Swiss Deal

By Tax-News.com Editorial

A landmark tax deal designed to resolve long-standing antagonisms between Germany and Switzerland was reached earlier this month, and similar agreements between the Swiss and other nations are expected to follow, although this is unlikely to be the end game in the on-going campaign by the high tax nations to end banking secrecy.

The Swiss-German agreement was initialled on August 10 by the negotiators Michael Ambühl (State Secretary, Swiss Federal Department of Finance) and Hans Bernhard Beus (State Secretary, German Federal Ministry of Finance) and it is expected to be signed later this year before coming into force in 2013. The agreement means that while German residents will still enjoy a degree of confidentiality in respect of their Swiss bank accounts, they will now have to pay a price for the privilege in the form of a withholding tax which will be passed by Swiss banks onto the German tax collectors.

The Swiss-German agreement is supposed to put an end to a rather undignified episode in relations between the two countries which has seen the tax authorities in Germany more than happy to purchase stolen data on German residents with offshore bank accounts from disgruntled ex-employees of banks in Switzerland (as well as in Liechtenstein). However, old habits die hard it seems, and just days after the landmark agreement was announced, reports surfaced about the new purchase of a tax data disc by German tax investigators. The allegations have been rebutted by the German Finance Ministry.

An accord along similar lines between Switzerland and the UK is understood to be imminent, with Patrick Odier, head of the Swiss Bankers Association revealing recently that he has "no doubt" that a deal will be struck "very soon".

There has been much speculation over the terms of the UK/Swiss deal during the past few weeks, and it has been suggested that the terms will be much more severe for Britons with Swiss bank accounts than for Germans. Odier has, however, said that the agreement will be "fair and balanced", while maintaining the confidentiality of Swiss banks' UK clients.

France has, for the time being at least, reportedly ruled out the idea of concluding a bilateral tax deal with Switzerland, despite the fact that an agreement could potentially raise substantial amounts in extra tax revenue at a time when the French government is under particularly strong pressure to rein in its budget deficit.

Switzerland and the US are also reportedly in advanced stages of negotiations towards an agreement. The proposed deal in question is said to be on the table not just for Swiss banks, but also on offer to other banks in Europe. There have however been reports of political resistance in the US to any such deal.

It is hoped that any Swiss-US agreement will draw a line under the UBS affair, which resulted in the Swiss bank handing over the names of about 250 US clients alleged to have evaded US taxes, and agreeing to dismantle its cross-border business in the US and pay a USD780m fine. Last month, Switzerland's Federal Supreme Court ruled that the disclosure of UBS customer data by the Confederation's Financial Market Supervisory Authority (FINMA) to the US Department of Justice was indeed lawful.

Swiss deal or no Swiss deal, the Obama administration has proposed many anti-offshore initiatives, and seems determined to push the jurisdiction of the Internal Revenue Service beyond the United States' borders. Examples include the Foreign Account Tax Compliance Act, which expands the information reporting requirements imposed on foreign banks with respect to accounts held abroad by US residents.

The IRS is also attempting to persuade offshore account holders with undisclosed income to make declarations ahead of the closure of its Offshore Voluntary Disclosure Initiative, with the carrot of a reduced penalty framework. Those who refuse and wait for the IRS to find their accounts face punitive penalties on top of any back taxes owed as well as possible criminal proceedings.

It is not just Germany and the US, however, which have a vested interest in the dilution of banking secrecy. And it is not just Switzerland that it the target of this campaign. Indeed, the wider offensive against the world of offshore by the OECD, the EU and their members remains very much alive, despite the targeted jurisdictions having done much to clean up their image in recent years.

Last month, the European Commission asked the European Council for authorization to begin negotiating changes to agreements signed in 2004 by Switzerland, Liechtenstein, Monaco, Andorra and San Marino on the taxation of savings income received by European Union (EU) residents under the Savings Tax Directive with the objective to expand the application of automatic exchange of information to a wider range of savings instruments.

While banking secrecy remains largely intact in many offshore jurisdictions, international agreements that permit breaches of confidentiality in some circumstances, often under the auspices of a Tax Information Exchange Agreement (TIEA) or double tax agreements with equivalent provisions, are becoming ever more prevalent. Dozens of such agreements have been signed, or have entered into force recently, with jurisdictions such as Guernsey, Jersey, the Isle of Man, Bermuda and the Bahamas leading the way.

So with high-tax countries doggedly pursuing their 'anti-offshore' agenda, especially in the context of depressed tax revenues and budget deficits, the long-term survival of banking secrecy seems increasingly under threat.