Tax privileges come under fire from Brussels

European Commission President José Manuel Barroso: not impressed by the Swiss tax set-up Keystone

The European Commission's president, José Manuel Barroso, has sharply criticised the tax breaks awarded to companies by some Swiss cantons.

Barroso, speaking on Swiss television a few days before meeting Swiss President Moritz Leuenberger, described the breaks as “clearly discriminatory”.

The former Portuguese prime minister said he was in favour of tax competitiveness, “but the fact that some cantons grant tax privileges to companies that carry out their business chiefly abroad is a clear discrimination”.

He said that to be fair, these reductions must be offered to all companies.

The EU Commission has stated a number of times that advantageous cantonal tax rates constitute a state subsidy, which goes against the spirit of a free-trade agreement concluded between Switzerland and the then European Economic Community in 1972.

Barroso warned that if Switzerland wanted to benefit from the EU, it “would have to accept the rules”.

Leuenberger is set to travel to Brussels on Monday to have discussions with Barroso, whose comments have put the tax issue once again on the political agenda.

Dismissive

The federal authorities have dismissed EU concerns on several occasions.

In March the official Swiss position was detailed in a ten-page letter personally delivered to the EU by ambassador Bernhard Marfurt.

The document stated Switzerland’s “firm conviction that the tax rules for companies do not fall within the jurisdiction of the 1972 free-trade accord”.

That came in response to a memorandum from the Commission in December questioning whether generous tax breaks for companies in cantons Zug and Schwyz constitute an unfair tax advantage. Since then canton Obwalden has introduced the lowest corporate taxes in Switzerland.

Switzerland has consistently rejected any link between the tax practices of some cantons and trade in goods.

Michael Ambühl, state secretary in the foreign ministry, met EU officials in February for talks on the tax issue. He said afterwards that Brussels had “expressed its concern” but there had been no talk of ramifications for bilateral relations.

Withholding tax flop?

In a separate development, figures just published suggest Europe’s struggle to tax its citizens’ offshore savings has brought in less revenue than expected.

The treaty, which came into effect on July 1 last year, compels Swiss banks to collect a 15 per cent withholding tax on the savings interest earnings of EU resident customers unless they voluntarily disclose account details to their home country.

According to the Financial Times, EU tax commissioner Laszlo Kovacs has ordered a review of the operation of the savings directive amid concerns over how it has been implemented in offshore financial centres.

In the first six months of the law’s operation, Switzerland – the world’s leading offshore financial centre – raised €100m (SFr155 million) in withholding taxes on the savings held there by European Union citizens.

After Bern took its 25 per cent cut for administration costs, SFr119.6m was allocated to EU member states in the second half of last year.

But Swiss Bankers Association spokesman James Nason denied that the withholding tax was a flop.

“The withholding tax system is working perfectly and is delivering results,” Nason told swissinfo.

“The fact that revenues may not be as high as some people expected lies simply with the fact that the EU itself designed its directive to have a very restricted catchment area.”

The savings tax accord is part of the second set of bilateral agreements between Switzerland and the EU that came into force in July last year.

Dieter Leutwyler of the federal finance ministry said any consultations with the EU over “substantive changes” to the directive could only happen after July 2011 or when both sides agreed to such talks.

swissinfo with agencies

In brief

Cantons and communities in Switzerland are autonomous in tax matters, and tax rates vary widely from canton to canton.

Several German-speaking cantons have recently slashed tax rates to encourage wealthy individuals and firms to relocate there.

The European Commission maintains that such low taxes constitute a form of subsidy for businesses and therefore contravene a long-standing free trade agreement.

Bern argues that the agreement governs only the trading of certain goods, and has nothing to do with competition, which concerns only members of the EU’s internal market.

Key facts

Switzerland and the EU entered into a free trade agreement in 1972.
Article 23.iii of that 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”.
Swiss cantons are free to set their own tax rates within the framework of the Tax Harmonisation Act, brought into force in 2001.
Obwalden is the latest canton to introduce a special tax rate – 6.6% – to entice companies.