Swiss Report Exposes EU’s Hypocritical “State-Aid” Attack against Tax Competition

In a fight that may be a precursor to World Trade Organization battles involving America, the European Commission has been persecuting Switzerland because pro-market cantonal tax laws supposedly are a form of state aid. The EU’s state-aid rules prohibit (at least in theory) handouts to individual companies since subsidies create an un-level playing field, and the EC apparently thinks that low taxes in Swiss cantons are akin to a subsidy. Switzerland is not a member of the European Union, but the EC argues that a trade treaty obliges the Swiss to obey rulings from Brussels. Tax-news.com reports on a recent meeting, noting that the Swiss are holding firm against outside interference:

The EC argues these cantonal company tax regulations restrict trade in goods between Switzerland and the EU, and distort competition. … the Swiss delegation, led by Alexander Karrer, Head of the Monetary Affairs and International Finance Division in the Federal Department of Finance, and including representatives from the cantons, argued that Swiss taxes do not distort bilateral trade, because the types of company concerned in Switzerland have no, or at most subordinate, business operations which are taxed normally. … Furthermore, the Swiss emphasised that both domestic and foreign-controlled companies are entitled to take advantage of holding-company privileges. The European Commission is basing its legal argument against Switzerland on the latter’s alleged breach of state aid rules, which, in the EU, are in place to prevent member states from favouring certain companies and industries with beneficial tax rules and subsidies. But the Swiss say that the EC’s arguments rest on shaky very legal ground, pointing out that the country is neither an EU member or part of the Single European Market, nor party to the competition regulations of the EC Treaty, including those on state aid. Moreover, Bern insists that even if the tax laws in question were covered by the 1972 Free Trade Agreement, they would not fall under the EU’s definition of state aid, because they do not favour certain companies or industries.

Interestingly, the Swiss government recently released a report exposing the European Commission’s hypocrisy. The full report is only available in French and German, but Pierre Bessard of the Institut Constant de Rebecque in Switzerland shared with me his useful analysis. On the broader issue, Pierre noted that the report revealed that the EU allows many exceptions to its supposed prohibition of fiscal state aids, and allows generous subsidies while limiting tax competition, while Switzerland does not subsidize businesses but allows greater tax competition, which leads to innovation in the public sector and relative government efficiency.” And on the specific issue of state aid, Pierre also explains that the report reveals that “65% of state subsidies in the EU go to manufacturing and services, and only 26% to agriculture.” In other words, the subsidies for business in the EU, which clearly do create an un-level playing field, are more than twice the size of the widely criticized subsidies from the Common Agricultural Policy. In Switzerland, by contrast, individual businesses do not receive handouts and instead are allowed to compete in a low-tax environment

At first glance, this Swiss-EC spat may seem interesting just to tax geeks, but do not be surprised if the United States is ensnared in this type of fight at some point in the future. Statist academics and policymakers already are making the argument that low tax rates “distort” trade by causing jobs and investment to migrate away from high-tax jurisdictions. It is not inconceivable to think that the European Court of Justice might accept this argument at some point, thus paving the way for more extensive tax harmonization in Europe. The next step would be the World Trade Organization. I hope my fears are misplaced, but experience teaches us that politicians are very clever at expanding the power of the state.