Tax Proposal 17 Will Intensify Locational Competition
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Tax Proposal 17 Will Intensify Locational Competition

The cantons of Zug, Zurich, and Aargau hold on to top rankings in the 2017 Credit Suisse Locational Quality Indicator. Appenzell Ausserrhoden overtook Thurgau and Obwalden. The competition for companies is likely to enter a new phase.

Intense competition between different locations is forcing the Swiss cantons and regions to take steps to optimize their appeal. The annual Locational Quality Indicator (LQI) of Credit Suisse measures the attractiveness of Swiss cantons and regions to business. It looks at seven "hard" locational factors and on the one hand serves as a guide for companies that are weighing up various potential locations. On the other, it can be used as a benchmarking tool for the optimization of cantonal and regional location policy.

Unchanged Top Field, Movement in the Middle

The Canton of Zug has for years topped the cantonal ranking, followed at some distance by Zurich. The Canton of Aargau held on to its third position before Basel City. These locations have the most favorable combination of attractiveness factors. The cantons of Nidwalden, Schwyz, and Lucerne likewise boast results that are well above average. A series of suburban cantons, plus the city canton of Geneva, make up the broad midfield. Compared with the previous year, Appenzell Ausserrhoden improved and advanced past Thurgau and Obwalden from tenth to eighth position. The Canton of Schwyz narrowly overtook Lucerne. Vaud drew closer to Solothurn by cutting corporate taxes. The peripheral cantons of Jura and Valais have the lowest locational quality. Their natural parameters – such as topography or longer travel time to larger economic centers – are largely immutable and make location policy difficult. Positioning can be influenced, however, as illustrated by the example of the Canton of Uri, which is significantly better placed than other mountain cantons thanks to attractive tax levels.

Cantonal Ranking

Cantonal Ranking

Source: Credit Suisse

Significant Differences within the Cantons

For the larger, heterogeneous cantons – such as Bern, Vaud, Ticino, or Graubünden – an analysis merely at cantonal level is too superficial. Thus the Credit Suisse analysts also examine locational quality at the level of Switzerland's 110 economic regions (detailed results in the study). The highest degree of attractiveness is exhibited by the centers Zurich, Zug, Baden, Lucerne, Basel and Bern, as well as their agglomerations, thanks mainly to their accessibility. In French-speaking Switzerland, Nyon is positioned well above the neighboring regions, and in Ticino the same is true for Mendrisio und Lugano. Alpine regions and the regions of the Jura arc are clearly less attractive to companies due to their topographical features and the length of travel time into the urban centers.

Tax Proposal 17: Intensive Competition for Companies Based on Standard Tax Rates

Following the clear rejection of Corporate Tax Reform (CTR) III, the federal authorities and parliament have swiftly started work on a new bill to achieve a consensus. Abolition of the privileged taxation of special status companies that has come under criticism is undisputed. Compared with the CTR III bill, the cantons will have less scope to reduce the basis for assessment: The possibility of showing income from intangible property rights separately in a so-called patent box and taxing it at a lower rate than other income is likely to be restricted. The allowances for research and development are also expected to be narrower in scope. The combined maximum relief at cantonal level is to be 70 rather than 80 percent; the interest-adjusted tax on profits is likely to be left out altogether. Altogether the scope for customized fiscal policy measures will therefore be somewhat smaller.

At the same time, however, the cantonal share of direct federal tax is only to be increased to 20.5 instead of to 21.2 percent. The cantons would therefore have less money available for funding the cut in corporate profit tax rates. It therefore remains to be seen whether the cantons uphold the tax rate reductions announced for CTR III, some of which are dramatic. However, cantons with a large number of special status companies and high tax rates will be compelled to act: The competition for companies is set to intensify again, according to the Credit Suisse economists.

Peripheral Regions Benefiting from Commuters with Higher Levels of Education

A town/country divide exists in terms of the availability of highly qualified labor, according to the Credit Suisse economists. In urban regions and nearby agglomerations over 40 percent and in the city of Zurich as many as 52 percent have a diploma from a university of applied sciences, a university, or a higher technical college. The share in rural regions is below 20 percent. The pool of labor in a given region encompasses not only those people who reside there, but also inbound and cross-border commuters. The analysis by the Credit Suisse economists shows that these workers frequently have a higher level of education than local residents. For example, the tertiary rate of inbound commuters not only in Central and Western Switzerland but also in the cantons of Solothurn, Aargau, and Schaffhausen is in many places more than 10 percent higher than that of persons living there.

Highly-qualified personnel tend to live more in the urban economic centers

Highly-qualified personnel tend to live more in the urban economic centers

Share of resident persons of working age with tertiary education, 2011 – 2015 in percents.

Source: Swiss Federal Statistical Office, Credit Suisse, Geostat

Inbound and cross-border commuters often with a higher level of education than local residents

Inbound and cross-border commuters often with a higher level of education than local residents

Share of inbound and cross-border commuters of working age with tertiary education, 2011 – 2015, by employment region in percents.

Source: Swiss Federal Statistical Office, Credit Suisse, Geostat