Tax rates stay low despite rising costs

International firms have flocked to canton Zug for its favourable tax rates Keystone

Tax rates for companies and well paid workers have remained low in most cantons despite rising healthcare costs and pension fund deficits, according to a survey by the BAK Basel economic research group.

Only three of the 19 cantons surveyed (out of 26) had raised income taxes for high income earners and just one has announced a hike in corporate levies. Some cantons even reduced taxes last year in the face of worsening economic conditions.

Plunging stock markets and the increasingly volatile global economy have blown big holes in most cantonal pension funds while recent changes to the law have forced cantons to contribute more to healthcare, such as building new hospitals.

But most cantons have stuck fast to the principle that low taxes will attract more multinational firms and wealthy individuals who will boost state coffers.

Nidwalden inflicts the lowest tax burden on companies with an effective tax rate of just 10.6 per cent, according to the BAK Taxation Index 2012.

Lucerne has jumped into second spot with the same rate after slashing its levy of company profits last year.

In international comparison, only Hong Kong has a better corporate tax rate (9.7 per cent) than Nidwalden.

Taxing the easy life

The easy life enjoyed by many multinational companies in Swiss cantons has come under recent scrutiny both in Switzerland and abroad. A rash of corporate tax cuts has led to accusations that cantons are engaged in a race to the bottom to attract foreign firms.

A report by the Federal Audit Office this year revealed that special tax deals to multinational firms had cost far more in tax revenues than anticipated. Such deals are due to be renegotiated this year and the terms are certain to be less generous.

The European Union has also attacked tax breaks on the foreign earnings of international firms as unfair competition – a long-running row that promises to come to a head this year.

Companies have also been taking advantage of changes to the domestic corporate tax laws in 2008 that eased the burden on dividend payments. It has been widely accepted that the government failed to get its sums right at the time, seriously miscalculating how much the reforms would cost in reduced tax revenues.

However, cantons have furiously resisted any attempts, particularly from abroad, to interfere with their sovereignty on tax issues. The BAK Basel report only highlights how much cantons have been digging in their heels.

Zug remains the best canton to live for high earners with an effective income tax rate of 23.6 per cent. Vaud (37.2 per cent) taxed the wealthy at the highest rate of the 19 cantons surveyed, but even this rate was lower than most of Europe.

Taxing the rich has been a hot debate in many countries in recent times, most recently in France, where many voters feel that the wealthy are enjoying too easy a ride.

Rich people in Switzerland too have faced a backlash in public opinion since the 2008 financial crisis. Zurich was the first canton in 2009 to put an end to lump sum tax deals for wealthy individuals, with several other cantons following suit or tweaking the terms of such deals to demand more cash.

BAK Basel concluded that cantons could afford to maintain such low rates for a while to come thanks to the relative fiscal stability (low national debt and restrained spending) in  Switzerland compared to many other countries around the world.

Taxation Index

Lowest and highest cantonal effective corporate tax rates, according to BAK Basel calculations of federal, cantonal and communal taxes combined:

Nidwalden 10.6%

Lucerne 10.6%

Appenzell Outer Rhodes 10.8%

Vaud 19.7%

Basel City 20.2%

Geneva 21.4%

Lowest and highest income tax rates:

Zug 23.6%

Schwyz 23.7%

Obwalden 24.4%

Geneva 36.4%

Basel Country 35.5%

Vaud 37.2%