Swiss-German tax treaty on 10 August will undermine prospects for automatic information exchange

UPDATE: This blog post was substantially updated on August 5, 2011. Scroll down to view the original blog post.

Gideon/Flickr*

An imminent “final withholding tax treaty”, will allow Germany to claw back some revenue from tax evasion, but it will also protect Swiss bank secrecy and undermine the prospect of automatic information exchange.

Swiss and German negotiators will probably conclude the deal on 10^th August. The deal will then have to be approved through the respective national legislative processes, so there will be opportunities for civil society to mobilize opposition and generate debate about information exchange.

A withholding tax will be charged on income from savings and investments of German citizens with Swiss accounts, i.e those who had previously evaded tax in Germany. There will be both a one-off payment for lost income in the past, paid initially by Swiss banks, and then an ongoing tax on interest and return on capital. However, the withholding tax will be returned anonymously, thereby protecting Swiss banking secrecy. This is called a final withholding tax because individuals no longer have to declare these earnings in their tax return. The matter is considered to be settled and the tax authorities have less information about their citizens’ offshore earnings.

The one-off compensation for past lost earnings could raise between €1.8 Billion and €10 billion according to different estimates, and will be paid for by Swiss banks initially, who will be reimbursed if Germany can make individuals pay up. The actual tax rate has still to be finalized but it is likely to be around 25-26%.

Actually obtaining the ongoing revenue is likely to be difficult as in many cases account holders can dodge these rules by moving money betweenSwitzerland and other tax havens. Equally, the German government is probably being naïve in trusting the Swiss authorities and banks to collect taxes for them. Tax ResearchUK point out thatSwitzerland is a country that “has a proven record of facilitating crime, and being utterly indifferent to it. And that has consciously and deliberately withheld information from other governments for decades.” It will become easier forGermany to investigate a limited number of suspects under improved information exchange on request. The domestic debates might determine how many peopleGermany can request information on annually.

Britain has been in negotiations with Switzerland for a similar deal, which could also be signed on the 10^th and other countries might well follow suit.

This will undermine the prospects of further automatic information exchange deals. An example of such an initiative is the EU European Savings Tax Directive (EUSTD) which requires member states except holdouts to automatically provide each other with information. The EUSTD applies only to wealthy individuals’ interest income however it could be broadened. For example, under the EUSTD Holland would have to automatically provide France with the details of any interest paid by Dutch banks to French citizens. This interest would then be taxed at 35%, from which Holland would keep a quarter and France the rest. Switzerland signed a similar agreement with the EU, however the money is returned anonymously which means tax collectors cannot get a clear picture of individual’s wealth. The Swiss-German treaty will strengthen the hand of holdouts Austria and Luxembourg, who also pay anonymous withholding taxes rather than sharing information. It seems Switzerland has been pursuing the final withholding tax deals to individual member states precisely to prevent a united EU pushing other states to sign automatic information exchange treaties similar to the EUSTD.

Read Mark Herkenrath and Nicholas Shaxon’s blog post for more details on the Swiss final withholding tax deals.

Read Nicholas Shaxon’s blog post on information exchange between Switzerland and India

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ORIGINAL POST:

Gideon/Flickr*

An imminent “withholding tax treaty”, will allow Germany to claw back some revenue from tax evasion, but it will also protect Swiss bank secrecy and undermine the prospect of automatic information exchange globally, and more specifically the EU European Savings Tax Directive (EUSTD).

Switzerland and Germany will conclude the deal on 10^th August, according to German and Swiss newspapers. A withholding tax will be charged on income from savings and investments of German citizens with Swiss accounts, i.e those who had previously evaded tax in Germany. There will be both a one-off payment for lost income in the past, paid initially by Swiss banks, and then an ongoing tax on interest and return on capital. However, the withholding tax will be returned anonymously, thereby protecting Swiss banking secrecy.

Actually obtaining the ongoing revenue is likely to be difficult as in many cases account holders can dodge these rules by moving money between Switzerland and other tax havens. Equally, the German government is probably being naïve in trusting the Swiss authorities and banks to collect taxes for them. Tax Research UK point out that Switzerland is a country that “has a proven record of facilitating crime, and being utterly indifferent to it. And that has consciously and deliberately withheld information from other governments for decades.”

Britain has been in negotiations with Switzerland for a similar deal, and other countries might well follow suit, with France and Spain currently considering it.

The actual tax rate has still to be finalised but it is likely to amount to around 25-26%. This is less than the EUSTD, and will therefore undermine the initiative. EUSTD requires member states except holdouts to automatically provide other members states with information, but this only applies to wealthy individuals’ interest income. For example, Holland would have to automatically provide France with the details of any interest paid by Dutch banks to French citizens. This interest would then be taxed at 35%, from which Holland would keep a quarter and France the rest. The Swiss-German treaty will strengthen the hand of holdouts Austria and Luxembourg, who also pay anonymous withholding taxes rather than sharing information. It seems Switzerland has been pursuing the withholding tax deals precisely because they undermine the EUSTD, and damage the prospects of other international automatic information exchange deals.