Only four out of 26 cantons said yes to the proposal, while 59.1 percent of voters – 1.4 million people – opposed the plan.
The government's plan aimed to bring in line tax rates for domestic and multinational firms, as well as creating new deductions for innovation, research and development that aimed to strengthen the country's competitiveness and attractiveness to foreign firms, argued backers.
But the voting public largely agreed with opponents on the political left who said the reform would leave a large hole in federal and cantonal finances that the public would ultimately have to make up.
The defeat is a heavy blow for the government, which must now come up with a plan b to tackle concerns over its corporate tax system from the Organisation for Economic Cooperation and Development (OECD), which argues Switzerland's current system is anti-competitive since foreign companies are treated more favourably than domestic ones.
Switzerland had agreed to quash that imbalance by 2019, and this internationally-accepted reform would have addressed the issue.
The reform's rejection throws the country into a period of uncertainty, with some regions that are economically dependent on multinationals facing the prospect that those companies may now choose to leave the country.
"There is now a real danger that Switzerland will disappear from the radar of international companies," finance minister Ueli Maurer was quoted as saying Sunday by the RTS public broadcaster.
There is even a risk of Switzerland's "blacklisting" by the OECD and European Union, the Zurich-based chief of PricewaterhouseCoopers, Andreas Staubli, was quoted as saying by the Bloomberg news agency.
Swissmen, which represents the mechanical and electrical engineering industry, said in a statement that the government should "quickly find a solution for a new reform plan", warning that Sunday's vote had plunged companies into "a great deal of uncertainty."
Speaking to Le Temps, Geneva MP Benôit Genecand said though multinationals are a vital part of the local economy and many people's lives, the wider population clearly doesn't register this.
“This defeat shows that it's not enough to say we want to keep multinationals, we must explain why,” he said.
The Swiss press were scathing in their judgment on the government and finance Ueli Maurer in particular, calling the defeat a debacle and a ‘Waterloo' moment for Maurer.
In a statement the Socialist Party, which opposed the reform, said the referendum had "shown the red card to arrogance" and claimed the days of giving sweetheart deals to powerful corporations were "no longer tolerated."
The party however said it was committed to working with the government in generating a new plan to address both the OECD and EU concerns, while also appealing to voters.