Cantons oppose unhealthy tax competition

Obwalden reduced its taxes on January 1 Keystone

Swiss finance heads say they want to adopt a set of principles that will prevent "excessive" competition among the cantons in the setting of tax rates.

It follows a controversial decision by canton Obwalden to introduce the lowest corporate taxes in Switzerland.

The cantonal finance directors discussed Obwalden’s newly introduced degressive tax system at a meeting in Bern on Friday. But they took no position on the issue.

At the end of the meeting they announced they had agreed to set up a working group to draw up guidelines for cantonal tax systems.

Switzerland’s 26 cantons are responsible for setting their own tax rates and in some cases compete against each other to attract businesses and wealthy residents.

Obwalden sparked criticism from some cantons after voting in the lowest corporate tax rates in Switzerland on January 1, while 18 rivals also lowered their taxes in the New Year.

“Downwards spiral”

Kurt Stalder, a spokesman for the Conference of Cantonal Finance Directors, told swissinfo the directors were in favour of a certain degree of competition as they believed this prevented taxes from constantly increasing. But too much competition was unhealthy.

“The finance directors don’t want us to get sucked into a downwards spiral, with the cantons seeking to outdo each other by reducing taxes,” Stalder said. “This just results in a big hole in the budget because of decreased income.”

Stalder said the situation in canton Obwalden had been clearly explained at the meeting, but that the finance chiefs had decided not to take a position on it. Instead they had agreed to set up a working group to look at the tax rules and make specific recommendations as to how they can be improved.

The sub-group of finance directors is expected to report back in a few months.

Obwalden model

Under a degressive (or regressive) income tax system rates fall as personal income rises. The system in Obwalden reduces taxes for all residents, but especially for those earning over SFr300,000 ($233,000) a year.

The scheme ran into opposition from the centre-left Social Democratic Party, which considers the degressive tax unfair.

The party had initially vowed to fight the new tax system, and had encouraged residents to take the issue to court. But on Friday it announced it did not now intend to mount a legal challenge.

Canton Zurich is also unhappy with Obwalden’s move. It believes it is disadvantaged by smaller neighbouring cantons lowering their taxes.

Finance Minister Hans-Rudolf Merz on Friday spoke out in favour of tax competition among the cantons, saying this is a fundamental element of the tax system in Switzerland.

Merz said the only alternative to competition was tax cartels.

swissinfo with agencies

Key facts

Last December canton Obwalden voted to introduce a degressive tax system that came into force on January 1.
The system reduces taxes for all residents, but more so for those earning over SFr300,000 a year.
Corporate tax rates were slashed to just 6.6%, becoming the lowest in Switzerland. Property tax dropped by at least 30%.

In brief

Switzerland sets some of the lowest corporate tax rates in the world, attracting multinational companies to set up holdings in cantons such as Zug, Schwyz, Nidwalden and Obwalden.

The European Union believes this may contravene the 1972 Free Trade Agreement signed by Switzerland and the EU.

Swiss and European Commission officials met on December 15 in an effort to resolve the problem, but progress was limited. The EC may take retaliatory measures if it can prove its case against Switzerland by the end of March.