Switzerland has offered banking secrecy since 1934, and since it is considered such an intrinsic part of its growth as a financial centre it was hard to imagine a time when secrecy would be overtu
Switzerland has offered banking secrecy since 1934, and since it is considered such an intrinsic part of its growth as a financial centre it was hard to imagine a time when secrecy would be overturned or even abolished. However Switzerland has no choice but to move with the times and while some level of financial privacy may survive, it is unlikely to be for tax purposes.
Switzerland hosts around a third of the estimated $7 trillion in global offshore accounts, and while there has always been some criticism levelled against its secrecy laws, they have come under increased attack by Western governments in the wake of the financial crisis. Bern has had to make wide concessions to avert international sanctions and in March agreed to co-operate more on tax evasion with foreign governments.
It has bolstered dual taxation agreements with various countries to ease banking secrecy and allow wider information exchange on banking details of foreign customers. At the end of September, the Organisation for Economic Co-operation and Development (OECD) removed Switzerland from its ?grey list? of unco-operative tax havens after it signed its 12th tax information exchange agreement.
A pivotal moment came in August when the US tax authorities were able to penetrate Swiss banking secrecy and force UBS bank to disclose the names of around 4,450 wealthy American clients.
This capitulation, along with the global crackdown on offshore tax evasion, has dented the allure of offshore banks, with bankers and industry experts going as far as to say that US success against UBS has killed traditional offshore banking.
Angela Knight, Chief Executive of British Bankers Association, commented:
?The key issue is: What are you wanting from an offshore centre? At the moment, what is not a workable proposition is whether there are tax advantages and confidentiality advantages. These are rushing out the window right now?.
Switzerland has not seen the last of the IRS (the US Internal Revenue Service). While the deal resulted in 4,450 names, the IRS expects its investigations into them to yield 10,000 new cases.
The two senior members of the tax-writing Finance Committee of the US Senate warned that the UBS settlement is just the start of a much more aggressive crackdown against offshore banking and privacy. While it represents an ?important step in the fight against offshore tax fraud? the fight is far from over?.
Swiss banks are feeling the consequences. While assets under their management rose by 3.6% in the first half of the year, this is attributed to the stockmarket rally. Overall the banks did not attract new net client money and UBS is continuing to experience client withdrawals.
Further doubts about the strength of Swiss secrecy were raised when the French government obtained a list of 3,000 suspected tax evaders holding around ?3 billion in Swiss bank accounts. The French government promised to pursue the account holders if necessary, to ?bring them to justice?.
The government received much of the information from two Swiss banks operating in France ? one of them being Credit Suisse – which had volunteered the information, and the rest came from its own tax investigation.
Under French law banks are obliged to reveal details of transfers and accounts in France, including any beneficiaries abroad, upon request by the tax authorities ? and this is a common obligation in European countries where there is no banking secrecy.
On 7th September, Swiss private bankers at the European Private Banking conference in Zurich appeared to have accepted that banking secrecy for tax purposes is coming to an end. Boris Collardi, Chief Executive of Julius Baer, said:
?Banking secrecy will continue to exist, but not for tax reasons. Private banks will have to offer services on a fully compliant basis.?
Walter Berchtold, head of Credit Suisse?s private banking business, agreed:
?Banking secrecy around taxation will go away?.
Pierre de Weck, Head of Private Wealth Management at Deutsche Bank, admitted that increasingly his operation will be focused onshore. Efforts were being made to move clients to onshore accounts, though he did not expand on how this would work.
On the other hand, Konrad Hummler, managing director at Wegelin & Co, the country?s oldest bank, criticised the fact that the authorities are moving towards a system ?criminalising the wealthy? – a sentiment many high net worth individuals may relate to.
On 17th September Swiss bankers attempted to halt the international pressure on banking secrecy by calling for a broad withholding tax to be introduced on earnings generated by non-resident investors.
Chief executive of the Swiss Bankers Association, Urs P Roth, told a news conference:
?The model would generate tax revenues while respecting the privacy of bank clients and it would represent an efficient alternative to a system of automatic information exchange?.
The suggestion is that it will be broader than the EU Savings Tax Directive ? it would cover dividends, income from collective investments and capital gains. It would apply to legal entities as well as individuals.
However, both the existing EU Directive and this new proposal only cover income generated from capital held in Switzerland. Neither of them deal with untaxed capital brought into Switzerland by foreigners, and with Western governments so keen to increase their tax revenues by taxing monies previously hidden out of sight, they are likely to continue to press for increased tax transparency rather than a withholding tax.
After the UK amended its double tax agreement with Switzerland in September, Dave Hartnett, HMRC permanent secretary for tax, commented that ?transparency and information exchange are the foundation on which fair and effective tax systems are built?.
More recently he told Business IFC that he considers the current tax information exchange on request as just a first step. Instead he sees automatic exchange of information as ?the benchmark? and this is the position he would like to ?reach as standard?.
As de Weck of Deutsche Bank said, ?our big offshore centre has to learn the onshore skills to survive?. The winds of change are blowing very strongly through Switzerland. If banking secrecy does survive, it will be watered down to the point where it is impossible to hide any money away from the taxman.
You don?t need to bank in Switzerland for these changes to potentially affect you. Once Switzerland changes, other financial centres will follow suit. The Isle of Man has already said that as from July 2011 it will automatically report on every single bank account owned by EU residents.
All this does not mean you necessarily have to face large tax bills on your savings and investments. There are legitimate arrangements available throughout the EU that allow you to reduce taxation, sometimes significantly. You may also be able to retain a level of financial confidentiality, and all within the law. Speak to an experienced tax and wealth management adviser like Blevins Franks to discuss your options.
By Bill Blevins, Managing Director, Blevins Franks
23rd September 2009