As the Telegraph reported on Sunday:
The European country is known for its banking secrecy and the Treasury estimates tens of thousands of British people have stored £125bn in its institutions without paying UK tax.
Any deal is likely to include a withholding tax, taken by the bank on dividend and interest payments, and a levy on previously untaxed income.
The difficulty of this for the UK is threefold.
First, this deal allows Swiss banking secrecy to continue. That means the abuse will go on, and on, and on. Indeed, it will now have official sanction. In this circumstances to call this a grubby little arrangement to generate a bit cash is being over kind to it. Candidly, it's the sort of deal no self respecting government and no self respecting tax official should be seen to have gone near.
Second, only the UK and Germany are doing this. So they break ranks in Europe and undermine attempts to firstly reform the European Union Savings Tax Directive and second to create universal automatic information exchange - which is the only way to ensure we really crack tax havens.
More important though, if the European Union Savings Tax Directive is reformed as planned - and I sincerely hope it is, then this is a serious error of judgement. Let Mark Morris, the guru of all things to do with the European Union Savings Tax Directive explain:
The tax agreement will be a catastrophic failure because of the revised EU level legislation, which takes primacy over the bilateral agreements:
- The amended EU savings tax will remove responsibility for applying the tax from the Swiss banks and assign it to entities and legal arrangements outside of Switzerland. Therefore the Swiss will not collect a fraction of taxes promised.
- In addition Swiss banking secrecy is compromised by the new external Paying Agents Upon Receipt reporting obligations.
- Furthermore, the UK and Germany cannot grant market access to Swiss banks without EU approval.
- The Rubik proposal is fraught with loopholes.
Therefore the Swiss will not collect a fraction of the forecast fiscal revenues, Swiss banking secrecy is not guaranteed and Swiss banks won't get access to treaty partner markets. It doesn't make sense why any party would continue the tax agreement.
Click on the report to read why the agreement will fail...
I think Mark is right, for all the technical reasons noted and precisely because this new deal will nbot collect the tax the Swiss claim.
I am well aware this blog is read in the Treasury. Can I urge they exercise a little caution before putting ink to paper by reading Mark's report? It may be a very good deal if they did so. Much better than the one on offer from the Swiss.
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I can’t see what was wrong with the Liechtenstein agreement – why couldn’t the UK agree something similar with Switzerland?
Liechtenstein made that deal with the UK because UK clients don’t even make up 1% of their clients. So to snitch on a tiny fraction in order to claim “transparency” is a low cost.
If Liechtenstein does a similar deal with Germany and Austria, I’d eat my hat. A leopard doesn’t change it’s spots.
I would surely be out of my depth if I tried to debate with Mark Morris on this issue. But a few things do not add up here.
Most of Mark’s argument is that the billateral treaties are of no relevance because (i) the fiscal revenues will be negligible because the revised EUSD will ensure that all deposits in Switzerland will be taxed outside Switzerland (through non-Swiss paying agents), and (ii) the banking secrecy will be open because under the revised EUSD, the paying agents will report all taxable transactions by non-resident holders of Swiss accounts.
That looks far too simplistic and really begs the question: what is the big deal about Switzerland? Mark makes it sound like it only takes a few changes to the EUSD (to which Switzerland is not even a party) to break its banking secrecy and to recover any taxed allegedly evaded there. The problem is surely more complex. To start with, any agreement between the EU and Switzerland will be separate from the EUSD, and the negotiation of its terms will reflect the agreements reached with Germany and the UK. Further, the agreements will in fact not be between Switzerland and each member state (the EU only has negotiating authority, but treaties must be ratified by each member state’s legislature).
Incidentally, isn’t the consensus that the revised EUSD is going nowhere fast in its current form? Both Austria and Luxembourg have indicated that they would not agree to it unless the current withholding regime was made permanent.
Thanks. D
a) The revisions are on track
b) Switzerland is covered – the EUSD covers more than 40 jurisdictions
c) Evasion happens because it is state backed – Swiss state backed. The new SD removes that backing
d) The UK and Germany are not allowed under UK law to do some of the things they’re doing, in my opinion
It is a common mis-conception that Switzerland is covered by the EUSD, but it is most definitley not. Switzerland’s participation in the scheme is through a series of billateral agreements with each member state. As I said in my previous post, any revision will be subject to negotiation, assuming the EU Commision receives negotiating authority on this, which can only happen if/when both Austria and Luxembourg agree.
