Swiss banking plans face tough scrutiny

Algirdas Semeta (r) says EU law takes precedence over bilateral agreements. Keystone

In his last few days in office, Swiss Finance Minister Hans-Rudolf Merz has pulled off a coup – perhaps – in protecting Swiss bank secrecy in the face of EU pressure.

Both Britain and Germany have agreed to negotiate on a plan to tax at source assets which their citizens hold in Swiss banks. This would circumvent the requirement for an automatic exchange of information about bank clients, which is what the European Union is pushing for.

If the negotiations are successful, the tax authorities would have to request information on a case-by-case basis.

But it is clear that the European Commission is keeping an eagle eye on the planned deals and is determined to keep its members in line.

“We are not worried about any strategy to divide member states,” Emer Traynor, spokeswoman for the EU commissioner for taxation, Algirdas Semeta, told swissinfo.ch.

“We have assurances from Germany and the United Kingdom that they are totally behind our aim of achieving automatic exchange of information within the EU, and of promoting as broad a system of information exchange as possible at an international level.”

Speculation about EU reaction has been rife since Switzerland announced that it was holding discussions with Germany and Britain aimed at regularising undeclared assets already held in Swiss banks, taxing future income from them at source – the so-called “withholding tax” – and easing administrative assistance.

Replenishing the coffers

To avoid a repeat of what happened in 2009, when it came under pressure from the Organisation of Economic Co-operation and Development (OECD) to agree to the automatic exchange of information, this time Switzerland has moved first.

The bargain it has offered to its neighbours goes like this: a lot of money, quickly, to plug the yawning public deficits which have accumulated since the 2008 financial crisis, in exchange for the establishment of a less intrusive system than an automatic exchange of information plus facilitated access for Swiss banks to national markets. Berlin and London have leapt at the idea, while Rome is waiting to see what happens next.

Switzerland has a persuasive argument: taxing the holdings of a country’s citizens would enable that country to get hold of the money straight away, whereas under a system of automatic exchange of information large amounts of data would have to be first collected, and then processed. According to the German press, an agreement could give the German tax authorities as much as €30 billion (SFr 41 billion), which would be more than welcome.

From the Swiss point of view, the plan has a number of advantages. On the one hand, by initiating the change Switzerland can hope to limit its extent, rather than having to suffer the consequences of someone else’s decision. On the other, it drives a wedge into European solidarity and the commission’s strategy of imposing the automatic exchange of information, something Swiss bankers are very anxious to avoid.

European law takes precedence

But the EU Commission is not unduly worried, as long as member states which negotiate bilateral agreements also respect their community obligations.

“If there is a conflict, European law always takes precedence over bilateral agreements,” said Semeta. There is a principle of loyalty between member states, who are obliged to avoid any measures that could endanger the aims of the EU as a whole. And the commission has made clear that one of these aims is the automatic exchange of information.

So once the negotiations have been completed, the commission will look very closely at what is actually contained in the agreements. It is too soon to say whether Commission experts would accept the combination of a withholding tax with a system of extended assistance, under which only the name of the client but not that of the bank would be provided.

Their attitude will certainly depend largely on the rate of the withholding tax and how helpful the assistance turns out to be.

So in fact the Swiss have little room for manœuvre. If in the end the tax rate is too high and the assistance too wide ranging, the EU might regard this as “equivalent” to the automatic exchange of information. But it would make Swiss banks less attractive to potential clients.

On the other hand, should the opposite be the case, the Commission might not accept the agreements. It would then continue to attack banking secrecy.

“It might also start making tougher demands on Switzerland in other areas where we would like agreements, such as agriculture and the chemical industry,” a Swiss expert on EU dossiers told swissinfo.ch.

Tax attacks

Banking secrecy was enshrined in Swiss law in 1934.

France and Germany launched an attack on Switzerland in October 2008 for allegedly helping foreign tax evaders hide their assets.

The country has been under continuous attack over the issue ever since.

The OECD placed Switzerland on a “grey list” of uncooperative tax havens in April 2009. The Swiss were removed in September after renegotiating more than 12 double taxation treaties, but they have refused to automatically transfer information to tax investigators without proof of wrong-doing.

Several countries, including Italy, France, Britain and the US, launched tax amnesties last year in an effort to repatriate assets from tax cheats.

Switzerland was particularly annoyed at the aggressive Italian amnesty that saw surveillance and tailing of cross border suspects entering Switzerland.

The most damaging tax evasion case involved the activities of UBS bank in the US. In February 2009, UBS was fined $780 million after admitting helping US citizens dodge taxes. It also handed over data of 285 account holders.

In September, the Swiss government agreed to transfer the details of 4,450 UBS clients to the US – in effect violating Swiss banking secrecy to prevent a ruinous court case for UBS.

Also last year, a former employee of the HSBC private bank in Geneva ran away with client data that he handed over to the French authorities.

Several CDs of stolen Swiss banking data have been bought by the German authorities.

(adapted from French by Julia Slater)