The FT reported today that the UK is to shortly sign a new tax deal with Switzerland. As it said:
Britons with billions of pounds hidden in Switzerland will pay tax at 50 per cent under a groundbreaking deal that will legitimise their undeclared assets, according to a source familiar with negotiations between the Swiss and British governments.
The agreement, which is expected to be announced this month, marks a shift in emphasis in the international crackdown on tax havens. Over the past two years, the focus has been on lifting bank secrecy and exposing evaders.
Under the deal, £3bn is expected to be raised over the course of this parliament and investors will also pay a one-off retrospective levy in recognition of past unpaid tax.
I've been talking to some people about this. I think that the FT has got this story very wrong.
First, if a 50% tax rate is applied anyone who is not a 50% taxpayer in the UK will either a) tax their move out of Switzerland and suffer the lower withholding rate of 35% available in places like Jersey or b) give up secrecy and declare their tax personally in the UK and so save money. Either way the Swiss lose out and their banking secrecy is compromised so there's no way they'll agree a 50% withholding rate.
Alternatively, I gather the Swiss think that withholding rates applicable in the UK should be used and argue that whatever this rate is that should settle the full tax bill due on the Swiss source income so that they do not have to tell the UK's HMRC who was paid and the recipients need not declare the income on their tax returns so that their right to Swiss banking secrecy is not compromised.
But that would mean the UK would have to agree that the de facto top rate of tax on investment income would now be 20% or every higher rate taxpayer would win by closing their UK deposit accounts and shifting them to Switzerland - after which HMRC would be entirely dependent ion the goodwill and probity of the Swiss for returning any tax that might be due - with all the accounts in question being off limits for any UK tax investigation for evermore henceforth.
Now, as I said of this deal when it was first announced last October:
In a quite astonishing move it seems that the UK has today announced it is to give up British tax sovereignty and has granted power to determine UK taxes to Switzerland instead.
As I explained then:
In other words ... the UK has ... done the following:
1) Granted Switzerland the right to set the effective higher rate of tax on investment income in the UK;
2) Granted Swiss banks an everlasting competitive advantage over UK banks — because it will pay all higher rate tax payers to bank in Switzerland henceforth;
3) Denied the UK tax authority the right to make enquiries of their own choosing about the tax affairs of a British person — the Swiss now being granted the right to decide how many enquiries may be made and whether they are appropriate or not.
4) Granted criminal immunity to Swiss bakers who sell tax evasion — so allowing them to commit ongoing crime in the UK.
In the process the UK is:
a) Promoting tax evasion by its citizens
b) Promoting Geneva and Zurich over London
c) Abandoning its right to tax
d) Abandoning its rights to enforce its laws
e) Alienating the OECD
f) Abandoning the fights against tax havens.
That's not melodramatic: that's what's this announcement implies.
I stand by that. If we sign this deal and the tax withholding rate is anything below 40% the UK has ceded its right to tax its subjects to the Swiss.
I think some Tories will be annoyed about that.
The rest of us should be livid.
And those responsible need to be held to account.
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Is this part of a ‘scorched earth’ strategy by G Osborne, in anticipation of the anticipated financial crisis this autumn? The super-rich will be able to safely deposit their wealth by paying a lower rate of tax,and the 30% difference between UK and Swiss rates would potentially cover their losses from the financial mess.
Now let’s see if this will work.. 😯
Very few UK wealthy individuals have their money in a Swiss bank account in their personal name. It will invariably be in the name of a trust / company (IBC) / foundation for let’s agree “succession planning” purposes. On top of this, virtually every individual’s bank account was moved into entities and legal arrangements in 2005 to avoid the savings tax.
Switzerland does not have any Trusts / Foundations or IBCs. So the usual suspects will be used i.e. BVI company, Guernsey trust or Liechtenstein foundation, etc.
The EU savings tax will appoint these entities and legal arrangements outside of Switzerland as Paying Agents Upon Receipt and they will be obliged to apply the savings tax provisions, even if the bank account is in Switzerland.
