Swatch stock plunges on tax evasion reports

The world's leading watchmaker saw its shares drop amid allegations that it evaded taxes Keystone

Shares in Swiss watchmaker Swatch took a tumble on Friday, following media reports that the group had evaded taxes and import duties.

The Swatch Group, the world’s largest watchmaking concern, has denied the allegations.

Analysts said that even though it was far from clear that Swatch had done anything illegal, the mere hint of scandal was enough to scare off investors.

The sell-off – shares dropped by 11 per cent during early trading on Friday – came in response to articles in the “Financial Times” and the European edition of the “Wall Street Journal” (WSJ).

But the stock fought back later in the day, with the bearer share losing just under four per cent in value at SFr141.50 ($114.23) by the end of trading.

Complaint filed

The WSJ reported that two former Swatch employees had filed a complaint in the United States alleging that the company had used an Asian subsidiary to evade taxes and duties in several countries including the US.

The share price later recovered some ground, suggesting the markets had over-reacted.

“In the current climate… anything that is even remotely negative will weigh heavily [on the share price],” said Roland Egger at Zurich Cantonal Bank.

The two former employees have accused Swatch of evading $180 million in tax and duties by manipulating prices within the group.

In a statement on Friday, Swatch denied that its pricing decisions were for tax purposes, but said it had launched an internal investigation as soon as it became aware of the complaint, which was filed on June 25.

Dispute

Swatch added that the complaint was submitted to the US Labor Department, alleging discriminatory employment practices. “The actual case… concerns a pure employment dispute between the company and former employees.”

The two men accuse Swatch of using so-called transfer pricing to funnel profits from countries with high taxes to those with lower ones.

According to the WSJ, the complaint alleges that Swatch Group’s senior management tried to cover up the alleged tax evasion activities in April, after the two employees complained to their superiors about the practice.

The two who filed the complaint – Joseph Ede and Matthieu Phanthala – worked as regional controllers for the group and were based in Asia. They left the company earlier this year.

In the complaint, they said they had been subjected to a “pattern of harassment” by Swatch because of their allegations.

Investigation

The US authorities confirmed that the complaint was being investigated, but said the focus was on the employee-protection aspect and not on fraud.

The two former employees say they chose to file the complaint in the US because the company’s stock can be bought and sold there, although it is not listed on a US stock exchange.

The WSJ report quotes the complaint as saying that Swatch Group Asia was used to move profits out of the US “resulting in cumulatively [much] more than $1 million in US tax evasion”.

The paper quotes Joseph Ede as saying that Swatch had evaded taxes and duties amounting to more than $180 million in Asia and Australia in the past six years.

Swatch said none of its companies uses transfer pricing “just for tax purposes, but with a view to harmonise the international price structure for the consumer [and] to avoid the very harmful parallel market”.

swissinfo with agencies

Key facts

The Swatch Group includes, among others, the Breguet, Blancpain, Omega, Longines and Swatch brands.
The group recorded a profit of SFr 492 million ($395.9 million) in 2003, with sales of SFr3.845 billion.
The total value of Swiss watches and movements exported in 2003 was SFr10.17 billion.

In brief

Shares in the Swiss matchmaker, Swatch, were hit by media reports that the group had evaded taxes.

The Swatch Group has dismissed the allegations, but said it had launched an internal investigation.