Another round of fruitless discussions forming part of the ongoing battle between
the European Union and Switzerland over the latter's corporate tax system took
place in Bern on Monday. But while the European Commission has the obvious weight
advantage over its more nimble neighbour, at present Brussels simply doesn't
have the legal reach to deliver the knock-out blow that would oblige the Swiss
to capitulate to its demands.
The dispute, and the focus of the latest discussions, centres on Switzerland's
cantonal tax system. The European Commission considers certain cantonal company
tax arrangements to be incompatible with the 1972 Free Trade Agreement - a notion
that the Swiss government firmly rejects.
The EC argues these cantonal company tax regulations restrict trade in goods
between Switzerland and the EU, and distort competition. However, this is only
a part of the debate. At its heart is the Commission's complaint that the cantonal
tax systems encourage EU-based firms to set up holding companies in Switzerland
to avoid taxes in EU member states.
On the first point, the Swiss delegation, led by Alexander Karrer, Head of
the Monetary Affairs and International Finance Division in the Federal Department
of Finance, and including representatives from the cantons, argued that Swiss
taxes do not distort bilateral trade, because the types of company concerned in
Switzerland have no, or at most subordinate, business operations which are taxed
normally. Regarding the second point, Karrer's delegation countered that in
the case of holding companies, revenues from Swiss sources are taxed in the
same way as those from foreign sources. Furthermore, the Swiss emphasised that
both domestic and foreign-controlled companies are entitled to take advantage
of holding-company privileges.
The European Commission is basing its legal argument against Switzerland on
the latter's alleged breach of state aid rules, which, in the EU, are in place
to prevent member states from favouring certain companies and industries with
beneficial tax rules and subsidies. But the Swiss say that the EC's arguments
rest on shaky very legal ground, pointing out that the country is neither an EU member
or part of the Single European Market, nor party to the competition regulations
of the EC Treaty, including those on state aid. Moreover, Bern insists that even
if the tax laws in question were covered by the 1972 Free Trade Agreement, they
would not fall under the EU's definition of state aid, because they do
not favour certain companies or industries.
According to the Swiss delegation, the aim of the latest meeting, which lasted
two hours, was to conduct "a more in-depth exchange on the respective viewpoints".
But as far as Switzerland is concerned it has no case to answer, and, for the
reasons outlined above, the Federal Department of Finance stated following the
meeting that: "Switzerland rejects negotiations with the EU."
The government has, however, indicated its willingness to continue the dialogue "at the
technical level".
Another meeting between Swiss and EC negotiators has been scheduled for early
2008.
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