EU tax pressure will backfire, says Merz

Staring down the EU: Finance Minister Merz refuses to cave in over corporate taxes Keystone

European Union plans to stifle Switzerland's status as a corporate tax paradise will drive firms further away, Finance Minister Hans-Rudolf Merz has warned.

This content was published on May 3, 2007 - 16:34

Speaking at the Swiss Economic Forum (SEF), Merz warned that the EU attack on the country's fiscal system would fail to encourage businesses that have set up shop in Switzerland to move back home.

The union is demanding that cantons scrap the practice of exempting tax on company profits generated outside of Switzerland. It claims this violates a 1972 free trade agreement, a charge the Swiss deny.

The EU's executive arm was recently granted a mandate from member states to negotiate further, but Switzerland has said it will not come to the table.

"It is still unclear what the European Union wants from Switzerland. We assume that the aim is probably that we change our special cantonal taxation regimes for foreign firms so that Switzerland loses its attractiveness," Merz told the forum in Thun on Thursday.

"One objective could be the repatriation of enterprises to European Union countries. This will not succeed," added the finance minister.

"International businesses would move, if at all, to offshore locations such as Dubai or Singapore. The EU calculations will not add up."

Reducing taxes on profits

Merz announced at the weekend plans to reform the Swiss corporate tax regime by slashing the federal levy on profits. Several cantons have reduced corporate taxes in recent months as the competition to attract international firms heats up.

He said in a newspaper interview on Saturday that his proposal was a response to falling tax rates across Europe and was not in response to criticism from the EU.

The Swiss Business Federation, economiesuisse - the main lobby group representing business interests - backed his statement this week.

Merz reiterated his defence of the cantonal tax systems at the SEF, saying it creates competition that keeps taxes low and stimulates efficient public spending. He also repeated his assertion that the free trade agreement covers only trade and not taxation.

The finance minister also made it clear that Switzerland's federal system enshrines the right of individual cantons and citizens to shape the taxation system.

"First of all, any decision to revise taxes in our country comes under the [...] sovereignty of the state and its legislation. That will remain," he said.

"Secondly, neither citizens or enterprises will be worse off in the future than they are today. The achievements that have made Switzerland a competitive [tax] location will be further developed."

Several international firms have relocated to Switzerland in recent years, including US food giant Kraft that is moving its European headquarters to Zurich from London and Vienna.

swissinfo, Matthew Allen in Thun

Taxing disharmony

Swiss position:

Switzerland believes that the 1972 free trade accord with the European Union does not apply to the tax benefits granted to foreign companies by a number of cantons.

It argues that the 1972 agreement is only applicable to certain goods (agricultural and industrial products).

Bern also says that when the agreement was signed, Switzerland and the European Community did not foresee harmonising their legislation. Bern also argues that the rules of the trade agreement must not be interpreted in the same way as internal EU regulations on competition.

EU position:

The European Commission says that tax privileges granted by some Swiss cantons to foreign companies are contrary to the 1972 accord.

The EU is calling on Switzerland to give up the tax practice and adapt to its demands.

The tax advantages in question concern foreign holding companies whose headquarters are in Switzerland but which make profits abroad.

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