As reported yesterday in Tax-News.com, Switzerland has once again asserted its determination to retain banking secrecy as a keystone of its financial system, saying that its withholding tax regime should be internationally acceptable as regards the taxation of non-resident income flows, and that banking supervision was fully up to international standards. The rejection of a money laundering bill by the lower house of the Swiss parliament earlier in the month was followed by Finance Minister Kaspar Villiger's categoric announcement that the Government considered its defences against money laundering to be adequate.
That may be the case, and may even be sufficient for the FATF and the OECD, but it is not likely to satisfy the EU as regards the Union's attempt to reach a universal system of taxation of savings income.
Mr Villiger said that the withholding tax system, which has been in place in Switzerland for the past 50 years, was much more efficient than any other, and taxed most forms of income at the high rate of 35%.
Well, maybe. The reality is that there are several Swiss corporate forms or structures, some involving Luxembourg, that permit very low-tax treatment of investment income. Some forms of income are not taxed at all in the hands of non-residents, such as interest on loans and royalties. And there is the 'fiscal deal' which allows rich people to live part-time in Switzerland on a very low-tax basis. It's true that your average Joe Punter is not going to be able to use Switzerland as a tax haven, but anyone with reasonably resourceful advisers will be able to work out a combination of structure and instrument to bypass the withholding tax quite handily.
This matters to the EU because its cobbled-together deal at the Feira summit in June relies upon a common agreement to move to information exchange as a way of dealing with national peculiarities on withholding tax, and the EU is never going to be able to believe that secret bank accounts don't conceal tax evasion, no matter how hard the Swiss protest.
Does it matter? The answer to that question depends on whether you think that the EU will be able to surmount the various obstacles it erected for itself in the closing stages of the Feira summit in June, of which Swiss adherence was just one, and maybe not the highest.
First, though, let's be clear what was agreed at Feira: and the answer is nothing. As so often happens with the EU, a messy 'agreement to agree' was dressed up as a bold announcement. The 'Report' (which is all it was) says:
'The Presidency and the Commission shall enter into discussions . . . with the US and key third countries (Switzerland, Liechtenstein, Monaco, Andorra, San Marino) to promote the adoption of (information sharing)' and the UK is to do the same for the Channel Islands, the Isle of Man and the Caribbean dependent territories. Once all these countries have given reassurances that they will adopt information sharing: 'The Council will decide on the adoption and implementation of the Directive (the whole tax Directive) no later than 31 December 2002, and do so by unanimity'.
Among the fifteen members of the EU, Denmark, France, Finland, Germany, Ireland, Italy, the Netherlands, Spain, Sweden and the UK gave it as 'their view' that exchange of information should be introduced within 5 years after the adoption of the Directive (ie by 2007), while Austria, Luxembourg, Belgium, Greece and Portugal are committed only to 'seeking agreement' to the Directive.
This 'agreement' is as full of holes as a Swiss cheese. The EU has squared circles before against all the odds, but this one is as round as they come. Just consider the position of the US: attempts by the Democrat administration to increase the authorities' ability to penetrate US banking secrecy were defeated in the current Republican-controlled Congress amid a frenzy of public libertarian outrage. A Democratic Presidency and Congress is one of the least likely outcomes of forthcoming elections, and even if that is the result, public opinion will fiercely resist any further inroads into individual privacy - in the US this is a much more emotive issue than in most European countries, barring Switzerland.
It may be the case, even probably is the case, that information sharing is the eventual level playing field on which international tax competition will take place, but it is scarcely credible that the EU will meet its self-imposed deadline of the end of 2002.
The conclusions of the Feira Council are at http://europa.eu.int/council/off/conclu/june2000/index.htm, and the tax Directive report is Annex 4.
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