Financial Transparency Coalition

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The European presidency has just issued a note advocating a push to increase financial transparency in Europe through its Savings Tax Directive. As they say:

“The Presidency attaches crucial importance to gear up bilateral talks in order to reach political agreement upon the adoption of the Savings Tax Directive in the very near future.”

Unsurprisingly, there are some rather large flies in this ointment. Austria and Luxembourg have long been holdouts on the European Savings Tax Directive, working hard behind the scenes to spike progress on transparency. Instead of agreeing to automatic exchange of information for tax purposes, they offer only an anonymous withholding tax. This arrangement, as we have just argued, goes against the spirit of just payment of due taxes by European taxpayers, and against a drive towards cooperation amongst member states in acting not to deprive fellow EU members of revenue. Furthermore, the relevance of the European Savings Tax Directive goes beyond Europe: it could become the nucleus of a multilateral agreement on automatic tax information exchange.

The current legal situation in the European Union is that this transitory arrangement for these two countries would end once the European Union signs treaties with a few (nearby but non-EU) secrecy jurisdictions for information exchange upon request (Article 10, Council Directive 2003/48/EC). The largest of these is Switzerland, others are Andorra, Liechtenstein, Monaco and San Marino. Remember, we’re talking agreement by each of those non-EU jurisdictions with the full European Union.

The prospects for such agreements have increased since the G20 stated its intention to fight against banking secrecy, and Switzerland and a few others have been forced to remove their ultra-tight interpretations of OECD norms. But progress on negotiations with these few non-EU countries is being blocked within the European Council by Austria and Luxembourg. The reason, of course, is that if EU negotiations with Switzerland were to be successfully concluded (the other minnows would be expected to fall in line, if Switzerland did), their ability to preserve banking secrecy for EU countries would come to an end.

What can the Swiss do in order to prevent the unthinkable: an end to secrecy? They remember the Roman Empire’s strategy of divide et impera (divide and rule; see TJN Germany blog). Dividing Europe’s key members on the issue of tax transparency would help them to prevent the dreaded automatic information exchange from reaching its borders.

So Switzerland has offered money instead of transparency to certain powerful EU members through an anonymous final withholding tax – see our previous blog commentary on Swiss-UK-German tax deals: money, not transparency. Germany and the UK began negotiations late last year. If key major players in the EU are lured into such preferential treatment with Switzerland, their incentives to put their weight behind the EU fully engage with the EU for a level playing field on tax issues beyond the EU-member countries (in order to include Switzerland) would be reduced.

An EU-wide coalition is necessary if the EU is to bring enough pressure to bear on Switzerland to reduce secrecy – and this new Swiss initiative seems aimed at removing the resolve of its two most powerful members. Others are increasingly indicating interest in this issue. Italy issued a ferocious warning recently that such behaviour undermines a common EU position towards increasing tax transparency via automatic information exchange.

A few days ago, Austria started expressly using these ongoing bilateral negotiations by Switzerland with the UK and with Germany as an excuse to incur further delay within the European Council on progress on automatic information exchange (see TJN Germany blog, in German). Austria’s Finance Minister Pröll has said that bilateral agreements between EU member states and with Switzerland may result in an uneven playing field at the European level.

Austria seems to be creating a pretext for vetoing progress on getting the EU to negotiate with Switzerland. However, if the UK and Germany persist with negotiations on bilateral withholding tax agreements with Switzerland, they become complicit with Austria, Luxembourg and Switzerland: they will be presenting Austria and Luxembourg with the gift of a political opportunity to stall. While Austria’s and Switzerland’s newspapers report on this crucial subject, media in Germany and the UK have so far ignored this issue.

This political mess incurs a serious risk of derailing, or at least impeding, progress on tax justice within the EU. If the UK and Germany were interested in transparency and the welfare of their citizens and of those in Europe, they would publicly announce the end of their negotiations with Switzerland on an anonymous final withholding tax, and publicly call on Austria and Luxembourg to end their veto in the European Council.

Secrecy is entirely, utterly incompatible with the economic needs of Europe.

Further, and crucially, there is great risk here of missing an opportunity for the construction of a fully functional information exchange system that could be implemented with an increasing number of countries – for the good of the majority of this planet’s population.

Are the UK and Germany interested in this?

Originally published on the Tax Justice Network blog…

* Image license:  Some rights reserved by Sputnikcccp, from Wikimedia Commons