Switzerland's tax breaks for wealthy foreigners and multinational corporations are coming under growing scrutiny, forcing the country's financial establishment onto the defensive against charges they are "looting" their neighbours.

The Alpine state is regarded as a fiscal paradise for those wishing to avoid their own national exchequer, although competition within Europe is growing as countries seek to attract revenue from wealthy foreigners or companies.

Politicians in neighbouring France this month attacked the Swiss system, saying it was drawing away French citizens subject to a wealth tax at home, while the European Union also signalled its disquiet about Swiss corporate taxation.

Swiss Finance Minister Hans-Rudolf Merz sought to rebuff the charges on Friday. He justified the country's tax system as "federalism in action", saying it reflected the country's cultural identity.

The Alpine country is heavily decentralised and the 26 cantons (regions) have sovereignty over taxation. They effectively compete against each other by offering different personal or corporate tax rates.

"When people and companies are free to choose their place of residence or domicile, this forces the politicians and governments of competing locations to raise their game," he added in a statement.

Those locations, whether they are countries or regions, "offer an attractive combination of efficient public services and a fiscal burden that is as low as possible," he argued.

Merz insisted that Switzerland conformed to international "rules of the game" and that it did not tolerate arbitrary or discriminatory forms of taxation.

Wealthy foreign residents such as ex-Formula One champion Michael Schumacher, ageing French rock star Johnny Hallyday, or Ikea's chairman Ingvar Kamprad can negotiate a special lump-sum tax fee with cantonal authorities.

Instead of being based on their income, it is based on their expenditure, provided they have no local earnings, resulting in a substantial personal saving over what they might face at home, according to tax lawyers.

Yet for some of Switzerland's cantons, it is lucrative added revenue. They earned some 260 million Swiss francs (163 million euros, 211 million dollars) in 2004, mainly for three regions in western Switzerland, according to the Swiss news agency ATS.

Cantonal finance directors on Friday failed to agree on calls by some of them to increase the minimum lump-sum, betraying unease within Switzerland over tax competition just months ahead of legislative elections due in October.

Meanwhile, the European Union reopened an old front this month by calling for further talks over Switzerland's policy on corporate taxation.

The Swiss offer tax breaks for corporations that are based in the country but do not carry out any business locally. Brussels has accused Switzerland of violating a 1972 free trade accord.

Corporate taxation is also triggering discord within the 27-member EU, where national goverments set rates ranging from 33 percent in France to 12.5 percent in Ireland.

The total corporate tax rate in Switzerland's economic capital, Zurich, is about 16.5 percent, according to data provided by the Swiss finance ministry.

Meanwhile, Britain, Belgium, Monaco and Ireland also provide favourable taxation for wealthy foreigners, while Monaco has no personal taxes at all.

Although Swiss cities such as Zurich and Geneva regularly top "quality of life" surveys, lawyer Philippe Kernel said that Switzerland's tax regime was the foremost factor behind the choice of rich foreign residents.

"First of all, you judge the country in terms of its fiscal attractiveness. After that you bring in personal criteria, but this is fundamentally a secondary choice. The first choice is fiscal," he told AFP.

Kernel said that Britain was an attractive option in fiscal terms but it also suffers from the high cost of housing.

"The Swiss system is relatively close to the English one, but the disadvantage of Switzerland for many French people, particularly Parisians, is that it's not very exciting," he added.

The tax issue became an election issue in the French presidential campaign this month, after pop icon and tax exile Johnny Hallyday, who has publicly proclaimed his support for centre-right presidential candidate Nicolas Sarkozy, moved to a chalet at Gstaad in the Swiss Alps.

A spokesman for rival Socialist candidate Segolene Royal accused Switzerland of "looting" its neighbours.

However, many Swiss feel the country is being unfairly targeted while other states are getting an easier ride.

Private banker Jacques Rossier, of LODH, said that French politicians who have proposed a "blockade" of Switzerland in protest at its tax regime would do better to turn their attention across the Channel to their old foes in England.

"As for the suggestion of a blockade, France should deploy its navy somewhere near Britain, because there are not only 3,600 fee payers around London, but 70,000," Rossier said.

"But the last time France did that, under Napoleon, it ended up badly," he added.