UBS Outlook Switzerland: Switzerland under pressure as a low-tax location

Zurich, 31 January 2019 - Conditions have grown tougher for Swiss industry since the electorate rejected Corporate Reform III last year. First, tax competition has intensified, driven in large part by the Trump administration's tax cuts. Maximum corporate tax rates have plummeted as a result - to 26 percent from nearly 40 percent in California, for example. Without tax reform of its own, Switzerland will see the tax advantage Basel, Geneva and Zurich hold over the US dwindle from 15 percent to just over 3.5 percent. Various EU countries will be slashing their tax rates in the years ahead, too.

At the same time, Switzerland is facing an increasingly adverse economic environment. Global economic growth will likely slacken in the current year, which will weigh on Swiss exports. Since the Swiss National Bank (SNB) has very little latitude left for monetary stimuli, it will be even more important for Switzerland to remain a competitive place to do business. This is where tax reform comes in. A better tax regime will benefit not just large multinational corporations, but also small, innovative, research-intensive companies that operate largely in the domestic sector.

Solid economic growth expected in Switzerland

With weaker exports, UBS economists expect economic growth to slow from 2.6 percent last year to 1.5 percent this year. Global risks such as an escalation of the trade war or a no-deal Brexit are fueling uncertainty, which will ultimately prompt more Swiss companies to hold off on their investment plans. On the other hand, the newly vibrant Swiss labor market will probably support the domestic economy, particularly consumption, which has contributed less than average to economic growth in previous years.

In an environment fraught with political and economic risks, the SNB will likely stick to its cautious monetary policy. UBS economists do not expect the SNB to hike rates until late 2019, when the European Central Bank (ECB) itself is due to raise interest rates for the first time. The prospect of a less expansive monetary policy from the ECB will probably strengthen the euro against the US dollar and the franc in the second half of the year. In the short term, however, the risks in the eurozone remain skewed to the downside, and so UBS initially expects the franc to move sideways.