo.
For the business community in Neuchâtel, a clarification of the possible consequences of an elimination of bilateral agreements is urgently needed because it depends greatly on the availability of foreign specialists. Like in Bern and Vaud, the business community in Neuchâtel is extremely critical of the impact of the Federal Government’s new spatial planning law since this is causing shortages on the market for office and residential space – when Neuchâtel actually wants to continue growing, specifically in the service sector. The outsourcing of production capacities has already begun in Neuchâtel. Yet unlike in the rest of Switzerland, this is not viewed as entirely negative since it in turn is freeing up R&D capacities, particularly for the watchmaking industry, while also allowing the region to boost its “Swissness” factor. One declared objective of the Neuchâtel economic region is to attract additional headquarters for relocation to the area, especially those from the watchmaking, MedTech, microtechnology and nanotechnology industries, because enterprises in Neuchâtel are frequently dependent on decisions reached outside Switzerland. The business community feels that there is room for improvement with respect to premium residential space and above-average energy prices which weaken the ability of the business location to compete.
In the St. Gallen/Appenzell economic region the key challenge is not the administrative burden. Instead, the government needs to adopt a more business-friendly mentality and optimize coordination within the administration. The region has been suffering a loss of importance for some time now which manifests itself in two issues: One is in the desire for improved transportation infrastructures to better connect the region (expansion of the Winterthur bypass, linking of the two Rhine Valley freeways, construction of the Brüttener tunnel). The other is in a modification of the Swiss spatial planning concept featuring three metropolitan regions (Geneva, Basel, Zurich) to one that views Switzerland as a single economic area and distributes central investments more prudently. Digitalization, referred to as Industry 4.0, is presenting some major challenges to the region’s business community and cooperation with the education system will be essential in order to train and retain the required IT specialists in Eastern Switzerland; one way of doing this is through a Federal Institute of Technology (ETH) campus in Eastern Switzerland. Eastern Switzerland’s industry has been under enormous pressure for some time now, yet as a traditionally export-oriented business community, it has had decades and even centuries of experience in dealing with structural changes and international competition.
Ticino’s business community is calling for corrections to be made in the country’s bilateral relationship to the EU, namely stronger supporting measures. It is the only economic region surveyed that did not attribute any primary importance to the strong franc or the shortage of specialists since it has long since learned how to deal with challenges such as these. In general, this canton’s business community is more concentrated on strengthening its competitiveness and its education system as well as improving its links with the rest of Switzerland and to neighboring countries – with a special focus on the north. In terms of transportation infrastructures, there is a need for action to be taken both in the areas of private and public transportation. The current public transportation system fails to meet the needs of the economic area and the number of available parking spaces is far from adequate. Private transportation is extremely important in Ticino, in part due to the canton’s expansive, intricate geography but also as a result of the fact that a majority of both the region’s indigenous workforce as well as the numerous cross-border commuters from Northern Italy relies on cars to cover the relatively large distances between home and work.
Low standard tax rates are becoming increasingly important in Vaud. Special tax incentives play a vital role, particularly with respect to research and development as well as company start-ups. The economic region is in the midst of a fundamental transformation toward globalization, one that is heavily impacted by the relentless trend toward digitalization. Businesses in Vaud have long since outsourced their production activities. Now the focus is increasingly shifting to research and development activities as well as services, whereby the business location has strong centers of excellence and a large number of start-ups thanks to a competitive knowledge cluster (EPFL, university). The recent boost in construction activities has safeguarded the availability of affordable office space for the near future; affordable housing, on the other hand, is still in short supply. The new spatial planning law is problematic and impeding vital investments.
Price and cost levels 30% above Germany’s are no longer considered tolerable in the economic region of Zug. This has prompted discussions of a regional depreciation of the Swiss franc as a means of helping the canton retain its long-term appeal as a business location in international competition. Not just production activities have been outsourced but also support services such as HR, IT and finance – not only at large corporations but increasingly at medium-sized companies, as well. Nevertheless, the objective of Zug’s business community is to keep both production activities and low-skilled jobs in the region. An intense examination of Industry 4.0 and the canton’s proximity to key research facilities in Zurich, Lucerne and Rapperswil are vital parts of this effort. Zug wants to hold on to its traditionally low standard tax rates yet feels the financial ramifications of current difficulties in the commodities and financial sectors; at the same time it fears other negative consequences in connection with its already high NFE burden within the scope of CTR III, something which could put Swiss solidarity to the test.
Respondents in the economic region of Zurich expressed a desire for a more customer-oriented administration and also indicated that they perceive the regulatory burden in the financial sector, for instance, as particularly heavy. Several different transportation infrastructures are in need of optimization, one specific example of which are the regulations governing flight operations that need to be amended in such a way as to safeguard the airport’s role as an intercontinental hub. What’s more, improvements are required along the north-south and east-west public transportation routes as well as road capacities around the City of Zurich. One especially important concern of Zurich’s business community is to ensure the availability of foreign specialists for the precision industry, information technology, the financial sector and the healthcare sector. To that end it is campaigning for a continuation of the Free Movement of Persons Agreement with the EU in particular and, as a highly export-oriented region, of the bilateral agreements in general. On top of that, it calls for the conclusion of additional free trade agreements and better protection of intellectual property, particularly in this context. On the subject of quotas issued for third-country workers, another factor mentioned is that not only the efficient processing of these quotas but also the detailed provisions regulating aspects such as partner or family reunification will be decisive.
The qualitative survey was performed within the scope of interviews conducted with the top representatives of ten Trade and Industry Associations in the cantons of Basel, Bern, Geneva, Lucerne, Neuchâtel, St. Gallen/Appenzell, Ticino, Vaud, Zug and Zurich. Following a questionnaire, the participants were first asked to name what they considered to be the three biggest challenges for their economic regions. The respondents were then told to rank various political and regulatory frameworks as well as economic criteria in order of importance and to explain the reasoning behind these rankings by providing concrete examples and comments. This then gave them an opportunity to address special regional characteristics as well as tasks and industrial sectors in urgent need of improvement.
© 2016 KPMG Holding AG is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.