By Annika Breidthardt
BERLIN (Reuters) - The German government's deal to stem tax evasion via Swiss bank accounts risks being defeated in the opposition-controlled upper house of parliament after Switzerland issued arrest warrants for three German tax inspectors.
The government is soon due to present the deal to parliament's lower house, the Bundestag, but also needs the agreement of the upper house, or Bundesrat, where Chancellor Angela Merkel's centre-right coalition doesn't have a majority.
But an outcry over the warrants has emboldened the deal's domestic critics who think it too soft on Switzerland and opposition-led states have said the tax agreement is full of loopholes.
German Finance Minister Wolfgang Schaeuble talked up the deal in a German TV interview on Monday.
"With this agreement we've come up with a good way to take care of a decades-long grievance," he said. "There won't be any problems in the future once this agreement takes effect...Switzerland won't be a cover for tax evasion anymore."
Berlin is hoping the opposition will look beyond the outcry and sign off on the deal as it would bring the federal states much-needed tax income on an estimated 150 billion Swiss francs ($166 billion) squirreled away by Germans in Swiss accounts.
If it was to be rejected, the deal may collapse and Germany would miss out on that money.
Berne's weekend move to issue warrants for the three Germans on suspicion of industrial espionage for buying CDs containing bank details of German tax evaders caused outrage among some German officials.
Schaeuble came under criticism at the weekend for initially defending the independence of Switzerland's justice system. But on Monday he spoke out on behalf of the tax collectors.
"It's an extraordinarily unpleasant situation for the civil servants involved because they're victims of different penal codes in Switzerland and Germany," Schaeuble said. "That's why this agreement needs to be implemented."
Germany's finance ministry spokesman Martin Kotthaus insisted on Monday that the agreement was the best way to avoid such spats.
"With the tax deal, all problems would be solved at once," Kotthaus told journalists. "Purchasing tax CDs would no longer be necessary."
If the deal goes through, the warrants for the tax inspectors would become obsolete, he said, adding that the deal will also prevent one country's prosecutors from pursuing tax offences in the other country.
In 2010 several German states including North Rhine-Westphalia said they had bought CDs containing Swiss banking data from whistleblowers as part of a drive to identify tax evaders. That led thousands of Germans to declare their financial holdings to avoid risking jail sentences.
Germany is hoping the deal will take effect at the start of 2013.
"The question is whether we will be able to convince everyone that, objectively, there are positive reasons for the agreement," Kotthaus said.
UP TO OPPOSITION
The Social Democrat-controlled (SPD) states had previously said that the concessions offered by Switzerland did not go far enough. The Swiss warrants have simply made matters worse.
"The arrest warrants against three German tax inspectors are a bad sign," said Nils Schmid, Social Democrat finance minister of the southern state of Baden-Wuerttemberg. "They don't help in getting a tax deal between Germany and Switzerland."
Under the deal, Switzerland would impose taxes on Germans' accounts and levy a punitive charge on undeclared money, and then pass the proceeds to Germany.
But it would not have to reveal the identities of its wealthy banking customers, who are a mainstay of its offshore financial services industry.
North Rhine-Westphalia, Germany's most populous state where the three tax inspectors work, said it would buy CDs with tax data again in future if the deal with Switzerland fell through.
The SPD-led state is due to hold an election on May 13, and Switzerland's "Neue Zuercher Zeitung" paper called its comment about buying more CDs "quite transparently election noise". ($1 = 0.9039 Swiss francs)
(Additional reporting by Gernot Heller and Albert Schmieder in Zurich; Editing by Andrew Osborn)