By Brian Blackstone

ZURICH--Switzerland is struggling to preserve a cornerstone of its ultracompetitive economy: low corporate taxes.

The Alpine nation faces pressure from the European Union and other international bodies to eliminate sweetheart deals that individual Swiss states, or cantons, strike with globally active companies, allowing some to pay far below the official rate. Parliament last year approved legislation eliminating these tax preferences, while giving cantons leeway to adjust their rates.

The tax overhaul is slated to go into effect by 2019. But the effort faces a big test this weekend. Opponents gathered the 50,000 signatures required to put it before a binding referendum, being held Sunday. Polls point to a tight race.

Theplan is backed by most political parties and businesses here. But critics say it is too generous toward companies. If its opponents win on Sunday, Switzerland likely would have to redo it, which might make it less favorable to business.

The stakes are high for Switzerland's small, wealthy economy. It relies on the attractiveness of its tax and labor policies to offset the costs associated with doing business in a country with a strong currency and high wages. The vote is also being watched closely in boardrooms across Switzerland, home to some of Europe's biggest multinationals.

"These reforms are an important way of maintaining competitiveness and the attractiveness of these locations as a place to do business," said a spokesman for Nestlé SA, based in the canton of Vaud. As part of the implementation of the legislation, Vaud is cutting the combined federal and cantonal tax rate to around 14% beginning in 2019, from 22%.

Of the cantons that have announced their own, new corporate rates since the new legislation, the average reduction in the overall rate is more than 3 percentage points to around 14%.

The real impact of the legislation on companies' tax bills is harder to pin down, since companies may pay taxes in multiple cantons. Nestlé, for instance, said it doesn't expect the reform to affect its Swiss tax burden much. But business leaders here see it as a crucial way of reducing uncertainty and keeping up with other countries that have made their own corporate tax regimes more attractive to international business.

The new law aims to bring Swiss tax policy in line with international norms while keeping Switzerland attractive to companies and without busting the budget. It also coincides with what is expected to be a more divisive debate in the U.S. later this year about corporate taxes there.

"It's a reform arrangement that guarantees Switzerland can stay competitive in terms of tax regimes compared to other countries," said Hans-Ulrich Bigler, chief executive of the Swiss Federation of Small and Medium Enterprises and a lawmaker. About half of small and midsize companies would benefit directly from the reform, he said.

Opponents have raised concerns that income taxes would rise to offset lost corporate tax revenue, or social services would be cut.

"It's too expensive and there are too many tool loopholes," said Prisca Birrer-Heimo, a lawmaker from the Social Democrat party in Lucerne. "Those who profit from this reform have to pay."

While dropping headline tax rates across Switzerland, the law also takes aim at individual deals that the cantons had been able to hammer out with companies. The EU has taken a hard line on such deals among its own member states, notably ordering Ireland to recoup EUR13 billion ($13.84 billion) in what it calls unpaid taxes from Apple Inc. Apple and Ireland are appealing the order.

Switzerland isn't in the EU but maintains close ties with it. In 2014, it agreed with the EU to abolish special arrangements that taxed foreign and domestic revenue differently, addressing a nearly decadelong dispute.

If nothing changes, Swiss companies are at risk of having retaliatory measures imposed on them by other countries where they do business.

Under the government's plan, the current patchwork system would be replaced by a corporate rate--lower in most cases--that would apply across firms in a particular canton. Sweeteners would be added for patent-related revenue, research and development, and capital taxes. The government would give cantons more than one billion francs ($1 billion) to partially offset any drain on revenue.

"The adjustment of the capital tax and the increased deductibility of investments in research and development are particularly important," saida spokesman for Switzerland-based engineering giant ABB Ltd., which has major research activities in the country.

Switzerland's federal effective corporate income-tax rate is low by global standards--about 8%. When cantonal taxes are added, Switzerland's top rate varies from 12% in Lucerne to 24% in Geneva, according to data from KPMG. This would even out somewhat under the government plan.

Write to Brian Blackstone at brian.blackstone@wsj.com

(END) Dow Jones Newswires

February 10, 2017 07:43 ET (12:43 GMT)

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