* EU wants Swiss to scrap tax breaks on foreign profits
* Cantons get creative over possible solutions
GENEVA, Dec 18 (Reuters) - "Happy Taxation" is a 2011 book
by Pascal Broulis, finance minister of the Swiss canton of Vaud
and celebrant of the low taxes that distinguish Switzerland. But
as times get tougher, discontent about Swiss tax breaks is
mounting.
Cash-strapped foreign governments have already chipped away
at the secrecy that allows rich individuals to store tax-free
funds in Swiss bank accounts. Now Europe's governments have
turned the spotlight on the incentives Switzerland offers
companies.
Swiss official company tax rates of around 21 percent
compare with 33 percent in France and 29 percent in Germany,
according to a 2011 survey by accountants KPMG; often companies
in Switzerland actually pay much less. Denknetz, a left-wing
Swiss think tank, estimates Switzerland's special tax regimes
deprive other countries of up to 36.5 billion francs ($39
billion) in tax revenue each year - almost double the amount
Spain's government raised in corporate tax in 2011.
Brussels has demanded that the country, which is home to
nearly 24,000 "tax privileged" companies from online retailer
eBay to Japanese automaker Nissan, scrap special tax breaks on
some company profits.
In particular, the EU is angry that Switzerland's cantons,
or states, compete with each other to attract multinationals'
business, and charge less tax on foreign-earned income than they
do on income earned in Switzerland. Brussels has said the
practice, known as "ring-fencing", is the equivalent of
providing unauthorised state aid to companies.
Last week the European Commission unveiled a plan to counter
inventive tactics increasingly used by big companies to reduce
their tax bills, and attacked countries like Switzerland whose
policies it says encourage aggressive tax avoidance.
Switzerland is not a member of the European Union but has
had a free trade agreement with the EU for the last 40 years. It
says it's not doing anything wrong, and it has so far largely
ignored the bloc's demands, which were first made in 2005.
In June, EU finance ministers threatened unilateral action
if a "satisfactory response" is not communicated by the end of
this year. The ultimate sanction would be trade tariffs, which
would choke off Swiss industry from Europe, its main trade
partner. Member states could take action by coordinating
blacklists to be implemented at national level, said Emer
Traynor, spokeswoman for the European Commission.
Harmonised EU sanctions would require "a good deal of legal
assessment and unanimous agreement in Council", she added.
"It's clear that the EU is not going to back down on this,"
said Martin Naville, the Swiss CEO of the Swiss-American Chamber
of Commerce who co-authored a study on Switzerland's appeal for
multinationals. "There has to be a solution and Switzerland will
have to give up ring-fencing."
Swiss officials point out that EU countries such as Ireland,
which offers a headline corporate tax rate of just 12.5 percent,
provide similar tax breaks. Google uses Ireland and the
Netherlands to reduce its tax bills.
"We are called a 'tax haven' by some of our European
neighbours but Switzerland is far from having the exclusivity on
legal devices that allow companies to avoid taxes," Broulis
writes in his book.
JOY OF TAX
The 47-year-old represents the Swiss Liberals party. It's
the third largest in Switzerland's parliament and stands for a
slender state, low taxes and tax competition among cantons. He
has distributed copies of the book, which is written in French,
to every 20-year-old in Switzerland's sleepy lakeside state of
Vaud. He says he wants to reach people who "have never paid
taxes but are about to pay them for the rest of their lives."
In the book, he defends the Swiss system, which lets cantons
determine two-thirds of the taxation paid by multinationals in
Switzerland (the remainder is decided at federal level). He says
it works because the system is democratic and not too
burdensome, noting that the Swiss tradition of direct democracy
means people are regularly consulted.
EBay - headquartered in the central canton of Bern - is one
beneficiary of the system. In the past four years, it has paid
an average tax rate on overseas income of between 2.5 percent
and 3.6 percent - a fraction of the headline tax rate in its
major markets - its annual reports show. "Tax rates are
important, but it's not the only reason," an eBay spokesman said
in an email about the company's choice of base. Location,
workforce, infrastructure and quality of life are also
important.
In Broulis' canton Vaud, the official rate of corporate tax
is nearly 24 percent, but firms often negotiate a better deal.
For more than a decade, Broulis has had the final say on whether
a foreign company qualifies for special tax regimes, including
offers such as up to 10 years tax-free, subject to conditions
such as job creation.
"If taxes are too high and confiscatory they become
intolerable," Broulis writes. Companies including Yahoo and
Brazilian miner Vale have settled in the canton. Vale confirmed
tax optimisation played a role in its decision, Yahoo declined
comment.
Other firms attracted by Switzerland's "ring-fence" include
some of the world's biggest commodity firms. Oil traders Vitol
and Trafigura, for instance, are based in land-locked
Switzerland. Much of their income is generated abroad, so the
tax breaks can be ample - usually less than a quarter of
earnings they make abroad is taxed. Their headline tax rate can
fall to just 11-12 percent of profits, or even less, says a tax
official.
