Cash Management in the Heart of Europe

According to the World Economic Forum’s (WEF) Global Competitiveness Report 2010-2011, Switzerland has topped the overall ranking as the most competitive country worldwide for the second year running. Some of world’s largest banks, food, industrial and pharmaceutical companies are located here, and over 1000 foreign companies have moved their European headquarters to Switzerland in the past five years. What makes it so attractive?

Multinational corporations (MNCs) normally consider five major criteria when deciding on an appropriate operations location:

  1. The tax rate and system.
  2. Proximity to key markets.
  3. Availability of skilled labour (local and imported).
  4. Stable environment and infrastructure (including political systems, currency, security, international schools, and airports).
  5. Fostering of education and protection of intellectual property.

Switzerland stands out in all five categories.

The Tax Rate and System

Corporates benefit from the current favourable Swiss corporate income tax regime whereby profits may be taxed at an effective corporate income tax rate of less than 10%. Traditionally, every canton (federal state) has its own tax rules and tax privileged regimes, which has meant that MNCs can negotiate tax rates with each canton.

It is not just the low level of tax that attracts corporates, but also the stability of the tax regime. As other previously lower tax jurisdictions, such as Ireland and the UK, respond to the effects of the global financial crisis by drastically changing their tax legislation, corporates are beginning to look elsewhere.

For example, Eurasian Natural Resources Corporation (ENRC), one of the world’s largest mining groups, is rumoured to have recently evaluated moving its London headquarters to Switzerland specifically for tax reasons – a move that could save more than £20m a year in corporate tax payments. Food giant Kraft moved Cadbury, its recently purchased UK subsidiary, to Zurich in December 2010 in order to save £60m a year.

In addition, Switzerland has recently changed a federal tax law to become even more attractive to corporates. As of 1 August 2010, the country changed its withholding tax (WHT) regulations. Previously, a Swiss-resident company that is the pool leader for a cash pool with zero balancing had to apply 35% WHT to the interest payments and Swiss issuance stamp tax (IST) on the issue of loans as soon as the pool included more than 10 or 20 participants.

Under the new regime, most group financing activities, such as physical cash pooling arrangements, are no longer subject to WHT on the interest from loans from group companies even if the Swiss pool leader has more than 10/20 non-bank lenders. A Swiss company that is the leader of a physical cash pooling does not suffer from IST or WHT any longer.

Therefore, any Swiss entity can now hold a liquidity structure as the group leader, which is another reason why more regional headquarters are relocating to Switzerland. It is an easy place to do business from a liquidity perspective, particularly now that the 10/20 rule has been abolished.

Proximity to Key Markets

When large MNCs are asked what they consider when they choose a location, proximity to key markets is one of the major factors. Switzerland is physically in the middle of Europe, with the main European business centres, such as Milan, Frankfurt, Paris or London, easily and quickly accessible by train or less than an hour’s flight away.

But, interestingly, although Switzerland is in the middle of and surrounded by the EU, it is not a member of the EU or the European Economic Area (EEA), nor is it part of the single currency. This means that it has relative independence in political, fiscal and economic matters, and was not as shaken by the recent turmoil in Greece or Ireland, for example, as other countries in Europe.

For MNCs wanting to set up global shared service centres (SSCs) and treasury centres, Switzerland makes sense as it is located in the middle time zone between Asia and the US.

Availability of Skilled Labour

Although there was a trend of locating regional SSCs or payment factories in central and eastern Europe, for example, in order to take advantage of lower labour costs, the treasury teams – the ones that actually take decisions – are typically located in Switzerland, where companies can find a pool of skilled labour at the required level.

High-calibre, multilingual professionals are drawn to Switzerland where wages are high, taxes are low, and the quality of life is considered to be the highest worldwide. In Mercer’s 2010 Quality of Living survey, Swiss cities Zurich and Geneva were ranked second and third, respectively, in the world.

It is renowned as a finance centre of excellence, with extensive banking facilities and the professional experience and trained personnel. With such a large number of corporates operating here, there is a wealth of knowledge that sits within its borders.

This is extremely relevant for cash management because this highly skilled workforce is at the forefront of rolling out best practices and benchmarking. It is here where they are leading the treasury world’s thought-leadership and cutting edge standards discussions and pilots, such as XML.

