EU goes toe to toe with Swiss over corporate tax system

Switzerland, famed for excellent chocolate, private banking, and fine
cheeses, has recently become equally renowned for its favourable corporate tax
regime.

Procter and Gamble, Colgate-Palmolive and most recently Kraft Foods have all
relocated their European headquarters to Switzerland, and you can bet your
favourite cuckoo clock that they didn’t move because of the Gruyère.

The real attraction has been the Swiss tax system, where the nation’s 26
cantons have autonomy over tax affairs. The cantons of Zug and Schwyz have been
the most popular locations for multinationals, as foreign companies are exempt
from regional and local corporate taxes.

It is a system that has irked the European Commission, which has come out and
demanded that Switzerland scrap this regime, as it amounts to illegal state aid.

Switzerland, of course, is not a member of the EU, and has thus refused to
bow to EC pressure. It is a stance that has prompted Brussels to dust off an
agreement signed between the two parties in 1972.

The pact, known as the EC/Swiss free trade agreement, does make mention of
fair competition and inappropriate state fiscal support, but Peter Cussons,
international tax partner at PricewaterhouseCoopers, said the agreement could
favour the Swiss or the EC. ‘The agreement is broadly phrased and open to
interpretation. You can see the argument from both sides,’ Cussons said.

It is not clear how a resolution over the 1972 pact will be reached if the
two sides do not settle the disagreement. In the event of a deadlock, the deal
provides for a joint committee to make a decision.

This committee, however, is split evenly between Swiss and EU representatives
and no further measures to broker a deal are specified.

The EU is not going to let this matter rest. Brussels is under pressure from
member states to shut down what they see as Switzerland’s unfair advantage in
attracting foreign investment. Expect the Swiss to fight any such suggestions
equally vigorously.