Swiss Banks Get Tough With European Clients

25.05.10

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Swiss banks are tightening up on Europeans whom they suspect may be evading taxes in their home jurisdiction. It is Switzerland?s latest quest to shake off implications of being known as an ?unco

Swiss banks are tightening up on Europeans whom they suspect may be evading taxes in their home jurisdiction. It is Switzerland?s latest quest to shake off implications of being known as an ?unco-operative tax haven? and pursued by governments in their clampdown on tax evasion.

From now on European clients will find it harder to hide behind Switzerland?s famous banking secrecy laws which in turn will threaten Switzerland?s reputation for client confidentiality. Around 80% of funds placed in Switzerland by Europeans are undeclared and not taxed in their country of residence.

Switzerland has already announced that it does not want undeclared foreign assets in Swiss bank accounts and will talk with other jurisdictions for ways to prevent undeclared monies being placed in Swiss bank accounts. In addition, Switzerland has said that it is also considering a withholding tax with the revenue being forwarded to the account holder?s tax authority. The tax would be raised on a broad base of assets including bank interest, dividends, capital gains and investment income. Switzerland currently withholds tax under the European Savings Tax Directive but on interest payments only. Switzerland is also considering requesting clients to sign a declaration that they are up to date with and compliant with tax due in their home jurisdiction. Some Swiss banks are requesting to see signed tax returns.

Ray Soudah, Head of Millenium Associates, an independent advisory firm to the global financial services industry was quoted in the Wall Street Journal as saying: “We are in the midst of a transformational period both culturally and operationally. Tax-compliant wealth management will become the product in Switzerland, not bank secrecy and a tax haven.”

Now Swiss bank UBS is spearheading a drive to closely scrutinise European clients whom they think could be tax evaders. As well as undermining Switzerland?s reputation for banking confidentiality and client privacy, such action will probably reduce the bank?s profitability. Nevertheless, UBS says it is pursuing tax compliance from European clients following an international crackdown on non-conforming tax jurisdictions.

UBS clients already have to sign a statement to the effect that any structure based in a traditional tax haven such as the British Virgin Islands which they hold with the bank is tax legitimate. Bankers at UBS and other Swiss banks are no longer allowed to travel abroad to see clients if the client is a possible tax evader and last year accounts held by US clients in Swiss banks were closed.

Swiss bank Julius Baer has said that this year every German account holder would receive a tax statement – a practice which could extend to other foreign clients.

Other banks are also taking defensive action. Bank Sarasin & Cie is curtailing the range of investment products available and restricting activity in the accounts of anyone suspected of not paying their tax. In some cases, bank accounts have been closed. Overall, new accounts are facing strict due diligence and many account holders wishing to move their portfolios have to reform them into fully compliant structures.

Tax ?amnesties? in the UK, US, France and Italy have reduced the amount of money held in Swiss banks as clients affected withdraw funds to repatriate them in their home jurisdiction. UBS bankers have encouraged clients to take advantage of these amnesties to get straight with the tax system. There have also been several incidents of stolen data containing names of suspected tax evaders and which were offered to German and French authorities and which has further impacted on Switzerland?s banking secrecy principles.

A long running battle with the US authorities over disclosure of names of suspected tax evaders has also highlighted Switzerland?s standing as a ?safe? financial centre where assets can be shielded from the taxman. US citizens are being prosecuted for tax fraud which involved Swiss banks and banks in other countries, one of which has been identified as the UK?s HSBC Holdings. Two clients of UBS have agreed to pay a total of US$25.2 million alone in civil penalties for not disclosing their Swiss bank accounts and have received prison sentences. Other UBS clients have pleaded guilty to criminal charges for not reporting millions of Dollars deposited in Switzerland.

Most of the people being prosecuted were included in the 250-300 names which UBS came under pressure to supply to the US authorities last year as part of a US$780 million settlement with the US Department of Justice over US citizens evading tax in UBS.

UBS also agreed to hand over 4,450 names of US account holders to the US tax authority. The agreement was declared as unenforceable by the Swiss Court which stated that there were insufficient legal grounds for providing treaty assistance in around 4,200 cases of continued and serious tax evasion. Tax evasion is currently accepted in Switzerland while tax fraud is a criminal offence. The Swiss parliament is now considering a revised agreement which would make the settlement conform with Swiss law and international tax standards. A vote on the agreement is expected to take place in June.

Despite its adamancy that it will continue to protect the identity of banking clients, Switzerland?s banking secrecy principles are slowly being eroded by the international pressure for tax transparency. Swiss banks are fast losing their allure for those who prefer to evade the law and hide their wealth in the jurisdiction. But there is no real sense in doing so as there are tax effective structures available which can legally mitigate tax liability while being fully disclosed if legally obliged to do so. A wealth management firm such as Blevins Franks can advise you on all the issues while keeping you tax compliant.

By Bill Blevins, Managing Director, Blevins Franks

21st 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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