Wednesday, 24 November 2010

Low Swiss Taxes (and a history of Switzerland)

As Ireland falters the Swiss Cantons are seizing the opportunity, but what are cantons and what is going?

A History Lesson
Switzerland contrary to what most people think is not a country as we think of today, it is a confederacy, which is why is official name is: Confederacy Helvetica (which is why you see CH crop up on documents, including in their number plates). 
During the middle ages 3 groups (or tribes) in the region of Helvetica (switzerland) know as The Uri, Schwyz and Ob/Nidwalden rebelled against the largest empire at the time the Holy Roman Empire. Unable to survive on their own they signed a document swearing to work together and protect one another. From that day onward they acted as one to fend off their foes, share resources and increase political leverage. Soon others wanted to join, rich city states such as Zurich joined making Switzerland ever stronger. Each one of these small separate nations or states within Switzerland is known as a canton.  
Because of nature under which Switzerland was formed each canton is very independent and can control is own taxes and most of its own public services (or to economists fiscal policy). 

Because of this independence some smaller cantons such as Zug (population of 110,000) can set an extremely low tax rate but by doing so can attract many wealthy people and business HQs so make a huge amount of tax revenue. Taxing 100 people earning £10,000 each at 20% equals £200,000 tax income but taxing 5 people earning 6 billion each at 1% equals £0.3 billion tax income, which is why Zug is very rich. 
Switzerland's tempting tax regimes attract UK firms

Benefiting from Ireland's suffering
Ireland  has also played this game, it's corporation tax rate is 12.5% but pressures are mounting for Ireland to increase its tax to deal with its debt. The EU is also putting pressure on Ireland because it is taking business away from other European countries.
Switzerland however is free from this, not in the EU Switzerland can simply tempt firms away from Ireland with low stable rates! 
Cantonal eyes smiling at Irish Woes

Hollow Irish victory
Even though Ireland appear to have won their battle with the EU and can keep their corporation tax rate down they have had to increase VAT and a new property tax. Also firms are more jittery at locating their HQ in Ireland because of social unrest and threat of future tax hikes. 
Switzerland in contrast, favours bigness, has a history of low taxes, less risk of unrest and have many things directors expect around their HQ (world class food and hotels, lakes with yachts, skiing, high end market shops...). Due to language barriers within Switzerland many of the population speak English as well, reducing language barriers for locating firms.
Locating in Switzerland looks a better option for now and Ireland may suffer for it. 
Irish unveil tough four-year austerity plan  

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