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October 9, 2003
EU's Tax Changes Scatter Corporations:
Switzerland, Ireland Draw Companies Seeking to Avoid a Rise in Obligations
A number of large multinationals -- mostly American -- have moved their European headquarters and finance operations out of traditional European Union locales to Switzerland and Ireland, aiming to
avoid costs associated with so-called tax harmonization. That's the EU's term for its effort to end competitive tax breaks among member states, a practice Brussels regards as harmful.
The corporate moves, by
such big names as John Deere, Ralph Lauren and General Mills, are starting to resemble the burst of migration by multinationals to Bermuda and other tax havens during the 1990s. They are also fueling concern among
business boosters and revenue officials in some EU countries, particularly the Netherlands and Belgium, which are losing their luster as tax havens.
High-tax France and Germany are suffering the
most defections, but the phenomenon may also be spreading to the so-called Benelux region, whose business-friendly tax regimes have long made it the European base of choice for American multinationals. In the World
Economic Forum's most recent annual report on global competitiveness, ratings for the Netherlands and Belgium plunged while they surged for Switzerland, a non-EU member. Tax lawyers say several U.S. firms in those
countries are thinking of pulling up stakes.
Once a European leader in attracting direct foreign investment, the Netherlands saw such inflows slump 43% last year to $29 billion (€24.57 billion), one of
the biggest drops among 30 industrial countries, tracked by Paris-based Organization for Economic Cooperation and Development. Though economists and business analysts attribute much of the retrenchment to the
effects of the global economic downturn, they say tax policies play a role.
"It appears that international business increasingly ignores the Netherlands and seeks refuge to the countries surrounding
us," a group of Dutch business lawyers complained in a letter to Holland's tax minister last year after the government tightened tax laws at the EU's insistence. "It is evident that taxes are an important
factor."
The shift is partly attributable to the EU's tax-harmonization drive, lawyers and development officials say. The European Commission, the EU's executive branch, has tried to do away with
"harmful tax competition" between member countries by clamping down on uncompetitive practices -- such as state aid and various shelters -- that have long figured in tax planning by multinationals. But
member countries have vigorously defended their right to control their own fiscal policies, so nations lower and raise taxes as they see fit.
To the east of the EU, Switzerland lures firms with full tax
exemption for holding companies and individually tailored benefits that meet EU guidelines, a political necessary given that Swiss companies do most of their business in EU countries. To the west, EU member Ireland
beckons with a rock-bottom 12.5% corporate-tax rate.
The Swiss government is seeking to exploit harmonization with an aggressive program run out of its Washington embassy called "Location:
Switzerland." The agency seeks to woo U.S. executives with images of a clean and aesthetically pleasing environment where the workers all speak English. But the heftiest portion of its promotional materials is
a 62-page booklet, "The Advantages of the Swiss Tax System." About 650 American companies already have operations in Switzerland, says Christian Blickenstorfer, the Swiss ambassador to the U.S.
Belgium is drafting a package of EU-acceptable tax incentives to give it an edge over the Netherlands -- ironically, just the sort of tax competition harmonization is supposed to stop. Belgium also has
reduced its corporate-tax rate to 33% from 39% -- still well above Ireland's rate.
Among companies alarming Belgian officials is Deerfield, Ill., medical supplier Baxter International Inc., which operates
across Europe and doesn't have a European headquarters. It is considering establishing one, and moving some operations now in Brussels to Ireland or Switzerland, prompted partly by the phase-out of tax breaks.
The company's first European office was created in Belgium 45 years ago. But the phasing out of tax breaks and the growing cost of doing business is prompting it to consider a move. Sally Benjamin Young, a
company spokeswoman, says Baxter would likely keep its marketing, technology, tax and legal support, research and distribution services in Brussels. But the treasury and finance activities could be relocated to
Ireland or Switzerland. "The phasing out of tax benefits is a very real consideration," she says.
The EU's tax-harmonization drive also complicates Belgium's attempt to lure new foreign investors.
Following EU pressure, Belgium is being forced to phase out nearly 400 "coordination centers," in which companies could set up to run treasury and administrative functions for their businesses. For nearly
two decades, Belgium tried to attract companies by taxing these coordination centers at reduced tax rates, regardless of the company's income. The coordination centers were allowed to exclude financial and personnel
costs when calculating their taxes.
Peter Cussons, an international-tax partner at PricewaterhouseCoopers in London, says the resulting effective tax rates for coordination centers was as low as 1%. "If
companies are now looking for places to establish their businesses, Switzerland and Ireland will be at the top of their shopping lists," he says.
Members of the American business community in Brussels
say the repeal of such tax incentives is making it harder to attract foreign investors.
