The people of canton Obwalden will wake up in a new tax haven on January 1 after voting for radical tax reforms that promise riches but also carry risks.This content was published on December 15, 2005 - 18:40
On Sunday 86 per cent of citizens voted for a degressive tax system that especially benefits those earning above SFr300,000 ($230,000) in an effort to attract big companies and wealthy residents.
Obwalden, one of the poorest Swiss cantons, hopes to emulate Zug, Schwyz and Nidwalden – neighbouring central Swiss cantons which have lured big spenders with the promise of tax breaks.
All Switzerland's 26 cantons have their own taxation systems and are free to set their own tax levels, often by asking citizens to decide at the ballot box.
Obwalden's new 6.6-per-cent corporation tax will be the lowest in Switzerland and property tax will drop by at least 30 per cent.
Individuals earning up to SFr70,000 will in future pay eight to ten per cent less personal tax.
Those earning up to SFr300,000 will be taxed up to six per cent, while those in the highest bracket will see their burden sink from 2.35 per cent to one per cent.
"We used to be known as a tax hell, but we will soon be referred to as a tax heaven," Robert Vonwyl, Obwalden's deputy tax chief, told swissinfo.
"We want to bring in big companies and people with high incomes. We currently get a lot of government subsidies, but we don't want to rely on this any more. We want to be more independent and generate our own revenues."
Obwalden struggles to generate revenues at present because the cantonal economy is largely based on agriculture and residents have a low average income, tax expert and former Obwalden tax head Erich Ettlin told swissinfo.
"Obwalden had to do something first and foremost to stop companies leaving to set up in neighbouring cantons that offered better tax breaks," he said.
"It is currently in fifth or sixth position in terms of tax competitiveness, but companies only look at positions one, two and three."
The scheme has run into opposition from the centre-left Social Democratic Party, which considers the degressive tax as unfair. The party plans to take its fight to Brussels.
"If Switzerland offers special tax rules, other countries will do the same and you end up with a race to the bottom, with every canton and country competing against each other [to attract wealthy foreigners]," senior party official Matthias Manz told swissinfo earlier this week.
But Vonwyl rejected criticism that the new tax system only benefits the rich and may drive poorer residents away from towns if the price of property and services rockets.
"There are critics and it is understandable, but everyone will benefit from this system, including those on lower incomes. People with higher incomes will still pay more money despite paying less tax as a percentage of earnings.
"We don't expect hundreds of rich people to come flocking to Obwalden to drive up prices. We are aiming for more like 20 to 50 people."
Obwalden is also gambling on big companies taking the bait to fill their coffers. Before that happens, the canton is using its slice of the SFr14-billion gold reserve, handed out by the federal authorities earlier this year, to pay off its debts and soften the blow of reduced tax revenue.
But Pascal Gentinetta of the Swiss Business Federation, economiesuisse, warned that companies expect more than just tax breaks when they choose a location in which to set up.
"Companies choose a location because it offers good access to their market, good transport links and an attractive set of public services including education and efficient administration," he told swissinfo.
"It is not enough to say only that you have low taxes, you must offer a complete package. Obwalden is not in a prime geographic location, but it has other advantages and time will tell if they are enough."
But Gentinetta welcomed Obwalden's decision and rejected objections from the European Commission that such low rates may contradict the 1972 Free Trade Agreement. EC and Swiss officials met on Thursday to thrash out the issue but failed to come to any agreement.
"For Switzerland, the Obwalden reform is very welcome and will compel other cantons to react and drive on healthy competition. If Switzerland wants to stay in the first ranks it must reform its taxes more because other countries like Slovakia are competing hard," he said.
swissinfo, Matthew Allen
Obwalden, together with cantons Graubünden, Fribourg, Uri, Jura and Valais, is deemed by the federal government to have a weak financial capacity (the ability to fund its services independently without government subsidies).
Obwalden has a population of 33,000.
8,623 people (86%) voted on Sunday (turnout 44.4%) for the new tax system, which comes into effect on January 1.
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