Financial Transparency Coalition

From my Escape from Europe blog, posted on Feb 23

Switzerland’s so-called “Rubik” tax deals with Germany and the United Kingdom are effectively defunct, following robust challenges from the European Commission recently which require the deals to be watered down so drastically that they will be functionally almost useless.

The project isn’t dead yet, however, and even in its near-lifeless current state Rubik remains a zombie-like threat to European efforts to promote financial transparency and to the ability of European states to raise tax revenues from their wealthiest citizens.

Europolitics on February 17^th revealed a new blockage to the European transparency arrangements. In essence, a long-awaited European push for greater transparency, through expansion of the current EU Savings Tax Directive, was taken off the agenda at the last minute, despite the efforts of EU chair Denmark to it push forwards. The new blockage came from a surprising quarter: not the tax havens of Austria and Luxembourg, but Germany, previously, an enthusiastic supporter of European transparency arrangements.

The original idea behind the Swiss Rubik deals is simple: UK and German taxpayers with assets in Swiss accounts would make a hefty one-off payment for past tax crimes, plus taxes on ongoing income, in exchange for an assurance that tax-evading clients could preserve their secrecy and receive an assurance that theirs was a ‘final’ tax settlement. Criminals, then, would effectively be in the clear.

Initially, citizen groups objected to the deals on the grounds of morality and justice: they did not like the spectre of immunity and secrecy for wealthy élites, creating a sense of ‘one set of rules for the rich and powerful, another for the rest of us.’ Once the deals were analysed properly, however, a harder objection emerged: they would raise almost no revenue – a small fraction of the sums that politicians have promised. The Rubik deals are riddled with loopholes, some so blatant and explicit that they amount to flags planted in the texts with signs saying ‘escape me here.’  For example, the UK government publicly predicted revenues of UK £4-7 billion, but a forensic analysis by the Tax Justice Network (TJN), drawing on data on revenues currently being collected from Switzerland under the EU Savings Tax Directive, revealed that the deals in their original form could not raise more than a tenth of the promised sum. (TJN sent its analysis to various private tax advisers, to the UK tax authorities, and to the Swiss tax authorities, and challenged all of them to find a flaw in its report, without any comeback; TJN also challenged HMRC to provide the basis for its £4-7 billion figure, but HMRC declined.)

Rubik will raise almost no new revenue for any country – and if they succeed in helping derail Europe’s own tax and transparency initiatives, as Swiss bankers hope they will, then the effects will in fact be revenue-negative for all. It is important to remember that.

The story does not end there, however.

The Rubik concept was created originally by Swiss bankers in 2008 and presented to politicians in Britain and Germany as a ‘pragmatic’ solution: Swiss banks and their clients would keep their secrecy, with a few modest opportunities for information exchange, and countries would get revenues. (It was not in their interest to tell the politicians how tiny the revenues would be.) Konrad Hummler, Switzerland’s most outspoken banker and a champion of banking secrecy, described the Rubik concept in his native German as “Voll Geil” – a slang term that means ‘really cool’ but also can carry strong connotations of sexual excitement. His words illustrate the fact that if the Rubik were to succeed, they would constitute a decisive victory for Swiss bankers over European taxpayers.

But from a Swiss perspective, the deals had two more aims. Apart from preserving secrecy, for clients and for Swiss banks, they also wanted to gain expanded access for Swiss financial institutions into British and German markets, as part of a deal. And the third, most devious aim, was to disrupt the progress of meaty amendments to the Savings Tax Directive that would enable it to raise serious tax revenues for the first time. This requires a little explanation.

The European Savings Tax Directive (STD) started operation in 2005. Most participating countries share information about the financial holdings of each others’ taxpayers, so they can be taxed appropriately. The EU STD is also riddled with loopholes, but major amendments are now in the last stages of preparation which will make the Directive far more effective, enabling it to raise serious tax revenues for the first time. The amendments are the prize at the centre of a complex game now being played out on the European chessboard.

The disruptive effects of Rubik were felt at an early stage, as Europolitics’ article Rubik wreaks havoc in Union, from September 2011, attests:

“Luxembourg and Austria have already decreed that the conclusion of these bilateral agreements “completely” changes the situation at European level and has to be taken into consideration in the process of revising EU rules on savings taxation.”

The aims of these two countries are are somewhat different from Switzerland’s, but they are effectively acting in alliance with it on this issue.

Switzerland’s aim is to use Rubik to sabotage the Amendments, by providing Austria and Luxembourg with an excellent excuse to insist on reopening the debate on the EU’s decision in 2003 to promote the automatic exchange of information – with the practical result of  blocking the  adoption of the amendments indefinitely.

The European Commission, sensing the threat to the proposed amendments to the EUSTD, came down hard on the Rubik deals, which conflict directly with the current EUSTD and with the proposed amendments. It ruled that Germany and the UK would have to renegotiate the scope their Rubik deals. Most importantly, they have to carve out and drop ‘interest’ from the scope of the agreements, leaving only dividends, capital gains and wealth taxes.