"We're not happy with EU tax harmonization, which is just a European code word for raising taxes," says
Leonard H. Schrank, managing director of the American Chamber of Commerce in Belgium, which represents American companies. "A lot of U.S. companies came here years ago because of Belgium's favorable tax regime.
Now if we were making that decision, we would think differently."
The move toward Switzerland has largely escaped notice, in part because many companies shun abrupt high-profile moves -- and the
political controversy that often results -- by quietly building up Swiss operations through mergers, reorganizations or acquisitions. New York-based Philip Morris, a unit of Altria Group Inc., has long manufactured
cigarettes in Neuchatel and had a small management office in Lausanne. Gradually, the firm added operations there, then last year made it official, transferring 50 employees to Lausanne from New York, where Phillip
Morris International has a staff of about 1,300.
For some firms, the path has been even more circuitous. When Compaq Computer Corp. acquired rival Digital Equipment Corp. in 1998, Swiss officials lobbied
Compaq to set up its Europe, Middle East and Africa (EMEA) headquarters in Geneva, but the firm opted instead for Munich.
Two years later, "Compaq went shopping for a better tax deal than it was getting
in Germany and moved its EMEA headquarters to Switzerland after all," according to a Swiss Embassy newsletter. When Compaq merged with Hewlett-Packard Co. last year, H-P was in the process of consolidating its
European operations in Geneva, so the two firms merged their European headquarters operations there.
The only real competitor to Switzerland within the EU is Ireland, which alone among EU member states is
willing to keep overall corporate-tax rates low enough to offset Switzerland's advantages. Manufacturer Ingersoll-Rand Corp., which had already moved its headquarters to Bermuda from the U.S. for tax reasons,
earlier this year consolidated much of its European operations this year in a new sales-and-trading division in Dublin.
The Netherlands, by contrast, is at risk of driving away companies by adhering too
strictly to EU dictates on eliminating corporate-tax shelters. "They did too much. They tried to do better than the best boy in the class," says Dutch tax lawyer Willem Van Wettum. "It was an
overreaction."
Andre Driessen, adviser on international economic affairs at VNO, the Dutch Confederation of Industry, which represents 105,000 Dutch companies, says steep corporate-tax rates, high labor
costs and laws that make it difficult to fire people are making the Netherlands a less attractive place to do business. "During the tech boom, we were at the top of the list of countries companies wanted to do
business in; now we are at the bottom," he says.
Particularly irksome to multinationals has been the government's decision, at EU insistence, to stop giving prospective investors advance notice of what
their tax burdens will be. When shoe firm Skechers USA of Manhattan Beach, Calif., opted against the Netherlands over this and other issues last year -- setting up a distribution facility in Liege, Belgium, and a
headquarters and financing office in Lausanne -- it set off a near panic among Amsterdam tax lawyers.
"The uncertainty with respect to obtaining rulings regarding the corporate tax and customs is
disastrous," a group of the lawyers warned the government. They added, "In particular, U.S. investors and their advisers demand clarity and consistent treatment. If from the government side agreements are
again and again reconsidered as a result of changing interpretations, the position of the Netherlands as a reliable government is seriously damaged."
Even some Dutch multinationals are moving part of
their businesses out of the Netherlands in search of more favorable tax regimes. Ahold NV, the Dutch retail giant, last year chose to move its financial operations to Geneva from Amsterdam. Fritz Schmul, a company
spokesman, said Ahold decided to move because Switzerland taxes financial transfers made within a company at a more favorable rate than the Netherlands.
Robert Schipper, North American director of a Dutch
government agency that advises potential investors, says the economic downturn rather reduced tax breaks explains why some companies are reining in investments. But he acknowledges the EU has made it harder to
dangle incentives. "We've had to obey EU rules on this, and it has made a difference," he says, "but there haven't been any big changes."
Indeed, not everyone agrees that taxes are the
biggest investment consideration. Many foreign companies say other factors -- labor skills, quality of life, access to technology -- are as important. Cisco Systems Inc., the San Jose, Calif., information-technology
company, recently built European headquarters in Amsterdam. General Manager Maggie Morrison says there are no plans to leave. "Companies may make noises when tax benefits are not as good as they used to
be," she says, "but you have to look at the whole picture."
GOODBYE TO ALL THAT
Some of the well-known multinationals moving offices to Switzerland from the EU:
Company/Headquarters Operations Moving From Moving To
John Deere, Moline, Ill. International sales Mannheim Schaffhausen
Polo Ralph Lauren, New York European headquarters Paris Geneva
Gillette, Boston European headquarters London Geneva
Cargill, Minneapolis International sales London Geneva
General Mills, Minneapolis European headquarters London Nyon
Source: the companies
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