Companies and tax competition in the digital economy

The project team, led by Marco D’Ambros (Università della Svizzera italiana) and Raphael Parchet (Università della Svizzera italiana), developed a data platform that makes it possible to trace companies over time and space – from their foundation to their deregistration – and to obtain information on their legal and network structures. The platform covers a total of 1.3 million companies active in Switzerland since 2002 and includes a collection of more than 5 million entries from the Swiss Official Gazette of Commerce.

The researchers used this information to analyse the impact of tax changes on companies’ location decisions, with a particular focus on digital firms.

Until now, little was known about companies in Switzerland, especially about their organisational and network structure and their spatial and temporal development. Previously, the data were scattered across the cantonal commercial registers, each with a different level of detail. The central register misses longitudinal data – information on the development of individual companies over time.

The project pursued two main objectives:

1. To build an open and extensible data platform that makes it possible to track companies over time – from their foundation to their exit – including information on their legal structure and location.

2. To use this data platform to examine how cantonal and local tax rates influence companies’ location and organisational decisions – with a particular focus on the digital economy.

This new data platform shows how new digital sectors are emerging in Switzerland, how they are intertwined with traditional industries and where they are spatially concentrated. It makes it possible to identify key trends in the digital economy. The data also reveals how companies respond to tax differentials. These insights are crucial for further developing the tax system in a way that ensures fair competition across all regions and fosters innovation.

The main purpose of the project was to build a comprehensive dataset on the corporate landscape in Switzerland – with a particular focus on the digital economy. The platform covers data on 1.3 million companies and provides information on their digital status. The project established that 11% of Swiss companies can be classified as digital – and they respond very differently to tax differentials compared to non-digital firms.

Three main messages

1. A precise definition of the digital economy is needed.
   The project team followed the definition of the US Department of Commerce and classified digital companies into six sectors: hardware, software, e-commerce, telecommunications, web design and digital media. There is however little consensus in the literature on when a company belongs to the digital economy. What is considered part of the digital economy today may be viewed differently in the future. Policy recommendations should therefore be forward-looking and based on future-proof definitions of the digital economy.

2. Governments and international organisations usually treat the digital economy as a single group.
   The research findings reveal considerable heterogeneity among digital companies, particularly in terms of their sensitivity to tax differentials. General-purpose digital firms are far more responsive to differences in municipal tax rates than specialised digital firms or non-digital companies. By contrast, specialised digital firms are not deterred by higher tax rates. Governments and international organisations should therefore take this heterogeneity into account when designing their policies.

3. Tax minimisation is not the main driver of location decisions for digital firms.
   This applies especially to specialised digital firms. The results show that these companies benefit strongly from agglomeration economies. The project team also found that specialised digital firms show a strong territorial attachment (low mobility).

Firms and tax competition in the digital economy: a data platform for geo-temporal network analysis