The winds of change  blow through  Switzerland.jpg

The winds of change  blow through  Switzerland

By BILL BLEVINS [email protected]

Bill Blevins is the 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.

Switzerland has offered banking secrecy since 1934, and since it is considered such an intrinsic part of its growth as a financial centre, it was hard to imagine a time when secrecy would be overturned or even abolished.

However, Switzerland has no choice but to move with the times and while some level of financial privacy may survive, it is unlikely to be for tax purposes.

While there has always been some criticism levelled against its secrecy laws, they have come under increased attack by western governments in the wake of the financial crisis.  

Bern has had to make wide concessions to avert international sanctions and in March agreed to co-operate more on tax evasion with foreign governments.

It has bolstered dual taxation agreements with various countries to ease banking secrecy and allow wider information exchange on banking details of foreign customers.  

At the end of September, the Organisation for Economic Co-operation and Development (OECD) removed Switzerland from its ‘grey list’ of uncooperative tax havens after it signed its 12th tax information exchange agreement.

A pivotal moment came in August when the US tax authorities were able to penetrate Swiss banking secrecy and force UBS bank to disclose the names of around 4,450 wealthy American clients.

This capitulation, along with the global crackdown on offshore tax evasion, has dented the allure of offshore banks, with bankers and industry experts going as far as to say that US success against UBS has killed traditional offshore banking.

Angela Knight, Chief Executive of British Bankers Association, commented: “The key issue is: what are you wanting from an offshore centre? At the moment, what is not a workable proposition is whether there are tax advantages and confidentiality advantages.These are rushing out the window right now”.

The tax-writing Finance Committee of the US Senate warned that the UBS settlement is just the start of a much more aggressive crackdown against offshore banking and privacy.  While it represents an “important step in the fight against offshore tax fraud… the fight is far from over”.

Further doubts about the strength of Swiss secrecy were raised when the French government obtained a list of 3,000 suspected tax evaders holding around three billion euros in Swiss bank accounts.  

The government received much of the information from two Swiss banks operating in France which had volunteered the information, and the rest came from its own tax investigation.

Under French law, banks are obliged to reveal details of transfers and accounts in France, including any beneficiaries abroad, upon request by the tax authorities – a common obligation in European countries where there is no banking secrecy.

On September 7, Swiss private bankers at the European Private Banking conference appeared to have accepted that banking secrecy for tax purposes is coming to an end. Boris Collardi, Chief Executive of Julius Baer, said: “Banking secrecy will continue to exist, but not for tax reasons. Private banks will have to offer services on a fully compliant basis.”

Pierre de Weck, Head of Private Wealth Management at Deutsche Bank, admitted that increasingly his operation will be focused onshore. Efforts were being made to move clients to onshore accounts, though he did not expand on how this would work.  

On September 17, Swiss bankers attempted to halt international pressure on banking secrecy by calling for a broad withholding tax to be introduced on earnings generated by non-resident investors.  

Chief executive of the Swiss Bankers Association, Urs P Roth, told a news conference: “The model would generate tax revenues while respecting the privacy of bank clients and it would represent an efficient alternative to a system of automatic information exchange.”

The suggestion is that it will be broader than the EU Savings Tax Directive – it would cover dividends, income from collective investments and capital gains, and apply to legal entities as well as individuals.  

However, both the EU Directive and this new proposal only cover income generated from capital held in Switzerland. Neither deal with untaxed capital brought into Switzerland, and with Western governments so keen to increase their tax revenues by taxing monies previously hidden out of sight, they are likely to continue to press for increased tax transparency rather than a withholding tax.

Dave Hartnett, HMRC permanent secretary for tax, recently told Business IFC that he considers the current tax information exchange on request as just a first step. Instead, he sees automatic exchange of information as “the benchmark” and this is the position he would like to “reach as standard”.

As de Weck of Deutsche Bank said, “our big offshore centre has to learn the onshore skills to survive”.  

The winds of change are blowing very strongly through Switzerland.  If banking secrecy does survive, it will be watered down to the point where it is impossible to hide any money away from the taxman.  

You don’t need to bank in Switzerland for these changes to potentially affect you. Once Switzerland changes, other financial centres will follow suit. The Isle of Man has already said that as from July 2011 it will automatically report on every single bank account owned by EU residents.  

There are legitimate arrangements available throughout the EU that allow you to reduce taxation, sometimes significantly. You may also be able to retain a level of financial confidentiality, and all within the law.  Speak to an experienced tax and wealth management adviser like Blevins Franks to discuss your options.

To keep in touch with the latest developments in the offshore world, check out the latest news on the Blevins Franks website by clicking the link on the right of this page.