There are several reports this morning that Luxembourg is backing down on the issue of banking secrecy. As the BBC put it:
Luxembourg would consider greater transparency of its banking sector to help curb tax evasion, the finance minister has told a German newspaper.
In an interview published on Sunday, Luc Frieden said he wanted to "strengthen co-operation with foreign tax authorities".
Speaking to Germany's Frankfurter Allgemeine Sonntagszeitung newspaper, Mr Frieden acknowledged that other countries were increasingly demanding more information on what their citizens were doing with their money in foreign banks.
"The international trend is going toward an automatic exchange of bank deposit information. We no longer strictly oppose that," he said.
Now, let's not go wild with excitement: "strictly opposed" still means they will fight tooth and nail, but this is important. I'm afraid it's not because of new tax haven revelations that this has happened; it is entirely because of the US FATCA. Luxembourg has agreed to sign a FATCA agreement with the USA and as a result has no choice but offer a similar deal to all 26 of its EU partners. With Austria being in the same boat the obstacle to major reform of the European Union Savings Tax Directive should be removed.
I won't be counting my chickens yet, but if this is in fact playing a game of appearing to move towards cooperation without duress despite the fact that Luxembourg has no choice but comply that's a game I can live with, on one condition And that's that it's over, quickly.
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I was thinking the same thing when I read the announcement. I’m going to be a bit pessimistic and guess the reason for this change in position is more of a public relations trick than anything. To people who don’t follow FATCA progress (which is most of the general public) it appears that Luxembourg is the good guy in the efforts to prevent tax-evasion . The reality is probably more about them preempting the outcome of negotiations with the US which will force them to do automatic information exchange with all EU countries (not sure when a FATCA announcement will come out).
I’m a bit leery of their co-operation. They’ve only mentioned transparency for depositors and I have a feeling they’ll fight hard to try only include bank deposits (The EUSTD includes funds and many other vehicles). It’s an interesting turn around and I’m curious to see how it all pans out.
Mr Matti,
You are correct that Luxembourg must offer the same administrative assistance to its EU partners as it offers the United States under FATCA. But that does categorically not mean it must automatically start exchanging information about non-resident bank depositors.
This depends on the type of FATCA intergovernmental agreement (IGA) it concludes with the US.
You seem to be very knowledgeable about FATCA and so will be aware thatt here are two types of model inter-governmental agreements that the US government has put forward to its FATCA treaty partners: In one model (IGA1), the treaty partner’s government collects data from financial institutions in its jurisdictions and passes it to the IRS. In the other model (IGA2), the treaty partners’ banks register with the IRS and pass the data directly.
The difference is important because in IGA2 there is no automatic exchange of information at the government level. The treaty partner’s government acts as facilitator of its banks registration with the IRS and enables them (for instance by waiving domestic privacy laws) to comply with FATCA requirements.
Under IGA2 the ultimate decision to exchange information sits with the bank and not with the treaty partner’s government. In theory at least, the bank could refuse to exchange the data. That would of course never happen because such a non-participating financial institution would suffer a 30% withholding tax on all US Dollar transactions and shut itself out of 80% of the world’s financial system, making itself unviable.
Obviously the EU partners cannot make the same threat against Luxembourg or Austria, since both are parties to the EMU treaties, and their central banks are part of the ECB system. In any event, the application of a 30% withholding tax against the two countries would be discriminatory under the EU Single Market rule.
In the case of Luxembourg, there appears to have been a genuine, albeit very surprising, reconsideration of the benefits and costs to the banking industry of maintaining strict banking secrecy.
Thanks for the in depth reply MRubio! That’s really good insight into the ramifications on the difference between the two models. It makes me wonder more as to the reasoning behind the shift in position – I can’t imagine this will help the banking sector. The only thing I can think of would be to give up bank secrecy in return for some leeway in other areas of financial sector.
I suppose in this regard Luxembourg is actually in a better position than Switzerland currently is. Switzerland opted for the model 2 IGA, it’s not within the EU and so needs to negotiate rights to participate in the single market. This means that the EU can strongly encourage Switzerland to do automatic information exchange in return for access to the single market.
Mr Matti,
Switzerland has already negotiated a series of agreements with the EU that gives it access to, depending on estimates, 80%-90% of the Single Market. There are almost no conceivable legal and political scenario under which these agreements could be rescinded, as it would essentially requires each of the 27 (soon 28) member states’ legislatures to denounce them.
