A Sea Change in Switzerland

May 30th, 2012

flickr / saikofish

Yesterday Switzerland’s parliament approved a much-anticipated tax information exchange agreement with Germany. The country has made similar agreements with Britain and Austria and is already in talks with Italy to make a similar deal.

Under the agreement, Swiss banks will make anonymous advance payments to German tax authorities for undeclared money. Germany stands to make big gains: lawmakers already plan to levy a retroactive tax of 21 to 41 percent on their citizens with undeclared accounts. With holdings of an estimated 222 billion euros ($291.8 billion) in Swiss accounts, about 60 percent of which are undeclared, German citizens can expect to pay up big time. That is, if the agreement even passes German parliament. There is significant opposition to the agreement, lead by the Social Democrat, who believe it is “too soft” because it would allow Switzerland to preserve most client confidentiality.

A few years ago, such a thing might have garnered international headlines. But in many ways this news came and went without much of a to-do. The reason for this is the abruptly shifted paradigm in Swiss banking. After years of pressure from the U.S., UK, and other European countries, the tide has shifted strongly in Switzerland. And now these deals seem more like a matter of course than a revolution.

While some argue otherwise, the deal could represent yet another blow to Switzerland as the world’s preeminent haven for tax evaders. Juerg Zeltner, head of wealth management at Swiss-banking giant UBS, believes UBS could lose 10 percent of its European assets to the tax authorities. He noted UBS has already been losing assets “in Europe for many quarters, around 10 billion francs [$10.3 billion] to date.” Edison Investment Research predicts that following the deal, affluent Germans will repatriate their funds from Switzerland en flock. As German funds represent 12 percent of non-resident money in Switzerland, this could represent yet another wave in the sea of change.

In response to this shift, Kaspar Villiger, outgoing chairman of the board of UBS said something very surprising.

“Banking confidentiality is increasingly losing its legitimacy.” Villiger also commented that “other states are no longer prepared to accept their citizens evading taxes in this way.”

Talk about a sea change.

Don’t get me wrong. Switzerland isn’t taking the shifting paradigm laying down. The right-wing Swiss People’s Party and leftist Young Socialists are both seeking a referendum on the new agreement. They have one hundred days to collect 50,000 signatures. And before you get too worked up feeling bad for Switzerland’s biggest banks, remember that it’s still an appealing safe haven for the savings of the world’s wealthy. Strong growth in new markets has allowed UBS to post strong money flows into its flagship private bank in the first quarter. And Switzerland still holds an estimated one-third of the $7 trillion in global wealth kept abroad.

But the truth is: the dynamic is shifting. Which is undoubtedly a good thing. But on the other hand, the attack on Switzerland will not put an end to tax evasion by offshore accounts. Because the wealth that Switzerland is losing isn’t, in large part, going “home to the authorities.” It’s being moved to Hong Kong and Singapore. And it’s also going to the United States and United Kingdom. Not to the authorities. To the secret accounts.

Because the truth is cracking down on Switzerland will be fruitless in the long-term until the U.S. and UK reform their own very opaque banking centers. In Delaware, Nevada, and Wyoming, for example, clients can anonymously set up shell corporations. Nevada, one of the worst offenders, does not require banks to even request the names of account or company shareholders, nor do they need to share that information with the federal government.  This means it’s easier to set up a corporation in Nevada than it is to get a library card.

So yes, it’s good the dynamic is shifting in Switzerland. Now it just needs to shift at home.

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Written by Ann Hollingshead

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