Can Switzerland Hang Onto Its Old Banking Secrecy Laws? – Part 2

07.04.10

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In Part 1 I looked at some of the ways in which Switzerland?s long held principle of banking secrecy is being undermined by various means. The Swiss government realises that it has to change its

In Part 1 I looked at some of the ways in which Switzerland?s long held principle of banking secrecy is being undermined by various means. The Swiss government realises that it has to change its attitude ? so what has Switzerland done and what is it planning, to conform to banking openness?

In March last year in the lead up to the April G20 summit when world leaders were anxious to crack down on tax evasion and recoup lost taxes, tax havens were threatened with sanctions if they did not co-operate. Switzerland agreed to relax its banking secrecy stance and comply with the Organisation for Economic Co-Operation and Development?s (OECD) internationally agreed tax standard. At the time Switzerland did not have tax information exchange agreements with another country and was on the OECD?s grey list of surveyed jurisdictions as having committed to the internationally agreed tax standard but not yet substantially implemented it.

By September 2009 Switzerland was promoted to the OECD?s white list of jurisdictions by completing the requisite twelve agreements as a jurisdiction that had substantially implemented the OECD?s tax standard which ?requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes?. By March 2010 Switzerland had negotiated double taxation agreements with 18 countries based on the OECD standard.

Switzerland has offered to impose a withholding tax with the tax levied being returned to the country involved. The tax would be raised on bank interest, dividends, capital gains and investment income. This tax would be based on more assets than the withholding tax Switzerland levies under the terms of the 2005 European Savings Tax Directive (STD), whereby Switzerland withholds tax on interest only earned on bank accounts held by people belonging to EU Member States. The STD withholding tax rate is currently 20% but is set to increase to 35% from 1st July 2011.

The STD?s withholding tax option was only meant to be a transitional arrangement. The eventual aim was that all participating jurisdictions would agree to automatic exchange of information on interest income of the account holders and tax would be paid in their country of residence. This aim still remains very much the EU?s focus for the future and it is surely only a question of when and not if it occurs.

The withholding tax proposed by Switzerland would raise ?billions per year? according to the Swiss Bankers Association.

?Do you want a lot of money in the next two years or the free exchange of information and get tax on a smaller pie three or five years down the road?? said Raymond Baer, Chairman of Julius Baer, a Swiss private banking group. ?At the end of the day that?s the issue.?

No more undeclared assets

Switzerland no longer wants foreign undeclared assets in Swiss bank accounts. Determined to safeguard the future of its financial centre, the government is preparing to negotiate solutions with individual countries in order to discourage undeclared funds from being deposited in its banks. Finance Minister, Hans-Rudolf Merz, said that the Swiss government no longer wants “untaxed money from abroad” in the local financial system.

In addition, or as an alternative to the proposed withholding tax, the Swiss government would like clients to complete a self-declaration form confirming that they have already fulfilled their tax obligations in their home country. Merz ruled out an automatic exchange of tax information option in Switzerland?s resolve to protect clients? privacy and Switzerland?s reputation for banking confidentiality.

Financial Centre Plan Unveiled

Switzerland?s ruling Liberal party, the Free Democratic Party (FDP), wants to adopt a more developed and concrete strategy for the Swiss financial centre in order to address the challenges it faces and to proactively strengthen its position.

According to the FDP, the challenges which Switzerland currently faces are increased competition from rival financial centres, such as London and Hong Kong, and the mounting pressure from debt-ridden countries, eager to source additional tax revenue.

The FDP?s proposed strategy centres around three axes:

? At national level, the FDP aims to establish a clear distinction between tax evasion and fraud by the end of 2011.

? At international level, the FDP intends to launch a ?white monetary strategy? agreed with individual member states of the OECD by the end of 2011. The FDP also aims to implement the OECD?s standards included in bilateral double taxation agreements, to propose the introduction of withholding taxes in bilateral agreements, and to refuse illegal money from abroad. The FDP is also seeking to renew negotiations with the European Union regarding the STD.

? The FDP also intends to toughen penalties for data theft and industrial espionage.

Radical changes

So for how much longer can Switzerland protect the privacy of its banking clients? The future of offshore banking is transparency and Switzerland needs to radically change its attitude and laws on banking secrecy in order to fight the pressure for international regulation and to keep it popular with both governments and investors.

Tax does not really have to be an issue for wealthy expatriates. There are various tax planning vehicles available which can reduce tax liabilities in your country of residence and also in the UK if it applies to you. For expert advice on how they can help you in your individual circumstances seek a consultation with a tax and wealth management firm such as Blevins Franks.

By Bill Blevins, Managing Director, Blevins Franks

25th March 2010

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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