Implications Of The Switzerland/UK Tax Deal

13.09.11

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The recent tax deal between the UK and Switzerland is quite an achievement for the UK Treasury. It will receive both retrospective and future tax on all bank accounts and other inves

The recent tax deal between the UK and Switzerland is quite an achievement for the UK Treasury. It will receive both retrospective and future tax on all bank accounts and other investments held by UK residents in Swiss financial institutions, and is expected to earn ?6 billion a year out of the agreement ? perfect timing for a government struggling to reduce its budget deficit.

The agreement comes into effect in 2013. British account holders will then have to voluntarily disclose their account to HM Revenue & Customs or their bank will deduct between 19% and 34% of their capital and make an anonymous payment to HMRC. This will cover back taxes owed to the government for previous non-declaration. All future earnings will suffer a withholding tax of 48% on investment and savings income; 40% on dividends and 27% on capital gains. HMRC will also be able to make 500 information requests a year about individuals suspected of tax evasion.

Does this UK/Switzerland deal have international implications?

For a start other countries may decide to open similar negotiations with Switzerland. Germany has already signed a similar deal and in Italy the largest opposition party is urging the government to open talks. The Minister of the Economy is known to be against any such treaty, however, wanting to push for automatic exchange of information instead.

France has also reportedly ruled out the idea for the time being. The budget minister said they have not excluded the possibility, but have not gone ahead yet for reasons of principal and electoral pressures. France reportedly wants to uphold its principles by continuing to actively combat tax fraud and tax evasion. On the other hand, a deal with Switzerland could bring in several billion Euros in 2013 when it needs to reduce its deficit right down to 3%, so I would not be surprised if it does decide to strike a deal after all. The same goes for other indebted European countries like Spain, Portugal, Ireland, Cyprus etc.

These deals seem to suit Switzerland. It retains its prized banking secrecy but the fact that they are taxing accounts for foreign governments helps them discard their old reputation as a ?tax haven? and become a reputable financial centre with a focus on managing tax-compliant assets.

According to Swissinfo, Switzerland is hoping for a ?snowball effect?. The more countries that sign agreements similar to the UK and Germany?s, the fewer which will need to push for automatic exchange of information. Bern has been trying to convince the EU that this withholding tax system is actually similar to automatic exchange of information. When this did not work it began approaching Member States directly, with more success.

While the agreements allows Switzerland to retain confidentiality, tax evaders will not be able to escape their tax obligations anymore and will also lose up to a third of their capital in retrospective tax.

What about EU Savings Tax Directive (STD)?

The UK and Germany have come under some criticism for their tax deals, as they may affect the negotiations for the next stage of the STD. The EU has been working towards automatic exchange of information across the board, to include third countries like Switzerland. It is believed that 25 of the 27 Member States have agreed to this, though this would not include Switzerland.

Swiss and UK officials have reportedly said that their agreement does not change STD negotiations; nonetheless EU officials are not too pleased as they wanted all Member States to ?stick together?.

However, while the UK and Germany would presumably prefer to receive the names and details of tax evaders rather than just the cash, the STD reforms will be long and slow and so they have found a way to raise revenue in the meantime. A senior HMRC official described the deal as ?a pragmatic solution to a seemingly intractable problem?.

The UK agreement takes precedence over the STD, so while the STD withholding tax is 35% (and 25% is retained by Switzerland), under this new deal they will receive 100% of 48% tax on interest income. Also, the STD currently only covers savings income, while the UK?s deal also covers shares, commodities, dividends and capital gains. And then of course there?s the retrospective tax, for which Swiss banks are making an advance payment of around ?385 million.

Looking outside Europe, the US is taking a different approach to the UK and will only settle for full disclosure of information. The US Foreign Account Tax Compliant Act (FATCA), to be unilaterally imposed from July 2013, requires all foreign banks to disclose information on accounts owed by US citizens or businesses, or face sanctions, including large financial liabilities that would affect their branches operating in the US.

The US has already taken a successful tough stance against Swiss banks and UBS has had to pay a $780 million fine for aiding US citizens evade tax and to hand over details of around 4,500 owned accounts. Some Swiss private bankers have been prosecuted and the US authorities are now investigating Credit Suisse.

With the UK and German deals not due to start until 2013, some clients may consider taking their money out of Switzerland ? but where to? The quality of the services available and level of deposit guarantee may be inferior.

Then there?s the fact that Swiss banks will have an obligation to inform HMRC of where money is being moved to, and while this will not include client or bank information, HMRC will then look into those tax havens.

In any case it is dangerous to rely on banking secrecy anywhere in the world these days. Jurisdictions could come under much international pressure if they are seen to happily accept funds transferred there for the purpose of evading tax. Any financial centre looking to the future to establish a respectable reputation internationally will slowly give into international demands for transparency.

While the UK and German tax deals may fall short of the ultimate prize of automatic exchange of information, they provide a very lucrative temporary measure until such time as there is full disclosure of information. The deals hammered another nail into the coffin for banking secrecy. If you are looking to legitimately save tax you need to seek professional advice from an experienced firm like Blevins Franks to make sure you get it right.

Statements relating to taxation are based upon current taxation laws and practices which may be subject to change.

By Bill Blevins, Managing Director, Blevins Franks

2nd September 2011

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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