By the time these negotiations eventually take place (they will, that we can be sure of), the treaties with Germany, the UK and numerous other countries who have expressed an interest in the arrangement will have been signed, ratified an implemented.
I am surprised about your comment a). Have Luxembourg and Austria been left out of the memo distribution list?
D
Darren,
Switzerland is party to the EU Savings Tax Directive. In fact, they have an agreement to “expeditiously” adopt equivalent measures to changes to the directive as per clause 18. Furthermore, the changes which affect Switzerland actually occur outside of Switzerland. If you think Switzerland is badly impacted, there are even harsher consequences for Caymans (all their funds), BVI (all their IBCs), Liechtenstein (all their foundations and Anstalts) and Guernsey & Isle of Man (all their trusts and companies subject to auto exchange). Switzerland is actually the least affected.
The EU Commission would not object to the savings tax directive amendment be approved with the “externalities condition” asked by Luxembourg and Austria. The automatic exchange of information can be a separate issue. However, it is the EU Council of Finance Ministers which is demanding automatic exchange of info from those two countries. I would guess that Luxembourg & Austria will get their way and that the EUSD amendments will pass with the withholding tax option intact, until Switzerland agrees on automatic exchange (which will happen shortly after hell freezes over).
Regarding “it only takes a few changes to the EUSD to break Swiss banking secrecy..”. The amendments have taken 4 years to draft and involved tens of thousands of man hours of consultations with industry experts. No quick and easy feat.
Mark – you may say it is semantic, but Switzerland is not party to the EUSD. The actual document between Switzerland and the EC (in fact its member states) is titled “Agreement between the European Community and the Swiss Confederation providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments”. This agreement does not commit Switzerland to adopt any changes made to the Directive itself.
You seem to take the view that the revised EUSD will retained the withholding tax option for Luxembourg and Austria. This is reasonable considering that neither country will ever accept automatic exchange without Switzerland (and probably Hong Kong and Singapore) also agreeing to it. Maybe you can make Murphy see the light of day on this issue.
I still do not understand your earlier contention that the new EUSD would break Swiss banking secrecy. It may force non-Swiss entities to disclose taxable transactions settled in Swiss bank accounts, but it will not force the Swiss institutions themselves to any incremental disclosure.
To conclude, I think we are reaching an overall positive outcome that will balance the revenue authorites right to seek enforcement of national tax codes with individuals fundamental right to privacy.
There is no fundamental right to privacy when it is used to break the law
You are arguing in favour of structures that invariably have a criminal purpose
Your ‘right’ is a fiction of perverted ethics
It is semantic
Let’s deal with realities shall we?
The reality is they’re in
Stop playing silly games or I might think you’re a tax avoider
Richard – you may see from my post that I was not actually arguing in favor of anything. I was only seeking some clarifications to and/or pointing some inconsistencies in Mark’s comments that you originally reproduced.
The main take-away from Mark’s (the guru) own response is that the revised EUSD will retain the withholding option for Luxembourg, Austria (and by extension all non-EU jurisdictions applying similar arrangements). This will render possible the implementation of the revised EUSD, to every party’s benefit. This seems like good news to me.
D
Once a entity or legal arrangement discloses the details of the Swiss bank account it holds, then the EU fiscal authority can approach Switzerland with the details in hand to get more info, as per any TIA with Switzerland… It will no longer be a fishing expedition.
Mark – you may have a point here. But the EU revenue authority will still have to explain the purpose (under the relevant tax code) of its enquiry, what precise information is being sought and why that particular information is relevant for the purpose at hand. So the EU revenue is only at best 25% of the way to getting anything from the Swiss banks/government. It may be some progress from the EU revenue’s perspective, but it does not really create additional disclosure requirements on the Swiss (and others’) side of things.
This is interesting.
