By Gernot Heller
BERLIN (Reuters) - Germany and Switzerland scrambled on Friday to salvage a landmark deal on taxing secret offshore accounts after the main German opposition party raised 11th hour objections to a compromise plan it branded full of "loopholes".
Germany and its tiny Alpine neighbor want to conclude by this weekend a pact that would protect Switzerland's tradition of banking secrecy -- cornerstone of its $2 trillion financial services industry -- by taxing wealthy Germans' Swiss accounts and levying a high interest rate on undeclared money.
But Chancellor Angela Merkel's centre-right coalition needs the backing of states controlled by the opposition Social Democrats (SPD) to ensure the tax deal wins approval in Germany's upper house, the Bundesrat.
SPD state premiers, who blocked an original deal last year as too lenient to tax dodgers, discussed concessions proposed by the Swiss on Thursday but decided they did not go far enough.
"We still have big problems with this agreement," Hannelore Kraft, SPD premier of North Rhine-Westphalia, Germany's most populous state, told the Bundesrat.
"Switzerland has moved. But there are still far too many loopholes," she said, commenting on the proposed amendments. "Here lies the money of people who have evaded taxes and the question of how we deal with this is a fundamental one of justice."
The Swiss finance ministry said it had updated its proposals for a deal and asked for further clarity from Germany on the issue by the end of March to allow a new treaty to come into force from April 2013.
The German finance ministry said it too was working hard to finalize a compromise by a weekend deadline.
"Not to get a deal is the worst possible outcome for us, so in that sense we will do everything, we will not rule out any talks, in order to get a good result," a German finance ministry spokeswoman told a news briefing.
The spokeswoman said a March 31 deadline on the Swiss side was "unchanged". Asked if a deal by April 1 was still possible, she said: "We're working on it"
SPD sources said the party, which wants to unseat Merkel in a federal election next year, believes the tax rate proposed by the Swiss could be raised further and is also unhappy with the length of the transition period to the new regime.
The Swiss daily Tages-Anzeiger reported on Thursday that Switzerland had agreed to levy higher rates of punitive taxes on an estimated 160 billion Swiss francs ($176 billion) of German assets in secret accounts, potentially yielding billions of extra revenue for Germany.
Switzerland had already agreed to pay Germany 2 billion francs upfront under the original deal and Germany was seen as keen to finalize the agreement in time for it to come into force by next year's budget.
Switzerland has also agreed to increase a planned withholding tax on future income from Swiss-held accounts to 29 percent from an originally agreed 26 percent, the newspaper said. The SPD states want the tax rate raised to 35 percent, which would make it comparable to German levels.
Switzerland hopes a deal with Germany, and a similar one with Britain, could become a model for agreements with other European states such as Greece, desperate for extra revenue in times of austerity. Austria is also working on a parallel deal.
($1 = 0.9072 Swiss francs)
(Additional reporting by Katie Reid in Zurich, Writing by Gareth Jones, Editing by Noah Barkin)