Swatch denies using BVI company to evade taxes

by Marie-Noelle Blessig

Saturday, August 14, 2004

ZURICH, Switzerland (AFP): The Swiss watchmaking group Swatch ran into financial turbulence on Friday, when it was forced into a public denial of allegations of tax evasion involving an offshore subsidiary in the British Virgin Islands made by two former employees.

The Swiss watchmaker's share price on the Zurich stock exchange plunged by up to 10 percent after the allegations and a complaint to US authorities targeting the company were revealed by two major financial dailies.

With top executives Nick Hayek and Hanspeter Rentsch in Athens for the opening of the Olympic Games -- where Swatch is the official timekeeper -- the group appeared to take time in responding to the reports.

It released a statement well after share trading was under way, underlining that an internal probe launched when the allegations were first made had so far concluded that Swatch had behaved within legal bounds.

"According to the first results of our investigation, it is confirmed that Swatch Group did not violate laws," Swatch said.

The group's share price regained some lost ground by mid-afternoon, trading 4.3 percent lower at 29.05 Swiss francs.

The allegations were made by two former employees who filed a complaint in the United States alleging tax evasion by Swatch in its use of transfer pricing, a complex accountancy process that international companies often use to cut their taxes.

Swatch retorted that it strived to ensure that its use of transfer pricing remained legal.

"Nevertheless, it is normal practice for every company to structure the business in a way to pay all due taxes without exception but not more than required by the law, and always within the rules given by existing laws and regulations," the statement added.

The Financial Times and Wall Street Journal reported internal e-mail correspondence between executives at Swatch indicating unease with transfer pricing and how it would stand up to scrutiny by national tax authorities.

Two former regional controllers for Swatch in the Far East filed a complaint with the US Department of Labor, reportedly in June.

They alleged that Swatch had used its offshore subsidiary in the British Virgin Islands to evade taxes and duties in several other countries, including the United States, according to the newspapers.

Swatch said the case involved a "pure employment dispute" between the group and the former executives, one of whom it said was claiming higher severance compensation than agreed in his contract.

The case was forwarded to US authorities after Swatch said it had refused to enter into a settlement proposed by the lawyer of the two employees.

Transfer pricing involves adjusting prices for goods in different strands of a worldwide group to take advantage of the lowest tax regimes and minimise the burden on the company's profits.

"None of the Swatch Group companies is calculating transfer prices just for tax purposes, but with a view to harmonise the international price structure for the consumer, to avoid the very harmful parallel market which is causing great damage and much more cost than taxes," Swatch said.

An analyst with the Swiss private bank Pictet, James Amoroso, said he was sceptical about the "coordinated coverage" of the affair.

"It would be surprising if Swatch had broken the law," he said.

The Swatch group includes not only the eponymous brand of plastic fashion watches, but also many of the top Swiss brands such as Omega, Longines, Tissot and Blancpain.

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