Financial Transparency Coalition

Pasted from the TJN blog. By TJN staff and Mark Herkenrath, Alliance Sud

We already blogged about the signing yesterday of the Swiss-German tax deal, and TJN’s opposition to it. This blog goes into a little more detail than before, and outlines some of the salient points of the deal. This is something that matters a great deal – because several other countries are believed to be considering doing something similar. Which, in TJN’s view, would be a grave mistake.

(Our last blog also highlights the strange, even fishy-looking timing of this deal.)

A similar agreement with the UK will follow soon, probably within just days or weeks. It is important that civil society and parliamentarians in the UK and elsewhere understand the treaty and its implications. They will soon be facing a similar deal.

The Swiss agreement with Germany consists of two main parts: a retroactive source (“withholding”) tax on undeclared German assets from the past, and a withholding tax on various kinds of capital income in the future. In both cases, the tax will be raised and transferred to Germany anonymously. And it will be considered “final”. That is, capital holders will no longer have to declare their assets to the German tax authorities. They can stay hidden.

The rate of the retroactive tax will be 19-34%, depending on the amount of the assets and the time span over which they had been accumulated. The income tax that honest German tax payers paid in recent years has been much higher than this. This is one reason why German civil society and left-wing parties have strongly criticised the deal as a very cheap amnesty for German tax evaders.

The withholding tax rate on future capital income will be 26.4%. This is equivalent to Germany’s domestic (final) withholding tax on capital earnings. In the agreement with the UK, the rate will be considerably higher, as the UK taxes income progressively.

Switzerland seems to have succeeded in bilaterally co-opting Germany and the UK. This is a major threat to the European Union’s unified struggle for automatic tax information exchange.

To be clear, however, the Swiss strategy – to send the Germans “money instead of data” – has been only partially successful. German tax authorities will receive money and are promised a framework for receiving some data from Switzerland. Under the new treaty, they will have the right to submit names of possible tax evaders with a plausible suspicion of tax evasion, and Switzerland will then have to collect and communicate these persons’ Swiss banking connections.

In summary: As with the OECD standards, you have to know what you are looking for before you ask for it. This is a very weak form of information exchange.

Still, it is arguably somewhat better than OECD standards, because even though the number of such semi-formal information requests will be restricted to approximately 500 per year, this will make it substantially easier for the German tax authorities to then submit formal requests for more thorough administrative assistance in line with the OECD’s Article 26 (which covers information exchange). However, there will be no information-sharing required for assets placed in banks in Switzerland before January 2013, when the agreement comes into force. As the Neue Zürcher Zeitung (NZZ) said:

“What would happen if Germany swept up all the names of residents of a wealthy suburb – say in Munich – and sent these to Switzerland? This is certainly a sensitive issue and it is still unclear how this will be handled in practice.

The [Swiss] Bankers’ Assocation put this in perspective, saying that the request must be justified for every specific customer, and it must be based on a plausible reason.”

Yet several Swiss observers, including within the federal administration, have stated that a “reasonable suspicion” may be established on the simple fact a person has made various short trips to Switzerland. (There are not many German who haven’t.)

And, remarkably enough, the official Swiss media information sheet on the deal calls the OECD standard (tax information exchange on request) the “OECD’s minimum standards”. This may be the first time any tax haven has implicitly acknowledged the OECD standard as being ineffective with respect to tax transparency. The Swiss press statement says that foreign tax authorities often know who may have evaded their taxes, but don’t know the person’s foreign bank connection. The new Swiss-German tax treaty will change this.

On the other hand, the new treaty also gives legal immunity to Swiss financial institutions (and their employees) that have been involved in tax evasion schemes.

In sum, the new deal – which still needs to be approved (or rejected…!) by both countries’ parliaments – is a first step towards greater Swiss tax transparency, but also a major threat to automatic information exchange. And it is without doubt an tremendously convenient deal for German tax evaders and their Swiss helpers.

There is a real risk of a domino effect happening here. Not only is the UK reportedly close to signing a deal, but Liechtenstein has expressed interest in a similar deal. France and, Spain and Greece are also thought to be considering it. Greece has already been involved in informal talks with the Swiss authorities.

Opposition parties in Germany – the Social Democrats, Greens and Left parties – have said they will oppose the deal, and these parties together hold a majority in the Bundesrat — the Senate –- where the deal must be approved before coming into force. Tthere is a lot to play for; much will depend on the mobilisation of civil society. Yesterday a campaign was launched in Germany to stop this deal.

TJN asks you to sign on here. Urgently.

For additional information, see the official Swiss (English language) media release.