Finance Minister Hans-Rudolf Merz has defended the Swiss tax system after the European Commission questioned low corporate tax rates in some cantons.
Speaking at a Swiss Business Federation forum in Zurich, Merz rejected the idea of rigid tax harmonisation with the European Union.
His comments follow suggestions from Brussels that the corporate tax regimes in cantons Zug and Schwyz, that encourage large foreign companies to set up holdings, do not comply with the 1972 Free Trade Act.
"For Switzerland, tax competition is not only a theoretical concept. It represents one of the constitutive elements of our system of state and self-understanding," Merz said on Friday.
"Competition ensures diversity and quality of supply, innovative entrepreneurship, and low prices for consumers.
"This forces the policies and administration of competing locations to offer an attractive combination of public services and a tax burden that is as low as possible."
Merz said he recognised criticisms of Swiss business tax havens, but dismissed the concept of harmonising Switzerland's tax system with other countries.
No to harmonisation
"Tax competition is sometimes claimed to trigger a cut-throat tax cutting spiral, which may lead to a creeping deterioration of services in the public sector," he said.
"Efforts therefore exist to harmonise taxes internationally and to limit tax competition. Such a conclusion defies logic – it has not been proven.
"The realpolitik alternative to tax competition is a tax cartel. Cartels, however, are seldom advantageous for the citizen."
Merz added that the ability to attract business by setting low tax rates is essential if Switzerland is to compete with the larger economies of neighbouring countries.
"It is therefore not surprising that small countries distinguish themselves through aggressive strategies in tax competition," he said.
"Where their systems are fair, efficient and democratic, there can be no talk of harmful competition."
Also at the forum, European Commissioner for Taxation and Customs Làszlo Kovàcs spoke about a "grey area" that exists between harmful and fair tax competition.
But he refused to be drawn on whether he thought Switzerland fell into this category.
"As an EU Commissioner I do not think that I am in a position to form a view on the tax system of a country which is not a member of the Union," he told swissinfo.
He also played down a letter sent from the office of the EC External Relations Directorate-General last month alleging that the low corporate tax rates in Zug and Schwyz contravened the Free Trade agreement.
"It is not a letter of complaint or accusation. It is a letter requesting information which I hope Switzerland will soon provide so that the EC can form an opinion," he said.
Swiss officials are due to meet with EC representatives in December to discuss the implementation of the Free Trade Agreement.
swissinfo, Matthew Allen in Zurich
Swiss cantons are free to set their own tax rates within the framework of the Tax Harmonisation Act, brought into force in 2001.
The combined federal, cantonal and communal corporate tax rate in Canton Zug ranges from 14 to 17 per cent.
A letter sent to the Swiss Mission in Brussels on September 26 by the office of the EC External Relations Directorate- General for External Relations questions whether "certain corporate tax regimes" in Switzerland are "incompatible" with the 1972 Free Trade Agreement