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Locational quality 2019: Basel-Stadt tops the ranking for now, Vaud climbs nine places
For the first time in the history of the Locational Quality Indicator, Canton Zug has not taken first place in the rankings. By a small margin, the top spot in the cantonal rankings is now occupied by Canton Basel-Stadt, which has already significantly reduced its corporate tax rates with retroactive effect from the start of 2019. Canton Vaud has also lowered its taxes for legal entities and this has propelled it nine positions up the rankings to 8th place. However, the fundamental restructuring of corporate taxation in Switzerland has only just begun. The latest outlook for locational quality in 2025 envisages that Zug will return to the top, followed by Basel-Stadt and Zurich. Canton Geneva has climbed ten positions to 4th place.
Canton Zug has been the undisputed leader of the cantonal rankings ever since the analysis of locational quality began back in 1997. This year, however, it is Canton Basel-Stadt that has claimed the top position: Thanks to a significant cut in its rate of corporate profit tax to 13.04% (with retroactive effect from the start of 2019), Basel-Stadt has surged to the top of the rankings from fourth place and now boasts the most favorable combination of appeal factors, closely followed by Zug and Zurich (see Figure 1). Other cantons making significant moves up the table include Aargau, Nidwalden, Schwyz, and Lucerne. Canton Vaud has soared from 17th to 8th place thanks to a significant reduction in corporation taxes (its corporate profit tax rate is now 13.79%). As a result, this canton now leads the mid-field, which also includes various cantons with urban agglomerations and the city canton of Geneva. With their challenging topography, the peripheral cantons of Jura and Valais exhibit the lowest locational quality. Compared to last year, there has been a number of minor changes in the rankings, with the Cantons of Obwalden and Appenzell Innerrhoden each falling two places, while Canton Bern climbed one place.
Regional view: Significant differences within the cantons
For the larger, heterogeneous cantons – such as Bern, Vaud, Ticino or Graubünden – an analysis solely at cantonal level is too superficial. Credit Suisse economists have therefore also analyzed locational quality at the level of 110 economic regions. The urban centers of Zurich, Zug, Basel, Baden, Lucerne, and Bern, as well as their wider agglomerations, are among the most attractive regions for companies, not least due to their transport accessibility. Basel-Stadt now ranks third, an improvement of 13 places. With improvements of between 12 and 30 places in the rankings, the regions of Canton Vaud have performed even more impressively: Nyon (13th place), Lausanne (20th place) and Morges/Rolle (24th place) have all now moved into the top quartile, thus setting themselves apart from the other regions of French-speaking Switzerland. In Ticino, the Lugano region and, in particular, the Mendrisio region exhibit a higher locational quality than the neighboring regions. The regions of the Alpine and Jura arcs are clearly less attractive from the perspective of companies; this can be explained by their topography and the often significant amount of time required to travel to their main urban centers.
Locational quality 2025: Zug likely to reclaim top spot from Basel-Stadt
The fundamental restructuring of corporate taxation in Switzerland has begun. The privileged tax regimes that apply to status companies will be abolished in 2020. Within the permitted statutory parameters, the cantons can put together their preferred overall package of ordinary corporate tax rates and customized fiscal policy measures (including a patent box, an additional tax deduction for research and development expenditure, and an interest deduction on self-financing). Despite the newly introduced tax privileges, the options available to companies to reduce their tax assessment basis will ultimately be more restrictive. To remain attractive in terms of tax competition and prevent economically significant status companies from moving elsewhere, the majority of cantons are planning to reduce their ordinary corporate tax rates. A few cantons such as Vaud and Basel-Stadt have already significantly reduced their tax rates with effect from the start of 2019. In other cantons, the defined tax strategies are still subject to approval by the local electorate.
Based on the intended corporate taxation adjustments by the cantonal governments, which in many cases will be implemented in stages between now and around 2025, Credit Suisse economists looked into the future in November 2018 and April 2019 to predict locational quality in 2025. This involved them recalculating the locational quality sub-indicator ‘tax attractiveness for legal entities’. This sub-indicator measures the tax burden on ordinary corporate profit and capital taxes but not the planned design of the new tax instruments. It also involved taking into account changes in ‘accessibility’ indicators as a result of the completion of the New Rail Link through the Alps (NRLA) in 2020. The other locational factors such as the tax burden on private individuals and the availability of highly qualified and specialist personnel remain unchanged. As cantons have made further changes to their planned tax strategies in the meantime, the economists have updated the hypothetical ranking.
The latest outlook for locational quality in 2025 sees Canton Zug reclaiming its place at the top of the rankings. With its planned corporate profit tax reduction to around 12%, it could relegate Canton Basel-Stadt back to 2nd place. With the local electorate having already approved a corporate profit tax reduction to 18.19%, Canton Zurich remains in third place. On the basis of the latest information, the Cantons of Geneva and Basel-Land are set to occupy positions 4 and 5 (planned profit tax burdens of 13.99% and 13.45%, respectively) – representing a significant leap of ten and six places, respectively, compared to 2019. Canton Aargau, which ranked as high as 3rd in 2018, is expected to fall to 6th place due to its decision not to reduce its ordinary corporate profit tax rate.
Reductions in corporate taxes have positive impact on locational quality
Generally speaking, the planned reductions of corporate taxes will increase locational quality. At an international level, tax competition is increasingly also taking the form of lower standard tax rates. Switzerland is well placed in this global competition between locations: In addition to low corporate tax rates, Swiss locations offer a high degree of political stability, high-quality infrastructure and educational institutions, good industrial relations, and sound public finances. Due to the relative analysis of locational quality, cantons can nevertheless lose ground in the Locational Quality Indicator despite tax breaks. Today's frontrunners in terms of corporate taxes will lose at least part of their relative advantage because the differences on the whole will become smaller and some cantons will wish to position themselves even more attractively on the tax front in future. With the exception of Zug, the indicator figure declines for all central Swiss cantons, as well as the two Appenzell cantons. The most significant ranking decline – a full four places – is suffered by the Cantons of Appenzell Ausserrhoden and Obwalden. With the local electorate having rejected the cantonal tax legislation revision in November 2018, Canton Bern looks set to fall the furthest in the locational quality rankings, i.e. by five places to 23rd place. After years of stability, there are now set to be other changes at the lower end of the rankings too: With a corporate profit tax rate of 15%, Canton Jura is set to replace Canton Valais at the bottom of the rankings.
The Credit Suisse Locational Quality Indicator
The long-term economic potential of Switzerland's cantons and regions is primarily determined by the overall conditions for businesses. Intense competition between different locations is forcing the Swiss cantons and regions to take continued steps to optimize their attractiveness. Credit Suisse economists have provided quantitative analysis of the locational quality of Swiss cantons and regions since 1997. The annual Locational Quality Indicator (LQI) was developed in order to measure the attractiveness of the Swiss regions and cantons from a business perspective. The LQI serves on the one hand as a guide to companies and entrepreneurs seeking to evaluate potential locations, and on the other as a benchmarking tool for the optimization of cantonal or regional location policy. The indicator illustrates the attractiveness of an area in the form of a relative index, based on the following seven quantitative sub-indicators: Tax burden on legal entities and private individuals, availability of specialized labor and highly qualified personnel, population accessibility, employee accessibility, and access to airports.
The study ‘Locational quality: Basel-Stadt takes top spot’ is available online in English, French, German, and Italian at: www.credit-suisse.com/locationalquality