The Swiss government is balking at EU calls to report the interest income earned by EU residents because that would weaken its 70-year-old bank secrecy law. Instead, in talks that begin Wednesday, the Swiss are offering to levy a tax on interest on behalf of the 15-nation EU without revealing the identity of account-holders.
The EU needs Swiss help to make the plan work. Swiss banks manage about one-third of worldwide savings held outside the owner's country of residence and the EU is concerned Switzerland will be used as a loophole. EU members Austria and Luxembourg say they will veto the introduction of a cross-border disclosure law unless Switzerland complies.
``There are certain things we're not prepared to negotiate, including setting up an automatic system of information exchange between fiscal authorities,'' Swiss Economics Minister Pascal Couchepin said at a briefing in Geneva last week.
The financial industry is Switzerland's largest, contributing about 11 percent of gross domestic product and as much as 12 percent of tax income. Swiss banks, including UBS AG and Credit Suisse Group, oversee about $2.3 trillion in assets.
Tax Options
Switzerland will argue that its own offer is a genuine contribution to the EU aim of recouping lost tax income while protecting customers' right to privacy. The EU has agreed to let Belgium, Austria and Luxembourg levy a similar tax for seven years, before switching to the disclosure of information from 2010.
``Our position hasn't changed,'' said Lucien Michels, a spokesman for the Luxembourg government. ``If Switzerland were to opt for exchange of information, then Luxembourg would follow suit.''
With the withholding tax, Switzerland is seeking the same solution the EU denied to Luxembourg, a country of 400,000 inhabitants that owes a tenth of its jobs and a fifth of its economy to a financial industry that also depends on banking secrecy.
Switzerland will claim it fulfills an EU requirement for possible tax havens to introduce ``equivalent'' measures. Still, it intends to make even this offer conditional on the EU reaching agreement with rival financial centers, such as the U.S. and Singapore.
National Interest
``We do not want a one-sided agreement or we will have a competitive disadvantage,'' said Professor Christian Keuschnigg of St. Gallen University, Switzerland's top business school. ``There has to be some sort of simultaneity.''
Switzerland's chief negotiator is Robert Waldburger, a deputy director in the Federal Finance Administration and a colleague of Keuschnigg's at the university. The Finance Ministry turned down a request for an interview.
The EU levy would cover interest paid on bank deposits and all debt securities, including zero-coupon bonds. Bonds sold before March 1, 2001 and increases made before March 1 this year would be exempt.
The EU failed to agree on a combination of withholding taxes and disclosure by an original 1999 deadline. It risks missing the next deadline of passing the disclosure law by January 2003. In addition, there's not much it can offer that could persuade Switzerland to drop its resistance.
Bargaining Chips
The main demands of Swiss companies for better access to Europe have already been met. A set of free-trade treaties opening EU transport, drug and labor markets to Europe's most export- reliant economy come into force June 1.
The EU buys about 60 percent of Swiss exports and accounts for three-quarters of imports.
The EU needs Swiss help to make the plan work. Swiss banks manage about one-third of worldwide savings held outside the owner's country of residence and the EU is concerned Switzerland will be used as a loophole. EU members Austria and Luxembourg say they will veto the introduction of a cross-border disclosure law unless Switzerland complies.
``There are certain things we're not prepared to negotiate, including setting up an automatic system of information exchange between fiscal authorities,'' Swiss Economics Minister Pascal Couchepin said at a briefing in Geneva last week.
The financial industry is Switzerland's largest, contributing about 11 percent of gross domestic product and as much as 12 percent of tax income. Swiss banks, including UBS AG and Credit Suisse Group, oversee about $2.3 trillion in assets.
Tax Options
Switzerland will argue that its own offer is a genuine contribution to the EU aim of recouping lost tax income while protecting customers' right to privacy. The EU has agreed to let Belgium, Austria and Luxembourg levy a similar tax for seven years, before switching to the disclosure of information from 2010.
``Our position hasn't changed,'' said Lucien Michels, a spokesman for the Luxembourg government. ``If Switzerland were to opt for exchange of information, then Luxembourg would follow suit.''
With the withholding tax, Switzerland is seeking the same solution the EU denied to Luxembourg, a country of 400,000 inhabitants that owes a tenth of its jobs and a fifth of its economy to a financial industry that also depends on banking secrecy.
Switzerland will claim it fulfills an EU requirement for possible tax havens to introduce ``equivalent'' measures. Still, it intends to make even this offer conditional on the EU reaching agreement with rival financial centers, such as the U.S. and Singapore.
National Interest
``We do not want a one-sided agreement or we will have a competitive disadvantage,'' said Professor Christian Keuschnigg of St. Gallen University, Switzerland's top business school. ``There has to be some sort of simultaneity.''
Switzerland's chief negotiator is Robert Waldburger, a deputy director in the Federal Finance Administration and a colleague of Keuschnigg's at the university. The Finance Ministry turned down a request for an interview.
The EU levy would cover interest paid on bank deposits and all debt securities, including zero-coupon bonds. Bonds sold before March 1, 2001 and increases made before March 1 this year would be exempt.
The EU failed to agree on a combination of withholding taxes and disclosure by an original 1999 deadline. It risks missing the next deadline of passing the disclosure law by January 2003. In addition, there's not much it can offer that could persuade Switzerland to drop its resistance.
Bargaining Chips
The main demands of Swiss companies for better access to Europe have already been met. A set of free-trade treaties opening EU transport, drug and labor markets to Europe's most export- reliant economy come into force June 1.
The EU buys about 60 percent of Swiss exports and accounts for three-quarters of imports.
