BERNE Switzerland outlined plans on Friday to reform the way it taxes companies as it seeks to counter criticism from Brussels while trying to remain attractive to the many multinationals based in the country.
The Swiss have lured thousands of foreign companies including online retailer eBay (EBAY.O) and trading giant Glencore (GLEN.L) by taxing foreign profits at a lower rate than domestic earnings, a practice known as "ring fencing".
But the European Union says such tax breaks amount to "unauthorized state aid" and has given Switzerland a June 21 deadline to come up with alternatives if it wants to avoid sanctions.
Initial proposals made by a steering committee on Friday broadly recommended abandoning the ring-fencing practice as it has been conducted previously, in part by reducing standard corporate tax rates and introducing other kinds of tax breaks used in EU states.
The recommendations will now be the basis for consultations with the country's 26 fiercely independent Canton regional governments, who compete to attract companies resulting in current corporate tax rates ranging from 12 to 24 percent.
"We want to remain competitive," Finance Minister Eveline Widmer-Schlumpf told a news conference. "We have an interest to keep these mobile companies in Switzerland."
Firms with special tax status contributed about half of Switzerland's total corporate tax revenues of 8 billion Swiss francs ($8.34 billion), Widmer-Schlumpf said.
The proposals include using so-called license boxes to allow income from intellectual property to be taxed at a lower rate. License boxes also known as a "patent boxes" are already used in EU countries including Britain, Belgium and Luxemburg.
Fabian Baumer, head of tax policy at the Swiss tax administration, said it was possible the box concept could be broadened to include items such as brands.
But license boxes are deemed less appropriate for cantons like Geneva, home to commodity trading firms Vitol and Trafigura TRAFGF.UL, that make little use of special tax treatment for intellectual property.
Geneva has proposed a standard corporate tax rate of 13 percent for both foreign and domestic income. This compares with a current rate of around 24 percent for Geneva firms not qualifying for special tax rates.
Some officials have expressed concern that this unifying of rates at a lower level could leave a gaping hole in cantons' finances, forcing the Swiss Federal government to plug part of the gap.
So that it doesn't endanger strict rules limiting government debt, the finance department has set out options to compensate for the potential shortfall, including making savings elsewhere, systematically taxing dividends or increasing sales tax. ($1 = 0.9594 Swiss francs)
(Editing by Emma Thomasson and Patrick Graham)