Swiss banks’ deal – or no deal?

  • Author : Aileen Barry
  • Date : January 2011
ABOUT THE AUTHOR: Aileen Barry TEP is Director, National Tax Investigations DLA Piper UK LLP

S peculation is still rife as to the terms of the ‘deal’ negotiated between the Swiss government on behalf of its bankers and both the UK and German tax authorities. UK Chancellor George Osborne agreed a deal with Hans-Rudolf Merz, his Swiss counterpart, whereby the UK may receive GBP1 billion from Switzerland. At the time this article is published, it is most probable that the detailed terms of the deal will still have not been negotiated. At the moment, we merely have a declaration of intent, the outline of an agreement that will, temporarily at least, allow the Swiss to continue to offer full banking confidentiality or privacy to their clients. Patrick Odier, chairman of the Swiss Bankers Association says he is ‘pleased to see that our proposal has replaced the idea of an automatic exchange of information to the benefit of all countries involved’. I wonder how good a deal it really is for the UK government or Swiss bank account holders and whether there may be a further agenda?

Terms of the deal

While the actual terms are to be negotiated early in 2011, our understanding of the terms is broadly:

  • a higher rate of withholding than under the EU Savings Directive (50 per cent has been suggested);
  • an historic levy in respect of a period prior to the operation of the EU Savings Directive (back to 1990?);
  • a revised and stricter definition of what constitutes an account held by a UK (or German) person.

The stricter definition may bring into scope both the corporate accounts set up for the benefit of individuals and the ‘portfolio’ accounts. The historic levy could also catch individuals who had held monies directly in their own names in bank accounts before any arrangements were put in place to side-step the Directive.

However, the treatment of accounts belonging to UK resident non-doms has not been referred to at all. If Swiss banks can exclude them on the same basis that they had been excluded from the scope of the EU Savings Directive, i.e. that they were not liable to taxation on overseas earned income in their country of residence unless remitted, large numbers of account holders will remain unaffected.

EU Savings Directive

It has been a source of rancour, since 2005 on the inception of the Directive, for tax authorities and financial institutions in competitive jurisdictions, that Swiss banks have ignored the intended effect of the Directive. The Directive requires reporting (or in the case of Switzerland, Austria, Luxembourg and Belgium, withholding tax on savings income, principally being bank interest) details of individual account holders and their income. 75 per cent of the tax deducted in lieu of reporting should be paid to the tax authority of the client’s country of residence. However, the effect of the Directive could be easily bypassed by setting up an individual’s bank account in the name of a corporation for which the bank would provide company, etc. services, while allowing the beneficial (not necessarily the legal) owner access to normal banking facilities. An alternative common method of sidestepping the terms of the Directive was for the bank to designate the account as a portfolio account, on which dividend income arose or capital value accrued, neither of which would be reportable under the Directive. It is estimated that UK taxpayers hold between GBP100 billion to GBP125 billion in Swiss accounts. It is understood that the UK receives fairly insignificant sums from Switzerland under the terms of the Directive.

US pressure

The world has been watching and listening to the exchanges between certain Swiss banks, the Swiss government and the IRS following the intelligence received in the US of significant numbers of US persons sheltering US income or gains in Swiss bank accounts. Switzerland has had to reconsider its position very carefully regarding banking privacy, tax evasion and fraud before coming to terms with an agreement to divulge to the IRS details of some several thousand US persons who are Swiss bank account holders.

Liechtenstein Disclosure Facility

The Liechtenstein Disclosure Facility (LDF) was negotiated between the UK and Liechtenstein governments last year, the terms of which are set out in a Memorandum of Understanding. Broadly, it enables any UK taxpayer who is not already under investigation by HMRC for suspected fraud (Code of Practice 9 cases), and who has some tax liability in relation to funds held offshore, to establish, if not already held, a relationship in Liechtenstein and then make disclosure and settlement of all historic tax liabilities on extremely favourable terms.

Impact on Switzerland

Swiss banks have seen clients move funds to Liechtenstein in order to take advantage of the LDF, but are also aware that there are taxpayers who baulk, no matter how generous the terms, at ever coming to settlement with the tax authorities. For some people it is a game of wits, to avoid paying tax so far as one can legitimately. Dealings with revenue authorities are regarded by such people as ‘warfare’ and all that matters is success, not the method of success. Swiss banks may be conscious of a business opportunity to service such clients and at the same time to preserve their centuries-long, justifiably proud tradition of banking privacy. Switzerland has an excellent reputation of maintaining excellent anti-money laundering controls against ‘traditional’ criminals. Tax evasion is not regarded per se as criminal. An element of fraud is needed to enable bank privacy to be breached.

The crystal ball

I am tempted to speculate what may follow in the years to come, once the terms of the deal have been agreed and reporting and tax deduction has been in place for some while. A UK resident and domiciled taxpayer is subject to tax on worldwide income or gains. A UK resident non-domiciled taxpayer is only not subject to tax on non-UK source income if they have been resident in the UK for less than seven years or have opted to be taxed as a non-domicile (subject to GBP30,000 levy, withdrawal of personal allowances, etc.). Swiss banks will be conscious, with the passage of time, which of their clients have the ability to be taxed as a non-domicile, and which are accepting the EU Savings Directive withholding tax or the Swiss banks further levy as the lesser evil to the disclosure of the source of the funds to HMRC.

  • Will such banks feel obliged to reconsider the terms and conditions under which these accounts were opened, and to review the actual maintenance and operation of the accounts, to see if there has been any element of fraud in the documentation provided? Might they transgress the current Swiss anti-money laundering provisions?
  • Might the UK and German governments perform the mathematical calculations upon receipt of this new annual withholding tax and the historic levy, and estimate the numbers and value of US/German-held Swiss accounts? They will be fairly sure that such accounts are not being disclosed to the home tax authorities as otherwise credit for the tax would be claimed. If just one case can be proven whereby a bank official has been over-eager to assist his client to avoid the effect of either the EU Savings Directive or the proposed new levy, will pressure then be brought to bear by the UK/German authorities, following the lead of the IRS, to require the Swiss banks to actually disclose the details of all account holders?
  • If details are provided and individuals investigated, will credit be available for the further levy?
Conclusion

Governments and tax authorities worldwide are pressing for greater transparency in tax related transactions. The Swiss deal is unlikely to bring to a halt the progress of such developments.


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