Switzerland, the bastion of banking secrecy, collects tax ...jpg

Switzerland, the bastion of banking secrecy, collects tax ..

Switzerland, the bastion of banking secrecy, collects tax for the EU

ONCE UPON a time, Swiss banks held a certain elusive quality. Secret, numbered accounts were the name of the game!  

There are various reasons for an investor to seek out such confidentiality: not wanting certain members of your family, or business partners, to know about your bank accounts or perhaps just because you believe that private financial matters are, just that, private! But there’s no doubt that there was one particular person many wanted to hide their money from – the taxman. For them, a Swiss bank account meant tax free savings and secrecy.

It was quite a historic occasion when Switzerland signed up for the EU’s Savings Tax Directive, designed specifically to prevent tax evasion and ensure money held in foreign banks was taxed. Taxmen could only guess at how much money was hidden away in Swiss banks, but knew they were losing out on a huge amount of tax. It was unsurprising then that the EU was determined to include Switzerland in its Tax Directive.  

The negotiations weren’t easy and a compromise had to be reached. Switzerland got to keep its banking secrecy, for the time being, but agreed to impose a withholding tax on interest earned by EU residents. The fact that Switzerland agreed to tax bank accounts was a significant step, one few would have forecast years ago.

The current rate of withholding tax is 15 per cent, rising to 20 per cent in 2008 and 35 per cent in 2011. Out of the tax collected, 75 per cent goes to the Member State the account owner is resident in; Switzerland keeps 25 per cent to compensate for additional operating expenses.

Recently, Switzerland released data showing how much withholding was collected by December 31, 2005. This data conceals some interesting facts:

• For the 2005 collection period, the Swiss Tax Administration received approximately 138 million Swiss francs – equivalent to 61 million pounds sterling (89 million euros).

• With a tax rate of 15 per cent, this means the total amount of interest earned was around 407 million pounds sterling (596 million euros).

• Let’s assume the average interest rate was three per cent. This means the amount of capital undeclared to EU tax authorities could be as high as 13,560 million pounds sterling (19,857 million pounds).  

• The data only covered a six month period (July to December 2005), so the real figure is double – it’s possible the undeclared capital held by EU residents in Switzerland is around 2.7 billion pounds sterling (3.9 billion euros)! A staggering sum.  

• And this is only the amount of undeclared capital in just one country! One has to add capital in Jersey, Guernsey, Isle of Man, Luxembourg, Austria, Belgium, Andorra, Liechtenstein, Monaco and San Marino.

• It doesn’t stop there either – money is also hidden away in places like Hong Kong, Singapore, Dubai and so on, so far not included in the Directive.

• And the amount of capital revealed by the Swiss data is only that belonging to EU residents. It doesn’t include money held there by people from the rest of the world.  

The total of money hidden away from the taxman over the world must be staggering, and will lead to further action once the numbers sink in among those in authority.  Finance ministers will be more determined to ensure this capital is declared and taxed.

Think about it – European tax authorities are now receiving 11.25 per cent of the interest earned. This is low compared to some countries’ income tax rates. Many of the people with bank accounts in Switzerland may be in a high tax bracket in their country of residence and should be paying, for example, 45 per cent tax. That’s 33.75 per cent tax that their tax authority should be earning but isn’t.  

Income tax isn’t the only tax that may be due on this undeclared capital – there’s capital gains tax, wealth tax (where applicable) and inheritance taxes. That’s a lot of precious revenue governments are missing out on.

Where will this lead? The EU always said the withholding tax was only for a “transitional period”; its “ultimate aim” is for all jurisdictions to automatically exchange information. This would mean that the interest earned (and, by deduction, the capital too) is automatically declared to your local tax authority. It will be taxed at full rates and, if you haven’t previously declared this capital, you may be faced with back taxes, penalties and criminal proceedings.

Getting Switzerland to agree to automatic exchange of information will be no easy task and, right now, few may believe it will happen. But, at one time, the idea of Switzerland applying a withholding tax was inconceivable too.  

Switzerland is slowly inching closer to the EU. The EU parliament claims EU membership remains a “long-term option” for Switzerland. Twice last year, Swiss voters approved closer ties with the EU and, in July, the Foreign Ministry confirmed it had commissioned a two-year report examining the ways in which closer co-operation with the EU could be achieved.

The EU is likely to use exchange of information as a bargaining tool, and when the day comes that Switzerland decides to join the EU, it will undoubtedly have to drop its banking secrecy laws.

The EU is also likely to turn up negotiations with jurisdictions like Singapore and Hong Kong, to bring them into the ambit of the Savings Tax Directive. And more will be done over coming years to prevent tax evasion on a global scale.  

The data released by Switzerland is highly likely to open a can of worms. What would you do if you were the person responsible for tax collection and you were aware of the hidden capital in Switzerland and elsewhere?

• To keep in touch with the latest developments in the offshore world, check out the weekly news update on our website, www.blevinsfranks.com