Rich Germans nervously await Swiss tax deal

Merz (front) could be signing the deal with Schäuble as early as Thursday Keystone

Wealthy Germans with undeclared Swiss bank accounts are hoping a proposed tax treaty between the two countries will save them from expensive punishments.

This week, Switzerland and Germany will sign up to negotiate a double taxation accord. It is reported that bank clients will remain anonymous provided they pay back-dated and future taxes to Germany.

The Swiss finance ministry said on Monday that German Finance Minister Wolfgang Schäuble would travel to Bern to sign the agreement on Thursday – Merz’s last day at work before he hands over to successor Eveline Widmer-Schlumpf.

Schäuble and Merz will also sign a declaration pledging to begin talks on tax matters.

Merz will first travel to London on Monday to meet British Chancellor of the Exchequer George Osborne and sign a similar declaration, the finance ministry said.

Many holders of secret Swiss bank accounts have been made to sweat in the last year as the German authorities paid for stolen data that could reveal the identity of clients. The latest case involved the German city of Münster paying €1.5 million (SFr2.03 million) for a CD with information of around 200 Swiss accounts.

The German offices of Credit Suisse bank were raided by German tax investigators in March, reportedly using such stolen information.

The practice of paying for stolen data has generated much controversy and is similar to an incident involving Liechtenstein two years ago. In that case, Liechtenstein was forced to agree to enhanced exchange of tax data with both Germany and Britain, to whom the stolen data was passed on.

Switzerland has been negotiating a double taxation treaty with Germany for several months. This would most likely compel Switzerland to hand over tax data according to international standards without giving in to demands for an automatic exchange.

“Not cheap but attractive”

Some details of the proposed Swiss-German tax deal have been circulated in the press ahead of the agreement being signed. These relate to how both sides would deal with the thorny issue of previously undisclosed assets held in Swiss banks.

According to media reports, Swiss banks would calculate the financial gains made by secret accounts in the last ten years and pay 35 per cent of this amount back to the German authorities.

In addition, banks would also levy a 25 per cent withholding tax on all future account earnings. The back-dated and future payments would come with the proviso that banking client details would remain confidential and that Germany would not use stolen data to ask for Swiss assistance in tax fraud cases.

“Most Germans with undeclared Swiss bank accounts would probably be happy with this solution,” Swiss tax expert Toni Ammon told swissinfo.ch. “It would not be cheap but I think it would be quite attractive to people who want to become tax compliant without losing their anonymity.”

One advantage of remaining anonymous would be to avoid black marks with the tax authorities, thus reducing the risk of extra attention in future, Ammon added.

Counting the cost

Individuals would have to weigh up the potential costs of complying with such an agreement against the cost of getting caught by the German authorities if they do not.

At present, any German national who voluntarily discloses a hidden bank account would be forced to pay taxes and interest on earnings dating back at least ten years, according to the German branch of international law firm Allen & Overy.

A flat rate of 25 per cent was imposed on the capital gains of accounts in 2009, but before then such earnings were subject to an income tax rate as high as 45 per cent.

In addition, if the original assets invested in the accounts were undeclared then the holder would also have to pay extra taxes, such as value added tax.

A prison sentence of up to ten years awaits a German national who fails to declare an account and gets caught.

While Swiss banks doubtless hope that a successful tax treaty would help normalise cross-border activities with German clients, some observers fear a flight of assets from Switzerland to other countries.

Stick or twist?

Tax law expert Robert Waldburger, of St Gallen University, believes the risk of that happening can only be judged when it is clearly known how much Germans would have to pay in back-dated taxes.

“There is a risk that German clients will take assets out of Switzerland and go to a third country to avoid paying back-dated tax,” he told swissinfo.ch. “It all depends on whether the final figure is reasonable.”

“The attraction of such a deal is that clients would be compliant with German law without having to surrender their names or other details. Individuals would have to decide how much they are prepared to pay for compliance.”

But another aspect to consider is the psychological fear of being found out, according to Ammon. “Most people who open an undeclared account are soon looking over their shoulders and start to have problems. If a compromise can be found to make their accounts legal it would make them happier,” he told swissinfo.ch.

Switzerland’s chief negotiator Michael Ambühl, head of the State Secretariat for International Financial Matters, would not give away any details when interviewed by the Tages-Anzeiger newspaper. But he did confirm that the deal could be struck by the end of October when Swiss Finance Minister Hans Rudolf-Merz steps down.

“We are convinced that this system [of withholding tax] is efficient and correct for both sides,” he said.

Tax attacks

Banking secrecy was enshrined in Swiss law in 1934. For the past 18 months Switzerland has been under continuous attack for helping foreign tax evaders hide their assets.

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 crimes.

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.

Regulator watching

Switzerland’s financial regulators issued a warning on Friday that they would be making sure that banks and insurers comply with international cross-border rules.

The Swiss Financial Markets Supervisory Authority (Finma) issued a position paper saying it would be keeping a close eye on such transactions.

Switzerland has come under repeated attacks in the last two years for helping foreign nationals evade taxes.

A United States tax evasion investigation into UBS forced the Swiss authorities last year to agree to hand over the details of 4,450 clients.

In addition, stolen Swiss banking data has been circulated to several European countries, which are also probing possible links with tax evasion to Switzerland.

Finma warned it could use legal measures against banks or insurers which failed to comply with cross-border regulations in future.