Saturday, February 17, 2007


Switzerland has rejected criticism from the European Commission of corporate tax rates in some cantons, saying it will not yield its sovereignty over this issue. EU's fanatical opposition to tax competition seems unlimited. Instead, the EU is calling for tax harmonization via the savings tax directive. It is quite strange that a collectivist political body tries to enforce its own rules on competition by saying that tax competition framework is a kind of state aid. Switzerland is not a part of the interiror market of the EU while it's somehow unacceptable to claim that low corporate tax rates in cantons such as Zug, Obwalden and Schwyz violate the 1972 Free Trade Agreement. What the EU is trying to impose, applies only to certain goods as codified in 1972 Free Trade Agreement. Procedures for taxing management companies, mixed companies and holding companies do not fall within the scope of 1972 Free Trade Agreement.

The European Commission claims that there are unfair advantages for companies operating in Switzerland. Further, it argues that low corporate tax rates are a state subsidy. It is somehow easy to understand why bureaucrats in Brussels are exposing a fierce anger against Switzerland. Low corporate tax rates have attracted numerous international holding companies. In the EU, this effect has been seen as "capital-flight" which has been caused by harmfully high corporate tax rates, causing large cost burdens to companies operating in high tax jursidictions in the EU. EU claims seem to be focused on companies leaving the union for Switzerland's far more friendly tax and business environment. If the bureaucrats in Brussels aim to stop companies that leave the EU, then imposing restrictions and penalizing them will result in the worst possible scenario. Cutting harmful corporate tax rates, deregulation and labor market liberalization are far more appropriate measures to boost competitiveness and create a friendly business environment.

Anykind of government intervention against tax competition and low tax jurisdiction is a serious threat to the stability and growth of business sector. It is the EU that seriously violates the free trade rules by giving the commission more discretionary authority to penalize countries with low tax jurisdiction, not Switzerland.

Competitive tax federalism is a fact. As many countries aim to do so, Switzerland endeavours to be an attractive global business destination. Company taxation is decisively crucial factor in setting the business framework. Laffer's New Curve rule coherently explains the parameters of tax-investment relationship - invest only in low tax countries.

On 13 February 2007 the European Commission informed Switzerland that it considers certain tax schemes applied by the cantons to certain types of company (holding companies, management companies and joint enterprises) on the basis of parameters set under federal law (Tax Harmonisation Act), to be state aid. In the view of the Commission, these tax schemes at the cantonal and communal level distort competition and impair trade in a manner not compatible with the 1972 Free Trade Agreement.

What impairs trade in the EU are massive government subsidies set under the common agricultural policy. The pursuit of protectionism harms the competition and there have rarely been more serious violations of free trade and competition rules as common agricultural policy. First, there is a price effect. High quotas, tariffs and import restrictions harms the consumers by setting restrictions not to choose imported agricultural goods on the market. If you set an equilibrium as an engine of price determination via the forces of supply and demand, import quoats move the supply curve left from the point of equilibrium and thus an implicit grant is given to existing enterprises. They respond to import quotas by raising prices as the quantity supplied on the market is reduced. In addition, the government intervention in the EU is widespread and so is the tax burden in high-tax welfare countries such as Germany, Italy and France.

EU attacks on Swiss tax sovereignity is likely to be political rather than economic. When you go through options and economic analysis, you see that it is hardly justified on any particular basis that tax schemes are an appropriate instrument. Saying that competitive corporate tax system violates the free trade is a little bit overreacting. From this particular aspect, the European Commission acts like a socialist enterprise and a tax cop. It should reconsider its legal arguments whereas the claims for the interference into Swiss internal affairs and corporate tax structure. In fact, Switzerland is the most competitive economy in the world according to World Economic Forum, the degree of economic freedom is far above the European average, tax burden is one of the lowest among OECD countries and the business environment is far more flexible, more opened, less restrictive and far more friendly than in the majority of the EU countries. Free trade agreement does not require the harmonization of tax policies. Imposing tax schemes on certain type of companies, which are equally treated under cantonal corporate tax laws, could be a sign of having special preferences for taxing those companies. This would violate the principle of fair and transparent corporate tax code. If Switzerland said "yes" to EU claims, it would have a damaging impact on economic growth and company stock index.

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