So how can Switzerland think it can apply a 50% withholding tax when the Paying Agents Upon Receipt outside of Switzerland must apply the savings tax on the same account, irrespective of what happens in Switzerland. Bear in mind, it is the untaxed status of the entity / legal arrangement that determines if it has Paying Agent Upon Receipt responsibilities, not the tax status of interest received.
So, say Guernsey or Isle of Man Paying Agent Upon Receipt will be obligated to exchange information on their Swiss bank account details. So which UK resident will accept a 50% withholding tax, as well as subject to exchange of info or another 35% tax in the BVI / Liechtenstein.
The only hope for Switzerland, is that the EU Commission adopts the savings tax directive to accommodate Switzerland’s desire to maintain banking secrecy. This will happen the day after hell freezes over.
Mark – what about a Panama-registered company? This is the way many have arranged their holdings. Will this type of structure be affected?
Panama structures affected. 🙁
This is explained here. Panama’s structures included are described in Annex I of the directive amendment. Remember Annex I & III is only an indicative list, as any untaxed entity or legal arrangement is in scope.
Fideicomiso (Trust, governed by local law)
Trust governed by foreign law
Fundación de interés privado (Foundation)
International business company
So if customer owns the Panama structure in individual name, i.e. a shareholder, then the Swiss bank will be the Paying Agent. Obviously a Panama entity/ arrangement cannot be a Paying Agent Upon Receipt. The Swiss bank must then look through the Panama structure to the beneficiary according to EU money laundering directive. The 2nd review underway will deem the founder of a Panama foundation as the beneficial owner.
Now on the other hand, if a Jersey trust owns the Panama IBC, then the Jersey trust as the final entity / arrangement dealing with the customer, will be Paying Agent Upon Receipt.
Also to be wary of, if the Panama entity is managed from within the EU savings tax territory, then the management becomes a Paying Agent Upon Receipt.
If the money is in Switzerland in the first place it is there to avoid tax, this deal is being done so the Swiss can appear to be helping but in reality there will be zero tax raised, and the can is kicked further down the street.
The service the Swiss banks provide at present is to offer to set up a corporate BVI account to avoid any withholding, they don’t do this directly to protect themselves but put you in touch with an offshore company that set up the BVI for you and then they will transfer your cash/assets into the BVI, they will then operate this account as belonging to the BVI rather than the UK or any other EU state so there is no with holding taxes due.
What this agreement will do is make people a little more nervous about Switzerland being a little too close to the EU to really be a safe place to stash your money, Singapore and Hong Kong will continue to steal their business. These countries are not really like traditional tax havens offering breaks to foreigners they do not offer their own citizens (as the UK does ), but charge their own citizens very low rates of tax and allow offshore business the same low taxes, thus it is much harder to make any deals with them.
🙁 Panama structures affected.
This is explained here. Panama’s structures included are described in Annex I of the directive amendment. Remember Annex I & III is only an indicative list, as any untaxed entity or legal arrangement is in scope.
Fideicomiso (Trust, governed by local law)
Trust governed by foreign law
Fundación de interés privado (Foundation)
International business company
So if customer owns the Panama structure in individual name, i.e. a shareholder, then the Swiss bank will be the Paying Agent. Obviously a Panama entity/ arrangement cannot be a Paying Agent Upon Receipt. The Swiss bank must then look through the Panama structure to the beneficiary according to EU money laundering directive. The 2nd review underway will deem the founder of a Panama foundation as the beneficial owner.
Now on the other hand, if a Jersey trust owns the Panama IBC, then the Jersey trust as the final entity / arrangement dealing with the customer, will be Paying Agent Upon Receipt.
Also to be wary of, if the Panama entity is managed from within the EU savings tax territory, then the management is candidate to become a Paying Agent Upon Receipt.
[…] Telegraph has picked up on my story about HMRC’s plans to outsource the making of UK tax policy and the setting of UK tax rates to the Swiss government. […]