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EU declares tax war on Swiss cantons

The tax row threatens to cloud over Swiss-EU relations (Imagepoint)

The European Commission has called on Switzerland to amend tax rules that it says offer unfair advantages to firms operating in some Swiss cantons.

This content was published on February 13, 2007 - 13:49

The commission said low corporate taxes offered by cantons such as Obwalden and Zug violated a 1972 trade agreement, calling it a disguised state subsidy.

"Switzerland enjoys the benefits of privileged access to the [European Union] internal market and must accept the responsibilities that go along with this," said EU external relations commissioner Benita Ferrero-Waldner on Tuesday.

"The decision the commission has taken is not about tax competition but about state aid undermining the level playing field necessary for our partnership and the trade relations between Switzerland and the EU."

The commission said the system allowed companies based in non-EU Switzerland to enjoy tax breaks on profits generated inside the EU.

The Swiss authorities called the decision unfounded. In a statement, the finance ministry said no contractual regulations exist between Switzerland and the European Union on the harmonisation of company taxation.

It added that neither the EU rules on competition, including those on state aid, nor the EU member states' code of conduct on company taxation were applicable to Switzerland.

Although the 1972 agreement allows the EU to take retaliatory safeguard measures, EU spokeswoman Emma Udwin said in Brussels that the commission was seeking a mandate from the 27 EU governments to find a negotiated settlement with the Swiss.

"We're not looking for there to be negative consequences," she added. "We're not threatening." She said there was unanimous backing for the commission view but could not say when governments would grant the mandate.

Stalemate

Previous talks over the past year have failed to reach an agreement. The EU complains that Swiss law allows cantons to fully or partially exempt profits generated abroad from local company taxes.

In particular the cantons of Zug and Schwyz have attracted multinational companies to set up headquarters, coordination or distribution centres in order to minimise tax liabilities, the EU said.

Tax competition is also a problem within the bloc because nations such as Ireland and Luxembourg offer low business tax rates that can attract companies away from major higher-tax economies such as Germany.

Ireland and others are fiercely resisting attempts by the EU's executive arm to set a standard way of calculating tax on businesses' European revenue.

swissinfo with agencies

Switzerland's position

Switzerland is convinced that the procedures for taxing management companies, mixed companies and holding companies in the country do not fall within the scope of the 1972 free trade agreement.

The 1972 accord exclusively governs the trading of certain goods (industrial and agricultural processed products).

Bern says when signing the accord, neither Switzerland nor the European Economic Community intended to harmonise their laws either with regard to goods or in the areas of competition or state subsidies.

It argues that the provisions of the accord are not to be interpreted in the same manner as the EEC treaty's more detailed rules on competition.

Criticism that allocates responsibility to Switzerland as a participant in the internal market without legal justification is also rejected.

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