Tax Haven Row

Celebrities and entrepreneurs who move to Switzerland may not be allowed to turn on their washing machines after 10 pm because of the Alpine country's stiff noise regulations, but you never hear rock-and-roll granny Tina Turner or Formula-1 tsar Michael Schumacher grumbling about it. With all the money they are saving on taxes, they could probably do away with the washing and resort to buying new outfits every day. Wouldn't you choose to speak in a hushed voice if you could be practically making money from it?

The European Commission, however, is not very happy about Switzerland's screaming tax bargains. The real problem is not that rock stars like to eat Swiss chocolate, but that some 20,000 foreign companies are registered in the Alpine paradise on earth, even though their production lines may be elsewhere.

In many ways, celebrities and big companies think alike. Recently, French rock legend Johnny Hallyday joined an exclusive division of around 4,000 super-rich international tax refugees in Switzerland. At the same time, a growing number of firms is moving to Switzerland because of advantages they can get on profits made within the EU.

It has been estimated that these companies, including heavyweights such as Google, Kraft and IBM who have chosen Zurich as their European headquarters, save around 30 billion euros ($39 billion) a year by having their administration offices in Switzerland rather than in Germany, France or some other EU country.

Unfair practice

The EU Commission said on Tuesday that the tax breaks were "unfair" because they differentiated between domestic and foreign income sources and called on Switzerland to scrap tax advantages for companies. The commission sees certain company tax regimes in Swiss cantons as a form of state aid "incompatible with the proper functioning of the 1972 agreement between the EU and Switzerland."

The Swiss government, however, rejected calls by the European as "unfounded."

The Swiss finance, economy and foreign ministries said in a joint statement on Tuesday that "no contractual regulations exist between Switzerland and the European Union on the harmonization of company taxation."

"Consequently, it is not possible for there to be an infringement of any agreement," the statement added.

This applies in particular to the 1972 Free Trade Agreement, which only covers trade in certain goods and does not provide a sufficient basis for judging company taxation, the Swiss ministries contended.

"Switzerland will ensure that its appeal as a location for Swiss and foreign companies remains intact or even improve upon this," they added.

Accepting the responsibility

Earlier on Tuesday, the EU's External Relations Commissioner Benita Ferrero-Waldner said that Switzerland enjoys the benefits of privileged access to the EU market "and must accept the responsibilities that go along with this."

"The decision the commission has taken is not about tax competition but about state aid undermining the level playing field necessary for our partnership and the trade relations between Switzerland and the EU," she added.

"The commission asks Switzerland to amend these tax schemes to bring them in line with the terms of the agreement," the EU's executive arm said in a statement.

Direct negotiations

Switzerland owes its business-friendly taxation system to the country's unique federal organization: 26 cantons of the Swiss confederation enjoy a considerable degree of freedom in implementing their own tax policies. As a result, Switzerland's taxes are themselves subject to the laws of the free market: the cantons compete with one other to create the most favorable conditions for attracting foreign business.

Since the beginning of 2006, the canton of Obwalden, for example, has had the lowest tax rate for business profits in Switzerland: At 6,6 percent, it is six times lower than in Germany.

The EU has now asked its member states for a mandate to start direct negotiations with Switzerland. Ferrero-Waldner's spokeswoman Emma Udwin told a press conference that the commission could apply unspecified "safeguard measures" to deal with the situation in Switzerland, which is not an EU member, but added that this was not the goal.

"We are not looking for there to be negative consequences," Udwin said. "What we want is an agreement. We are not threatening, what we are looking for is a solution that all sides can agree on."

"Untenable demands"

Multinational companies based in Switzerland also rejected the EU move, saying Brussels was seeking to block competition and that it should not interfere in market dynamics.

Swissholdings, a federation of 40 multinational companies which have their headquarters in Switzerland, called on the government to stand firm against what it deemed the EU's "untenable and partly false" demands.

Swiss business federation Economiesuisse said that national fiscal sovereignty was non-negotiable, and that the EU's demands were "judicially unacceptable, and economically and financially harmful."