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Switzerland still under scrutiny

By Bill Blevins [email protected]

Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.

While Switzerland once had the reputation as the place to keep savings out of reach of the taxman, those days are all but over.

In 2005, Swiss banks began taxing accounts owned by EU residents as part of the EU Savings Tax Directive, even though it is not an EU Member itself.

The withholding tax rate was initially 15% but is 35% from this month.

In 2009, after the increased global campaign against tax havens, Switzerland agreed to soften its strict banking secrecy to help other countries catch tax evaders and pledged to comply with standards set by the Organisation for Economic Co-Operation and Development (OECD). 

The OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes recently published nine new reports, or “peer reviews”, on the willingness of various jurisdictions to reveal private bank information.

It included one on Switzerland, released on June 1. 

Switzerland has made considerable concessions, including in recent months, to obtain OECD approval and the peer review noted a number of positive developments.

The country’s approach to exchange of information for tax purposes has changed significantly over the past two years, having historically adopted a restrictive approach, and it has made rapid progress to implement its commitment to the internationally agreed standard. 

However, Switzerland failed the review on several “essential elements”. 

Its agreements for exchanging information and identifying taxpayers are still too restrictive and not fully in line with the standard.

This is because Switzerland currently obliges foreign tax authorities to provide identity information in their requests for information.

Switzerland had been warned that it would fail its peer review because of this issue and has already taken steps to correct it.

In February, the Federal Department of Finance agreed to respect foreign government’s demands for information about unnamed individual’s accounts at unspecified banks, provided the request was not just a fishing expedition. 

However, because the Swiss parliament has not yet voted on this, it could not be taken into account for the current OECD peer review.

Switzerland also failed because of a law which states that if a request for tax information is made by a foreign tax authority, the individual concerned must be informed and allowed to inspect the request and the data to be given to the overseas authority.

The OECD reviewers say the law must be changed to allow “appropriate exceptions to the right of notification and right to inspect the [request].”

In future, therefore, Swiss bank account owners could have their accounts disclosed without their knowledge. 

Switzerland was also criticised for the continuing existence of “bearer savings books” (albeit they are being phased out), and for allowing Swiss companies to issue bearer shares where ownership cannot be established.

This was just “Phase 1” of the peer review, and provided Switzerland has brought a significant number of exchange of information agreements in line with the standard, its Phase 2 review will proceed in the second half of 2012.

Some observers estimate that there is between 300 billion and 1 trillion Swiss Francs (around €245-€817 billion) of undeclared funds in Switzerland.

At the end of March the International Monetary Fund warned that, along with stricter capital rules, the changes to banking secrecy could mean earnings come under pressure as capital is withdrawn from Swiss banks.

According to data from the Boston Consulting Group, US clients have withdrawn almost completely from Swiss banks since 2006.

This follows an extended tax dispute between the US authorities and Swiss banks.   

In August 2009 the US tax authorities penetrated Swiss banking secrecy by forcing UBS bank to disclose the names of around 4,450 wealthy American clients and  brought criminal charges against the bank for helping wealthy Americans evade US taxes.

In February 2009 the bank agreed to pay $780 million (€533 million) to defer prosecution.

The US Internal Revenue Service finally agreed to drop the lawsuit in August 2010, when it was satisfied that the bank was on track to hand over the client data. 

Criminal charges have also been brought against four former UBS bankers and at least 24 former UBS clients.

Four Credit Suisse bankers were also indicted in February on a charge of conspiring to help US clients evade taxes through secret bank accounts.

Here in Europe, German tax authorities have been playing a leading role in cross-border and offshore tax investigations.

In April this year Swiss bank Julius Baer agreed to pay €50 million to the German tax authorities to end a tax evasion investigation.

The investigation came about after the German authorities received information from voluntary disclosures during a recent tax amnesty as well as from a disc of stolen data on secret Swiss accounts.

Germany also has an ongoing inquiry into whether bankers at Credit Suisse helped wealthy Germans evade tax.

Today Swiss banks are unlikely to accept new deposits where the funds are not tax compliant, and they have also closed accounts belonging to clients who they believe are using their accounts to evade taxes in their home country. 

It is risky for anyone to rely on Swiss banks – or banks in any other country for that matter – to provide complete and long-term confidentiality.

The only way forward is through authorised arrangements which allow you to mitigate tax in a legitimate manner.

Ask an international tax and wealth management firm like Blevins Franks for advice on the tax and estate planning opportunities available to you.

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