Swatch Group denies tax evasion, blames claim on ’employment dispute’

The Swatch Group, one of the world’s largest watchmakers, has denied published allegations by two former employees that it evaded millions of dollars in taxes. The claims were detailed Aug. 13 in articles in the Wall Street Journal’s European edition and in the Financial Times. The watch company says the charges arise from an “employment dispute” with the former staffers, but it launched its own investigation of the allegations.

The press reports say Joseph Erde and Mathieu Phanthala—identified by Swatch Group as regional financial controllers, one in Hong Kong and the other in Singapore—filed their complaint June 25 with the U.S. Department of Labor. It charged Swatch Group with discriminatory employment practices under the Sarbanes-Oxley Act (the U.S. law protecting workers who report corporate wrongdoing).

The complaint allegedly says the watch company used its Asian subsidiary to evade $180 million in taxes and import duties in several countries, including over $1 million from the United States, through “transfer pricing”—adjusting prices charged to various subsidiaries to shift profits from high-tax countries to those with low taxes.

According to the complaint, says the WSJ, after the two complained about the practice, Swatch Group’s senior management in April supposedly tried to cover up the alleged tax evasion. The pair claim they were subjected to “harassment” due to their allegations; both have since left the company.

The men told the WSJ they filed the complaint in the United States because Swatch Group does “substantial business” here and its stock is traded over the counter here. A Labor Department official told WSJ that the “employee-protection aspect of the complaint” is being investigated, “but not the fraud.”

Swatch Group contends the complaint isn’t covered by Sarbanes-Oxley because its stock isn’t listed on any U.S. exchange and the men never worked for the company in America. It also says that what’s really at issue is “a pure employment dispute” between the company and the two men—one of whom, it claims, wanted a higher severance pay than agreed in his contract. The case went to the Department of Labor, it says, when Swatch Group refused to make a settlement.

Even so, the company says it “takes the allegations very seriously” and that its top management ordered an internal investigation. The preliminary results “confirmed that Swatch Group did not violate laws,” it says, adding that it is “the strict policy of Swatch Group to vigorously respect all national and international laws, including tax laws.”

Still, the company said it’s “normal practice for every company to structure its business in such a way as 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.”

As for transfer price policy, that’s “a very complex matter” affected by a variety of international economic and business situations, Swatch says in its reposne. Still, it notes, “none of the Swatch Group companies are calculating transfer prices just for tax purposes, but with a view to harmonizing the international price structure for the consumer and to avoid the very harmful parallel market which causes great damage and far more costs than taxes.”

Reports of the complaint and Swatch Group’s response came on Aug. 13—ironically, the opening day the 2004 Olympics, for which Swatch is the high-profile official timekeeper—and caused the watchmaker’s stock to drop slightly.

Swatch Group’s annual sales top $3 billion. It posted a profit of $393 million in 2003. The company, headquartered in Biel, Switzerland, owns 17 watch brands, ranging from popular-priced to luxury (including Swatch, Omega, Tissot, Longines, Blancpain, and Breguet), a private label watchmaker, and ETA, one of the world’s major producers of watch movements.