The EU executive urged Switzerland to scrap rules that allow businesses based in Switzerland to enjoy tax breaks on profits generated inside the EU.
The Commission says that such tax privileges are a form of illegal state aid and violate a 1972 bilateral trade pact in which both sides agreed not to hand out subsidies that distort competition.
"Switzerland enjoys the benefits of privileged access to the internal market and must accept the responsibilities that go along with this," said External Relations Commissioner Benita Ferrero-Waldner.
However, Switzerland rejected the Commission's complaint, saying that taxes are not covered in the trade deal: "No contractual regulations exist between Switzerland and the EU on the harmonisation of company taxation. Consequently, it is not possible for there to be an infringement of any agreement," the Federal Department of Finance said in a statement, adding: "Switzerland will ensure that its appeal as a location for Swiss and foreign companies remains intact or even improve upon this."
Although the 1972 agreement allows the EU to take retaliatory safeguard measures (including punitive tariffs on Swiss exports), EU spokeswoman Emma Udwin said that the Commission would first seek a mandate from member states to renegotiate the agreement.
Member states are likely to give strong backing to the Commission, as frustration has grown with the increasing number of multinationals, including General Motors, Kraft Foods and Procter & Gamble, deserting their EU headquarters to set up in Switzerland.
Tax competition is also a problem within the EU, with countries like Ireland and Luxembourg luring companies away from high-tax France and Germany thanks to their low business tax rates. But, a Commission move to harmonise tax systems across the EU is being fiercely resisted by low-tax member states.
