May 17 (Bloomberg) -- Switzerland said it will stop differentiating between foreign and domestic income at companies in a bid to solve a disagreement with the European Union over preferential tax treatment for multinationals.
“It is important that we remain competitive,” while at the same time creating a tax system that is accepted internationally, Finance Minister Eveline Widmer-Schlumpf said in Bern at a joint briefing with Peter Hegglin, who heads the conference of finance director of the Swiss cantons.
To keep Switzerland attractive to foreign companies, the country plans to introduce new tax exemptions and will leave it up to cantons to reduce tax rates on profits, she said. The new rules will not include ring-fencing measures and won’t distinguish between Swiss and foreign companies, she said. New rules may come into effect in 2018, Hegglin said.
The EU has urged Switzerland to abandon a so-called auxiliary regime that allows multinationals to pay less tax on income from outside the country. That has helped lure hundreds of global corporations, among them Procter & Gamble Co., Vitol Group, Trafigura Beheer BV and Caterpillar Inc., to the country.
The EU says the practice conflicts with its code of conduct by treating domestic and foreign companies differently. The Swiss government was given until the middle of the year to come up with a proposal, or face retaliatory steps.
The EU is the biggest destination for Swiss exports. The two are at odds over a number of matters, including immigration and Switzerland’s tradition of banking secrecy that some citizens of EU countries used to evade taxes.
To make up the tax shortfall, the Swiss government will offer alternative perks, which could include lower taxes on intangible assets like license fees for patents.
Emer Traynor, a spokeswoman for EU Tax Commissioner Algirdas Semeta in Brussels, declined to comment.
Switzerland could see a tax-revenue shortfall of between 1 billion francs ($1.03 billion) and 3 billion francs a year as a result of the new rules, said Serge Gaillard, Director of the Swiss Federal Finance Administration.
According to Geneva authorities, companies that account for about a quarter of the canton’s economy and employ about 20,000 people currently benefit from the auxiliary tax regime.
More than 70 commodity trading companies, including Vitol and Trafigura, pay an average tax rate of 12 percent in Geneva, according to the Geneva Trading and Shipping association, below the canton’s standard rate of 24.2 percent.
The auxiliary regime is not used by all of Switzerland’s 26 cantons. Zug, home to commodities trader Glencore Xstrata Plc, grants all companies a low rate, with the effective average corporate tax rate amounting to 13 percent in 2011.
To contact the editor responsible for this story: Craig Stirling at email@example.com