Swiss say 'hard cheese' to tax transparency

by Ben Jones, Eversheds

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19 Oct 2011

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Swiss cheese

SWITZERLAND WAS RECENTLY ranked by the Tax Justice Network as "the world leader in financial opacity" and the "grandfather of the world's tax havens". Two days later, the UK and Swiss governments signed their much heralded agreement to tackle tax evasion by UK-resident Swiss bank account holders, one of a number of such agreements Switzerland has either recently entered into or is pursuing. But will such agreements change the perception of Switzerland as a tax haven?

To a large extent, the UK's agreement with Switzerland, like Germany's before it, represents a significant compromise in the battle against tax evasion. These agreements were born from concerns that tax was being evaded by residents with Swiss bank accounts. To fully clamp down on such evasion, governments need to know which of their residents are involved. However, strictly enforced and protected Swiss banking secrecy laws mean Switzerland refuse to accept any tax evasion proposals from other countries that seek to identify Swiss bank account holders.

The UK and Germany have therefore taken what they can get - agreement to the collection of potentially significant amounts of back taxes owed on the Swiss accounts of their residents together with the application of an ongoing withholding tax on such accounts. However, importantly, Switzerland is able to maintain the anonymity of the relevant account holders. This is not a bad deal financially (indeed it is anticipated to raise approximately £5bn of the UK), but such agreements completely fail to tackle cause of the perceived evasion - banking secrecy.

Pragmatism rules

This could be seen as a pragmatic approach, for Switzerland has consistently guarded its secrecy rules in the face of continued attempts to force greater transparency. The EU failed when negotiating the extension of the EU Savings Directive to Switzerland, achieving only a similar anonymous withholding tax, and the OECD had to threaten to place Switzerland on its tax haven blacklist before Switzerland agreed to implement OECD standard tax information exchange agreements (and even then, Switzerland stated it would only respond to specific and justified requests, giving these provisions limited application).

Unsurprisingly, there is likely to be a significant amount of self-interest behind Switzerland's fight to preserve its banking secrecy laws. The financial services sector is very important to the Swiss economy and is internationally renowned. There are many good reasons for this, a stable economic and political environment, low taxes, a mature and experienced financial services market, but these factors are not unique to Switzerland. Banking secrecy gives Switzerland a competitive advantage that the Swiss government clearly considers would be costly to give up (some studies estimate the value of banking secrecy to the Swiss private banking sector at 10-15% of the market value of such banks).

However, maintenance of such secrecy inevitably allows continued opportunities for residents of other countries to evade tax. The tax agreements will add to the coffers of the relevant nations, but it would be naïve to assume they represent a panacea for all tax evasion through Swiss bank accounts by their citizens. This is clearly the view of the US, who recently broke off tax agreement negotiations with Switzerland over the requirement to maintain banking secrecy, favouring instead the use of its probably incomparable economic clout to force holes in the veil of Swiss banking secrecy and fully pursue US citizens involved in tax evasion.

While it may seem that Switzerland is opening up to the world from a tax perspective and shedding it's "tax haven" label, by reason of its dogged protection of the sanctity of banking secrecy, Switzerland is likely to continue to be known by many as a "tax haven" for some time to come.

Ben Jones is an associate at law firm Eversheds LLP

Image credit: Shutterstock

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