EU renews tax offensive against Switzerland

Foreign Minister Calmy-Rey (left) and Finance Minister Merz unanimously reject EU attacks Keystone

The ongoing dispute between Bern and the European Union over Swiss corporate tax breaks was cranked up when the two sides met in Brussels on Thursday.

Switzerland once again reiterated its view that plummeting cantonal tax rates do not contravene the 1972 Free Trade Agreement with the EU.

The issue first popped up in September 2005, the day after the Swiss voted to extend open borders for EU workers to new member states in eastern Europe.

The EU executive body, the European Commission, then complained to the Swiss authorities that the practice of individual cantons setting low business tax rates to attract foreign companies was, in effect, an unfair subsidy.

Subsequent meetings between EU and Swiss officials have resulted in stalemate, while at the same time several cantons – most notably Obwalden – have been busy further slashing their corporate levies.

Scathing response

The stakes were raised last month after Swiss voters approved a SFr1 billion ($830 million) payment to recent EU member states. Eneko Landaburu, general director of the EU external relations commission, announced he was preparing a dossier denouncing the Swiss cantonal tax regime.

The declaration drew a scathing response from Swiss Finance Minister Hans-Rudolph Merz who suggested the EU was “jealous” of the country’s success in the field of tax competition.

Foreign Minister Micheline Calmy-Rey was also drawn from her usual pro-Europe stance to declare: “there is absolutely no room for negotiation.” And senior foreign ministry official Michael Ambühl recently told swissinfo that cantonal tax breaks “do not constitute a subsidy”.

The EU, however, has shown no signs of dropping the subject that is likely to feature prominently during Thursday’s regular meeting of the joint committee on the Free Trade Agreement.

Switzerland is not alone in reducing corporate tax rates in recent years. But EU member states that have also played this card – most notably Ireland and several eastern European countries – have signed up to a code of conduct that prevents anti-competitive activities.

Aggressive move

Switzerland’s wariness about joining the EU may be one reason behind the Commission’s offensive, according to Professor Laurent Goetschel of Basel University’s Europa Institute.

“The fact that Switzerland is not in the EU gives it more freedom regarding all sorts of issues, including tax,” he told swissinfo.

“This is an aggressive move from Brussels that says: ‘Don’t expect to take the most out [of the bilateral path] if you put as little as possible into it. We think there are other fields where you will have to adapt whether you want it or not.'”

Goetschel added that with no apparent room for manoeuvre it is difficult to predict how the impasse will be resolved.

“If the EU has any kind of strategy they will follow this up, but how will it proceed? Will it have negative consequences and is this the beginning of a sort of harassment strategy?” he said.

“It is all very delicate and open ended at the moment. If the EU starts getting obnoxious it could push Switzerland even further away.”

swissinfo, Matthew Allen

In brief

A survey conducted by tax specialists KPMG earlier this year concluded that the average corporate tax rate in Switzerland (federal, cantonal and communal) stands at 21.3%. This varies according to the canton in which businesses are located.

This compares with 40.7% in Japan, 40% in the US, 38.3% in Germany, 12.5% in the Republic of Ireland and 10% in Cyprus.

Selected cantonal tax rates from the KPMG report (from November 1, 2006): Obwalden 13.1%, Schwyz 15.6%, Zug 16.4%, Zurich 21.3%, Graubünden 29.1%

Cantonal Tax Competition

Swiss cantons are free to set their own tax rates within the framework of the Tax Harmonisation Act, brought into force in 2001.

Canton Obwalden in January 2006 introduced the lowest corporate tax rate in Switzerland at just 6.6% following a vote a year ago. The stated aim was to make the canton more attractive for businesses to locate.

At the beginning of this year the Conference of Cantonal Finance Directors set up a working group to draw up proposals to curb “excessive” tax rate competition among Switzerland’s 26 cantons.

Article 23.iii of the 1972 Free Trade Agreement states that “any public aid which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods” is “incompatible with the proper functioning of the Agreement”.