Swiss defy EU sanctions threat over bank secrecy

Switzerland refused to back down over plans for a Europe-wide savings tax yesterday, despite threats that Swiss banking operations in the EU might be curbed, or that cash flows to Swiss financial centres could be limited.

Despite the sanctions threat from EU capitals the Swiss president, Kaspar Villiger, insisted that Switzerland is determined to keep banking secrecy and that it would never agree to give the EU information about interest earned in Swiss accounts. "We could not introduce it [exchange of information] without a vote of the population – and that would have no chance," Mr Villiger said in Luxembourg.

The deadlock has plunged EU savings tax plans into crisis, with the EU member states divided on whether to negotiate on a Swiss compromise or to press ahead by threatening sanctions.

Britain has led the call for the Swiss to sign up to a system of automatic exchange of information similar to one planned among the EU's 15 member states to stop tax evasion. Under the scheme the tax authorities in EU countries would be told about any interest earned by their nationals on accounts in Switzerland, allowing tax to be levied.

Instead, the Swiss have offered to levy a withholding tax, giving most of the proceeds to EU coffers but not ending banking secrecy.

Without a deal with Switzerland and other tax havens the entire plan could collapse this December.

A meeting of EU finance ministers in Luxembourg was told that possible sanctions against the Swiss fall into two categories: suspension of bilateral relations, including those now being negotiated (such as passport-free travel to and from Switzerland and the EU) or measures to recoup the financial advantage the Swiss would enjoy by not participating.

The European Commission did not provide any detail, but diplomats said it could mean legislation to place conditions on the business that EU nationals could place with Swiss banks. Alternatively, a limit on movements of cash from the EU to Switzerland could be imposed.

But there was division over how hard to press the Swiss. The Chancellor, Gordon Brown, said that Britain was willing to consider sanctions, but Luxembourg's Prime Minister, Jean-Claude Juncker, warned against treating Switzerland as an "alpine Iraq".

Britain seems to be in the minority in its refusal to countenance the Swiss offer of a withholding tax. The European Commissioner for taxation, Frits Bolkestein, contradicted Mr Brown, arguing that an automatic exchange of information from Switzerland may not be necessary.