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.A comprehensive report in our Intelligence Report series looking at offshore and onshore corporate structures and their tax implications is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report7.asp
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