However Switzerland is extremely keen to extend its access to certain sectors including crucially financial services (and electricity). I would expect the negotiations to focus on the EU allowing free access to the Single Market to Swiss banks in return for Switzerland agreeing to a limited, time-delayed introduction of automatic exchange of information.
Unfortunately Mr. Rubio, you are wrong again. The IGA2 banks must hand over the names of relacitrant customers to the US, once request has been made. That’s part of the deal with the attached TIA. This then is “indirect automatic excnage of info”. Similarly then in a equivalent EUSD, if a EU resident customer of a LU paying agent chooses withholding, the EU MS can ask for the details of the recalcitrant customer.
Thanks Mark
Mr Morris
I am not wrong at all.
You are right that under IAG2, financial institutions that elect to comply with FATCA must obtain their customers’ consent prior to passing their data to the IRS. Customers who object are defined as “recalcitrant”. The IRS has then the ability to make a group request for information, according to the OECD standard, to obtain the recalcitrant depositors’ accounts data.
However, what you seem not to understand is that under IAG2 (there are different variations of IAG2s, but the conclusion remains broadly the same), a financial institution (as opposed to its individual customer) can elect to not comply with FATCA, and suffer the 30% withholding tax. In that case, there would be no recalcitrant customers, and furthermore the IRS could not make a group request. Indeed, since the depositors have not exhibited a particular pattern of behavior (objecting to the exchange of their information), the request would be considered a “fishing expedition”, and be disallowed accordingly.
The negotiators of IAG2 (Japan and Switzerland mainly) were very concerned to avoid creating government-level obligations beyond the existing OECD standard agreements, and have largely succeeded.
I am not convinced by your comment that an EU member state can ask for the details of a depositor solely on the basis that the customer has opted for the withholding option, since the law specifically allows this (hence no “recalcitrance”). what you are suggesting would amount to issuing a speeding ticket to any owner of a fast car.
I sincerely hope the world at large denies banking licences to any con-cooperative bank
Mr Murphy
In the case of the United States, that will not be necessary. No financial institution in the world can afford to be cut off from the US Dollar markets. You only have to look at the state of the Iranian financial system to convince yourself of that.
The situation is different in Europe, due to its member states’ infinitely more limited economic and financial leverage. However, there is an undeniable fallout from FATCA. Even though the most-favored nation clause is demonstrably legally irrelevant, it has great political significance and must be a factor behind Luxembourg’s (and apparently now Austria’s) more flexible stance.
The interesting next step is Switzerland which, as a non-EU member, will find both much easier and more difficult to resist demands from the EU and its member states.
Funny, all over the news today that the EU finance ministers have issued an ultimatum to LU / AT to change over to AEI based on FATCA. This derives explicitly from the most favoured nation clause of the mutual assistance directive. There is no pedantics over customer consent, etc. With you I guess it’s a case of “the whole army is out of step, except me”.
Mr Morris
You have probably noticed that the ultimatum (your words) was issued by five EU finance ministers, who all have signed up to IGA1, and not IGA2 (please refer to my earlier post for an explanation of the difference between the two IGAs).
I am not aware of which type of IGA Austria and Luxembourg are negotiating, as only this will determine the applicability of the most-favored nation clause.
Hi
I would just be pleased to see that US citizens also declare that they have or do not have any revenues from Luxembourg (or other FATCA country), when they open a bank account in the States: F*** Bureaucracy.
However I have a suggestion :
An annual wealth tax on the market value of real estate situated in the European Union at about 1% (so after a 100 Years it have would been given back to the community), that the owner is required to pay to the European Union through the tax administration of his residence, should be introcuded. A tax free amount of 500.000 Euro (or average value of a house in his region) for each taxpayer could be considered, in order to exempt the owner-occupied houses. This requires of course a cadastre at an European level (cadastral map).
It would be a bearable contribution for « the rich » to the European Union and over a longer period it could reveal unexplainable variation in the wealth of dishonnest citizens.
PS I hope YOU don’t have any undeclared account on the Cayman Islands, Delaware or elsewhere, Mr Murphy 😉
Let me assure you – the only account I ever had outside the UK was a current account in Limerick, Ireland, used when I worked there occassionally, and closed so many years ago I can hardly recall it