Switzerland should not agree to tax deals with countries beyond the European Union (EU) so as to ease economic integration with the bloc and avoid even bigger costs for Swiss banks, the deputy head of the Geneva Financial Center said on Wednesday.

The country has clinched deals with Britain and Germany to tax money stashed by their citizens in secret accounts and is inching toward an agreement with the United States to settle a dispute over Swiss banks helping wealthy Americans dodge taxes.

Should we hope to count a greater number of states as possible partners in this system of withholding tax? Yes, if they are in the heart of the European Union. Clearly not beyond that, Nicolas Pictet, vice president of the center and a partner at the private bank Pictet, told a news conference of the Geneva group that links 80 banks.

France is interested in a deal with Switzerland to catch tax dodgers, Pictet said.

Will they follow up? We don't know. It is their decision, they are in an electoral period, he said, adding that Italy, Greece, Sweden, Belgium and other northern European states were also interested.

The strict bank secrecy that has helped Switzerland build up a $2 trillion offshore financial sector has come under heavy pressure in recent years as governments with big budget deficits seek to boost revenues by clamping down on tax evasion.

The withholding agreements still face hurdles, particularly in Germany where the deal has come under fierce criticism for being too lenient on tax evaders and going against EU policy on transparency and information exchange.

The role of the Swiss banks as tax collector can only be in the context of a strong economic interdependence and market access for them, Pictet said. There would be a disproportionate cost should such deals be extended beyond the EU bloc.

The figure of 500 million (Swiss francs) was mentioned at the time of the agreement with Germany as the cost for banks to set up the system. I leave to your imagination what it would represent to put in place a system for collecting a withholding tax across the planet with all the different existing systems.

Beyond the EU, Pictet said Switzerland should offer double taxation deals based on standards set by the Organization for Economic Cooperation and Development (OECD).

U.S. DEAL MUST BE IN LINE WITH SWISS LAW

Regarding the United States, he said difficulties remain.

As much as we want a deal with the United States, it must be in line with (Swiss) law and should not constitute an unacceptable precedent, he said.

Swiss bankers expect the economy to face hurdles this year and next, the results of an annual survey conducted by Geneva Financial Center showed. A majority expect a difficult year in 2011, or stagnant at best, Bernard Droux, its president said.

Given the chronic debts of our neighbors and the United States, we suffer along with it. If you add the strength of the Swiss franc, we will also have a difficult year in 2012 if markets don't come back, he said.

It is a challenge, Droux said. Ours is an industry that is reinventing itself and will fight back.

Swiss-based financial institutions should pay greater attention to management of institutional funds, Pictet said. Other financial centers including Singapore are positioning themselves as centers for administering funds.

We must be vigilant and defend ourselves, he said.

(Reporting by Stephanie Nebehay)

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