Taxing times: a difference of opinion over controversial Swiss tax breaks for foreign companies is threatening to place further strain on the country's already brittle relationship with the European Union. But what is the argument really about, who is in the right, and will they get their way?

AuteurLedsom, Mark

When the European Commission and the Swiss government held separate press conferences the day before St Valentine's Day, love was certainly not in the air. In fact, the only thing the briefings in Brussels and Bern seemed to have in common was frequent use of the words "ungrounded" and "negotiations". While both sides considered the opposing argument to be ungrounded, the European Commission argued that negotiations were urgently needed. The reply from Swiss Finance Minister Hans-Rudolf Merz a few hours later seemed unequivocal: "There is nothing to negotiate," he stated firmly.

As with so many international disputes, the sticking point was money--in particular the revenues raised in Switzerland by attracting (or 'enticing') international companies to set up administrative headquarters in return for beneficial tax rates--often at much lower rates than those imposed on 'regular' firms.

Since Switzerland is not a member of the European Union (EU) and there are no specific treaties on taxation between the two, the Swiss government says individual cantons remain free to determine their own tax rates.

"The system forces politicians and authorities to come up with attractive public services," Merz insisted, "and I fail to see how a system based on democratic decisions by autonomous bodies can clash in any way with a free trade agreement."

Public aid

The European Commission is unlikely to disagree with Merz's observations on Switzerland but will argue that the country's impressive public services are at least partly funded by taxes that should be collected in the EU.

The Commission points to a free trade agreement signed in 1972 by Switzerland and the European Economic Community (forerunner to the EU), prohibiting "any public aid which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods."

Although the holding, mixed and management companies cited by the Commission are not usually directly involved in manufacturing, the Commission says Swiss cantonal tax breaks effectively serve as public aid to private companies which eventually trickles down to offset production costs elsewhere.

"At stake are schemes offering unfair tax advantages to companies established in Switzerland, for profits generated in the EU," insisted the Commission in its February statement.

"Switzerland enjoys the benefits of privileged access to the internal market," added External Relations Commissioner Benita...

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