On the face of it, this suggests that Rubik is still alive: weakened, perhaps, but still able to play the spoiler role. And that is true, at least politically speaking.

What most observers do not seem to realise yet is that the carve-out that Britain and Germany are being forced to accept do not merely water down the deals: they render them functionally worthless. For one thing, the carve-outs mean that they would raise even less revenue than the original deals. Not only that, however, but from a tax evader’s point of view, the whole point of Rubik is to enable a ‘final’ fulfilment of tax obligations, after which secrecy is preserved and one’s tax affairs are considered in order. But the problem is that a portfolio that is supposedly still ‘covered’ by Rubik would itself earn interest – which will fall outside the scope of a renegotiated Rubik deal. So no ‘final’ payment on the entire investment is possible, and information on those assets concerned may still be exchanged (either automatically, or on request in case of suspicion). As one observer notes:

“There is simply no reason that any customer of a bank would agree to a Rubik levy on capital gains or dividends if they are still subject to the unknown future effects of EU savings tax directive. . . customers earning interest will be subject to the inevitable automatic exchange of information in future savings tax revisions.”

Furthermore, but the definition of interest under the EUSTD will be a wide one. A European Commission official told Europolitics on Wednesday:

“[The EC is] more determined than ever to promote information exchange at the largest scale possible. . . . We agreed on the need to remove from their scope” all products covered by existing European rules on savings taxation and those that may be covered in the future.”

Those last words in bold text are crucial. They mean that the Rubik arrangements must avoid clashing not only with the current, loophole-riddled EUSTD, which has a fairly narrow definition of interest, but also with the much beefier Amendments, which involve a highly expanded scope for defining interest, and include entities and arrangements not currently covered.

In short, a ‘final’ arrangement of ones tax affairs will become impossible – which means the whole arrangement is pointless, at least from the point of view of a tax evader.

What is more, if the conflict between the Rubik deals and the EU STD is removed, then that may remove the pretext for Austria and Luxembourg to block progress on these deals, since Rubik would no longer be tilting the playing field.

Recently, then, it looked as though the amendments were going to be pushed through after all, and European officials began to take a harder line in pushing for transparency and tax collection. Algirdas Semeta, the commissioner for tax, said in The Economist recently that he is ready to play tougher with Switzerland and will use “sticks”, not just “carrots” – including through restricting Swiss access to EU markets.  Europolitics reported on February 15^th that:

“Encouraged by recent international developments to improve transparency and administrative cooperation” on taxation matters, the European Commission reiterated, on 15 February, that it is “more determined than ever to promote information exchange at the largest scale possible.”

In the same story, on a different but related matter, there was also this:

“There is also no question of granting Switzerland, in exchange, too many advantages on access to financial services markets (one of Berne’s demands): the Union’s “external competence” in this area must be respected.”

In other words, two of the three Swiss justifications for Rubik – a ‘final’ settlement for criminal tax evaders and secrecy preserved plus some withholding tax payments; as well as better access to their partners’ markets – are now gone, effectively torpedoed by the European Commission.

The third possible justification – to sabotage the European Savings Tax Amendments – is also weakened, not only because withholding taxes will no longer amount to ‘final’ taxation on certain items of income (making it harder for Austria and Luxembourg to object to the EU’s choice of automatic exchange of information) but also because Britain and Germany will now have a greater interest in accelerating the adoption of the far more effective EU amendments not only by the EU but also by other jurisdictions like Switzerland.

With all three objections removed or watered down, one must ask what the point of Rubik is at all.

All of this makes it even more surprising to hear that progress on the long-awaited EU STD amendments – which would arguably represent Europe’s greatest ever step forwards on transparency and its ability to tax its wealthiest citizens – were suddenly blocked again. Discussion of the amendments was suddenly taken off the agenda for the February 21 Council agenda, and Europolitics suggested that the obstacle appears to be a formidable one:

“It will be put back on the table “as soon as possible” provided there is a “realistic” hope of making progress, Copenhagen announced.”

Which country took it off the table? Not the usual suspects, it seems – but, we understand, Germany.  (For good measure, however, Austria is now seeking to breathe new life into the Rubik zombie by negotiating its own Rubik deal with Switzerland.) And Germany appears to be making a new condition: drop European objections to the Rubik deals, or you will not get your amendments.

This is a dangerous moment for European transparency: a time for other countries to stand firm and continue to reject the potentially highly destructive Rubik project.

The ultimate inspiration behind this German push for a potentially revenue-negative secrecy deal is not entirely clear, given Germany’s previous strong stance in favour of transparency and tax collection in Europe. The inspiration this time appears to be Germany’s pro-Swiss Finance Minister, Wolfgang Schäuble. Perhaps he is pushing for this because he is fond of Switzerland. Perhaps he simply believes the forecasts for tax revenue that the Swiss bankers and others have given him.

Or perhaps there is one more justification for the continued existence of the Rubik deals: so that politicians who realise they have signed bad deals with a wily Switzerland do not have to lose face and admit that they made a mistake.

END