Swatch hit by tax evasion reports

ZURICH, Switzerland (Reuters) -- Swatch Group shares plunged on Friday on media reports that the world's biggest watch maker faced allegations by two disgruntled ex-employees that it evaded taxes and customs duties.

A Swatch spokeswoman said the firm would comment on the reports later in the day. Analysts at Zuercher Kantonalbank said the firm had denied the reports to them.

The reports, stemming from complaints by two former Swatch managers, came as images of Swatch's logo were to be beamed around the world during the opening ceremony of the Athens Olympics where the firm is the official timekeeper.

Investors, made jittery by recent accounting mishaps at Swiss staffing firm Adecco, put bearer shares under sharp pressure. The stock dropped 4 percent to 141.50 francs, while registered shares were down 3.6 percent.

The bearer stock had opened more than 11 percent lower.

Analysts said the sell-off appeared overdone since, if the allegations proved founded, Swatch faced at worst a charge for tax arrears and a slightly higher tax rate in the future. "If there is a fine and back taxes, the financial impact would appear to be manageable," LODH analysts said in a note.

Swatch, which owns 17 watch brands including Omega and Tissot, has net cash of over one billion Swiss francs and generates net profits of around 500 million, giving it an ample cushion against any potential one-off costs, analysts said.

Allegations of tax evasion

The Wall Street Journal Europe had said in its Friday edition that the firm faced a complaint by two former managers who allege the group evaded up to $180 million in taxes and customs duties by manipulating inter-company prices.

Analysts noted the practice, whereby goods are charged at differing prices as they pass through company subsidiaries, is widespread among multinationals looking to minimize taxes.

Prices of goods are raised on sales from low-tax countries to high-tax areas to retain profits in countries where the tax burden is comparatively low.

"International tax optimization is normal and legal," ZKB analyst Patrik Schwendimann said in a note. "There is however always a certain room for maneuver in terms of what is and is not accepted by the tax authorities."

The WSJ said the complaint, filed with the U.S. Labor Department on June 25, alleged Swatch used an Asian unit to evade taxes in various countries including the United States.

It alleged that management attempted to cover up the purported tax evasion in April after the two employees complained to their managers about so-called transfer pricing.

The Financial Times, also reporting on what it called "a challenge" to Swatch's inter-company tax policy, quoted Swatch's top company lawyer as saying that the firm had done nothing wrong and had been acting within the legal boundaries.

The FT quoted e-mails from Swatch employees for its report and, like The Wall Street Journal, said Swatch Group (Asia) -- registered in the British Virgin Islands -- was at the heart of the transfer pricing practices.

"We can believe that the company would have taken all legal means possible to reduce its tax bill, and that this might mean pushing the envelope from a legal perspective," James Amoroso at Pictet Bank said.

However, Amoroso said he would be surprised if Swatch -- a multinational built from modest Swiss roots and dominated by billionaire Nicolas Hayek's family -- had broken the law and expressed suspicion at the timing of the reports.

"It bears all the hallmarks of the actions of former, disgruntled employees," he said.

The WSJ said that the complaint was filed in the United States because taxes had been evaded there and because Swatch stock is traded over the counter there.