D
Regarding the comment that Switzerland does not have to agree to changes to the EU Savings Tax Directive. Let’s ignore for now that the EUSD contains clause 18 that says the EUSD will be reviewed and improved every 3 years of operation … In fact, see the second review already under way.
Switzerland has committed to agreeing to the changes as per the very agreement you mention .
Article 13
1. The Contracting Parties shall consult each other at least
every three years or at the request of either Contracting Party
with a view to examining and — if deemed necessary by the
Contracting Parties — improving the technical functioning of this
Agreement and assessing international developments. The
consultations shall be held within one month of the request
or as soon as possible in urgent cases.
2. On the basis of such an assessment, the Contracting
Parties may consult each other in order to examine whether
changes to this Agreement are necessary taking into account
international developments.
3. As soon as sufficient experience of the full implementation
of Article 1(1) is available, the Contracting Parties shall
consult each other in order to examine whether changes to this
Agreement are necessary taking into account international
developments.
4. For the purposes of the consultations referred to in paragraphs
1, 2 and 3, each Contracting Party shall inform the other
Contracting Party of possible developments which could affect
the proper functioning of this Agreement. This shall also
include any relevant agreement between one of the Contracting
Parties and a third State.
Furthermore, Switzerland has said on many occasions it do not oppose the amendments and is in fact incorporated in their Rubik flat tax proposal. What Switzerland did try say in 13(3) that they will look at changes as soon as sufficient experience of the full implementation of Article 1(1) is available. They then said this was 2 years after full implementation i.e. in 2013. The EU Commission disagrees with this 2 year subjective statement and that 2011 is a valid date. In any event, as the amendments can only take effect in 2014, this is a not an issue.
Finally in 2004 when Switzerland started dragging its foot regarding agreeing to the directive, Germany did a go slow on the border regarding free movement of people and Switzerland then rushed through the agreement.
I think the other main point that the Government has missed is that the annual withholding tax is miniscule in the current low interest rate environment – 25% – 40% of say 1% pa is not much of a fee to pay for the benefit of secrecy. What the Swiss know, as does anyone who has dealt with a Swiss Private Bank, is that the real benefit is that the capital is not declared in the owners’ estates on death, thus avoiding inheritance tax. That’s why withholding taxes, even at high levels, are not a deterrent. The Swiss are laughing all the way to the bank, and with the blessing of your Government.
For once, I agree
Mark – Good idea to ignore article 18 of the EUSD since it does NOT apply to Switzerland as a non-member state. Well done also for digging out the agreement. However, I am not sure where in article 13 you read that Switzerland has committed to agree to changes to EUSD. This article only commits the parties to consult with each other on one party’s request about technical aspects of the operation of Article 1. This is very different indeed from a commitment to agree to amend the scope, rates or other core terms (including any move to automatic exchange) of this agreement, let alone to align those with any revised EUSD. I assume that you are not not lawyer, otherwise you would have immediately identified that this article does not create any obligation for either party other than to, well, talk (endlessly if need be).
Your point about Switzerland, whose collective political psyche has been shaped (rather subjectively one must admit) by a sense of resistance to Nazi Germany during World War II, being somehow coerced into agreeing to the directive by a bunch of slow-moving German border keepers is outright bizzarre. In any event, the border has now been “Schengenised” so a repeat of this alleged incident is even more unlikely.
I fully agree however with your view that Switzerland is actually supportive of the amendments to the current EUSD and its countless loopholes, other than the move to automatic exchange which was always going to be an unacceptable red line. In fact, the German and UK government have been smart enough to sense that the Swiss were ready for a deal which the EU commission was unable to put together (the commissioner in charge is a Lithuanian career politician who graduated from college at a time when his country did not even HAVE a proper tax system). This will probably help to break many internal deadlocks within the EU.
As governments raise taxes to support spending – mainly banking bailouts. This is going to lead to further political and economic pressure on the EU states to minimize evasion as well as avoidance of taxes. This will be bilateral,multilateral call it what you like.
Switzerland may find itself being locked out of EU markets if it does not co-operate, this may be irrespective of its historic banking practices. Of course there is the rest of the world to trade with but im not sure the US will not be any different with a $14trillion debt with 10 million on food stamps.