Vitol declined to comment and Trafigura stressed its revenue
is taxed "either in Switzerland or elsewhere." Nissan said it is
"a good corporate citizen in every country in which it
operates." Thomson Reuters also benefits from Swiss tax rates.
"The specific rates of tax we pay are at the standard Swiss
rates as appropriate," a spokesman said by email.
"HOSTAGE TO MULTINATIONALS"
As pressure from the EU has mounted, some firms have started
quizzing tax advisers about their options.
"The roots of these companies are fairly transient and if
they can get better terms somewhere else, they will consider
it," said Gary Klesch, head of Geneva-based commodities trading
and production firm Klesch Group.
That has prompted head-scratching among the Swiss as to how
to satisfy the EU without scaring firms away. Foreign firms that
invest in Switzerland employ 11 percent of the Swiss workforce
and contribute to 14 percent of GDP, according to a 2012 Joint
Study by the Swiss-American Chamber of Commerce and the Boston
Consulting Group. The 23,524 tax-privileged companies resident
in Switzerland in 2009 contributed 3.8 billion francs - around
half of the total tax income from all companies in the country,
according to the finance department.
"The problem is serious. If all these firms were to move
away, Switzerland would lose in total up to five billion francs
in tax and 10,000 jobs," Eva Herzog, finance director for the
canton of Basel said in October.
Some say the cantons have become totally dependent on
multinationals. "Cantons are now admitting that if they lose
their special tax statuses they will be in complete disarray,"
said Ada Marra, a lawmaker for the left-wing SP party and member
of parliament's economic committee. "Effectively this is an
admission that several Swiss cantons are now hostages to big
companies."
There are signs that even the Swiss are fed up with firms
being offered rock-bottom rates while people feel the squeeze.
In Zug - home to commodity trader Glencore and mining company
Xstrata - some argue that expats are pricing locals out of the
market. Voters in June backed an initiative to increase
affordable housing. Glencore declined comment and Xstrata did
not respond.
NEGOTIATING TACTICS
Some lawmakers say Switzerland's foot-dragging on the tax
issue may have weakened its negotiating position with the EU,
which is the destination of more than half its exports and a
vital prop for the economy. International pressure has already
forced it to agree ways to tax foreigners' cash held in Swiss
accounts.
"We have to be smart enough to play the flexibility which we
should still have to our advantage," said Armin Marti, a tax and
legal partner at PricewaterhouseCoopers in Zurich. "We're not an
EU member state, we can still be creative and think of what we
can do on the tax base."
Officials say the Swiss Federation is unlikely to meet the
EU's year-end deadline, but they are optimistic they can have a
tax proposal on the table by next spring. The European
Commission has seen progress but says more is needed from the
Swiss, said its spokeswoman Treynor: talks will continue and it
will report on its findings in June.
Assuming the Swiss system has to change, a presentation
co-authored by Switzerland's no. 2 tax official Fabian Baumer,
recommended in November that Switzerland should pursue "various
and bold" solutions.
One would be to charge even less: cantons could lower the
standard corporate rate. It's an approach championed by Geneva,
which has suggested slashing the standard rate to 13 percent by
2018 to keep hold of commodity giants. That way the EU could no
longer accuse it of "ring fencing," because domestic and foreign
income would be taxed at the same rate.
Traders such as Vitol have welcomed the idea. But it would
leave a gaping hole in Geneva's budget which would need filling
somehow - possibly by other cantons. "In my opinion we can't
start subsidising tax competition," said Christian Wanner,
finance minister of the northern canton of Solothurn and
president of the cantonal finance ministers.
More innovative ideas could include 'licence boxes' - which
allow income resulting from intellectual property to be taxed at
lower rates - that are already in place in EU states such as
Luxembourg, Cyprus and Belgium and the Swiss canton of
Nidwalden.
However, such a solution would not cover commodity firms,
now responsible for 3-4 percent of Swiss GDP, according to
estimates from the Swiss State Secretariat for Economic Affairs.
There could be incentives that aren't just about tax. Swiss
cantons could negotiate discounts on other charges, such as
giving companies free electricity, said one finance official,
although he said he did not personally agree with the idea.
Switzerland is already fighting back. In October, it lured
Greece's biggest company Coca Cola Hellenic, which said
Switzerland's stability and ease of doing business were behind
its choice.
"Switzerland knows how to preserve its fiscal system which
is something that many EU countries haven't been able to do,"
Broulis told Reuters.
In a one-page letter sent to U.S. companies based in Belgium
in early October, the marketing association Greater Zurich Area
highlighted negative aspects of the Flemish economy such as rail
strikes, massive public debt and the recession.
"Maybe it's time to consider changing your location and
moving your regional headquarters from Belgium to Zurich," Swiss
press quoted the letter as saying. The authority, which
confirmed it sent the note, has since apologised. "We never
intended to offend Belgian feelings or denigrate Belgium as an
investment location," it said.