Rubik gives EU new hope for Swiss tax accord

New to the EU presidency, officials in Copenhagen see scope for a new EU-Swiss agreement on tax imagepoint

Denmark, which took over the presidency of the European Union in January, has set its focus on reopening negotiations with Switzerland on taxation issues.

On February 2, high level experts from the 27-member block will meet in Copenhagen to revisit the debate on taxation of savings accounts. The basis of their discussion is a recently-penned Danish memo on “recent international developments” which the country believes justify new talks.

A first step will be the need to convince Luxembourg and Austria to lift their vetoes on the opening of new negotiations between the EU on one hand, and Switzerland, Liechtenstein, Andorra, San Marino and Monaco on the other.

The EU also wants to ensure that these five third-party states agree to adapting existing accords  with the EU on taxing savings to bring them into line with changes to European legislation.

In fact, the EU also wants to extend the scope of taxation – currently limited to interest earned on savings accounts held by individuals – to new products such as life insurance contracts and intermediary entities such as foundations and trusts.

Rubik for all

For the Danes, the time has come to test the Swiss. The memo points out that as part of the so-called Rubik agreements with Germany and Britain, Bern has made “significant specific concessions”, the benefits of which should be extended to all member states of the EU.  

Of course, the Rubik system relies on a withholding tax at source which preserves Swiss banking secrecy. But the memo suggests the scope of application for the accords is very large, covering all income made by investors in Switzerland.

The Danes have also pointed out that Switzerland and its banks have made many concessions to the US by delivering the names of clients to American tax authorities and by facilitating the exchange of information between the two countries.

On December 13, 2011, the Swiss Senate “accepted a very broad interpretation of the provisions for the exchange of information in the double taxation agreement between Switzerland and the United States”, the Danish memo says.

Provided that the House of Representatives follows suit, Washington “could, as it so desires, request information about groups of investors with a particular pattern of behaviour without the prior requirement of individually identifying the people concerned”.

For Copenhagen, “it will be important that all the members state of the EU coordinate their positions with a view to guaranteeing that Switzerland treats its European partners at least as well, if not better than it does the United States”.

The Fatca threat

Whether these arguments convince Austria and Luxemburg to make concessions is doubtful.

The two countries insist on being placed on an equal footing with Bern, despite European legislation not allowing it. It stipulates that the two countries must abolish their banking secrecy when the EU concludes agreements with other countries, including Switzerland.

In this context, the Danish presidency of the EU is also evoking the bogey man of the American Foreign Account tax Compliance Act (Fatca).

Set to come into force on January 1, 2013, Fatca will impose total transparency on non-American financial institutions in relation to the deposits and assets of all people with obligations to the US Internal Revenue Service. Financial penalties will be imposed on those banks which refuse to play ball.

“We urgently need to find a solution with the United States to resolve the numerous problems that the Fatca invokes for European financial institutions,” notably in terms of administrative costs, the Danish memo says.

The EU has already opened negotiations with Washington. In this context, it hopes to convince the US to soften its position by playing up “big similarities” between the aims of Fatca and the European legislation on taxing savings – that is, fighting tax evasion – as well as the means of achieving it.

That said, “the American authorities have noted that the scope of application for the actual directive on savings taxation is lower than that of Fatca”, the Danish memo says. In short, “it is clear that a rapid agreement on its extension will help us to obtain satisfactory results in our discussions with the United States.”

Something that would also be in the interests of the important Luxembourg financial centre.

Rubik

The Rubik principle was devised by the Association of Foreign Banks in Switzerland. 
 
The project wants to separate income from wealth and hand over tax at source to third countries, while keeping the Swiss bank account holder’s anonymity. 
 
The inventors say this strategy will also afford more protection to foreign bank employees in Switzerland from legal action by third countries. 
 
It is hoped that guaranteed anonymity will encourage foreigners with assets being managed in Swiss banks not to take them away.

Switzerland agreed to withholding tax deals with Germany in August and Britain in October that preserve banking secrecy.
 

The agreements signed with Germany and Britain allow for a regularisation of non-declared assets held in Switzerland by citizens of these countries. Where applicable, a lump sum tax payable on deposited capital will be taken by the banks and transferred anonymously to taxation authorities in Britain and Germany. The initial lump sum payments come with the agreement that Germany and Britain will renounce claims on unpaid taxes from the past.

The rate of taxation will vary between 19 and 34 per cent. For future taxes on capital, a withholding tax on interest and dividends will be claimed. For Germany, the applicable rate has been fixed at 26.375 per cent, the same rate as within that country. In Britain, the rate will vary between 27 and 48 per cent depending on the category of returns on capital.

Withholding tax

Is a tax which is levied by a bank and returned anonymously to a tax authority. In effect, it relieves the taxpayer from tax due on income from capital.

In the case of agreements between Bern and other countries, foreign clients of Swiss banks will have two options: declare their accounts to tax authorities and pay up to 35 per cent tax on interest, or remain anonymous and pay the withholding tax which would amount to about a quarter of their fortune held in Switzerland. 

(Translated from French by Sophie Douez)