Stable Environment and Infrastructure

Switzerland is seen as a safe haven, and has gained in popularity as corporates made a flight to quality and stability over the past two to three years. The Swiss Confederation, consisting of 26 cantons, has a long history of neutrality – it has not been in a state of war internationally since 1815 – and did not join the United Nations until 2002.

It has historically attracted rich people, along with their banks, and financing activities have been the foundation of Switzerland as a business hub. The Swiss franc is seen as a safe currency – it remains one of the world’s strongest currencies with the lowest inflation rate.

The Swiss business culture is one of measured and deliberated decision-making. At the close of the Sibos conference last year in Amsterdam, futurist Paul Saffo outlined how the world economy needs to progress, emphasising the long game rather than short-term benefits of banking. He cited two examples of projects, both of which are based in Switzerland: the Large Hadron Collider (LHC) and the Gotthard Base Tunnel (GBT). These are 25-30 year financing projects and illustrate the Swiss long-term perspective when building businesses.

Education and Intellectual Property

Switzerland is well known for its private education system with a number of world-class universities, such as the International Institute for Management Development. The first university in Switzerland was founded in 1460 in Basel, with a faculty of medicine, and has a long tradition of chemical and medical research.

In addition, the WEF’s Global Competitiveness Report 2010-2011 said that Switzerland had “an excellent capacity for innovation” and a “very sophisticated business culture” – categories where it ranked second and fourth out of 139 countries.

“Switzerland’s scientific research institutions are among the world’s best, and the strong collaboration between the academic and business sectors, combined with high company spending on R&D, ensures that much of this research is translated into marketable products and processes,” according to the report.

The WEF report also cited the nation’s strong intellectual property protection and government support of innovation as assets, noting that Switzerland has one of the world’s highest rates of patenting with 159 per million residents.

Best Practice Treasury Operations in Switzerland

Although it is a relatively small country, Switzerland is important throughout the cash management world, from both a regional and global perspective. And with Switzerland’s stable economy, currency and tax regime, many more corporates are making the flight to safety as well as quality.

A number of global household names – Proctor & Gamble, JTI, Ebay, Ralph Lauren, and Bacardi, to name just a few – have their European treasury operations or headquarters along shores of Lake Geneva. In many ways, it is like a Lake Geneva treasury club – the amount of knowledge and the number of senior, clever people in treasury is second to none. It is because of this talent that the country has become a forerunner in treasury thought-leadership.

An example of treasury leadership is Nycomed, an innovative healthcare company, who chose to move their headquarters to Zurich in June 2007. Previously, the company was based in Denmark but when it acquired a much larger German company, Altana Pharma, it decided to move its headquarters to Switzerland. As chief executive officer (CEO) Håkan Björklund explained: “Zurich offers exactly the right environment for our headquarters. It is close to our largest market, Germany, and Konstanz, where our R&D function is led from. At the same time our offices are close to an international airport.”

Because it was a highly leveraged acquisition, the company needed to quickly improve efficiency and centralise its cash. Nycomed worked on optimising cash management with its in-house bank. Post-implementation of the in-house bank project, the company has been able to concentrate 85% of its cash. In addition, it made a clear shift from transaction handling to transaction management and analysis. As Anne Holm, Nycomed group treasurer, states, this has allowed the company to be flexible and respond swiftly to market opportunities. The company went live with its pan-European payment and liquidity structure within six months.

European Treasurers Council Launches in Zurich

The European Treasurers Council (ETC), established by gtnews and sponsored by Deutsche Bank, held its inaugural meeting in Zurich on 6 December 2010 with discussions around the evolution of the corporate treasurer’s role and the methodology behind benchmarking, as well as the relevance of social networking.

The ETC provides a forum for high-level treasury professionals to meet face-to-face to discuss issues and solutions. Zurich was selected for the launch of the ETC because of the wealth of high-level treasury professionals located in Switzerland who are thought-leaders and orchestrating the treasury world?s cutting edge implementations.

In 2011, the ETC will be held in London, Frankfurt, Geneva and Brussels. From the discussion in Zurich, members selected bank pricing as the topic they’d like to discuss further in the next ETC meeting, which is taking place at the Dorchester Hotel in London on 7 February.

To read more from Deutsche Bank, please visit their gtnews microsite.

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