How much is privacy worth?

  • Author : Jakob Schaad
  • Date : November 2012
ABOUT THE AUTHOR: Jakob Schaad is Head of Financial Markets International and Deputy CEO of the Swiss Bankers Association

British citizens with a bank account in Switzerland have a choice: they can regularise their as yet untaxed assets by means of the Liechtenstein Disclosure Facility (LDF) or, for the past and future, they can opt for the Swiss withholding tax model. It is not possible to say in absolute terms which solution is better. Instead, it is more a question of what ‘better’ means in terms of the regularisation of untaxed assets. In addition to the payment of taxes due, other aspects of regularisation should be considered: the number of bumps encountered along the road to taxed assets varies.

Not without a lawyer

The LDF is a voluntary disclosure programme that allows untaxed income and gains to be taxed on an individual basis. This could mean that each client with assets in Liechtenstein must demonstrate, in a complete and traceable manner, the type and amount of assets held in the principality, and for how long – dating back to 1999. To be on the safe side, and to protect oneself against sanctions from the UK tax authorities, the counsel of a legal expert is essential, as it is nearly impossible for a layperson to assess whether or not the compiled documentation is complete, correct and accurate. Completing the administrative process is incumbent on each individual client.

The cost of consultation with specialists should be factored in when examining the LDF model. Depending on the duration of the process, this can be substantial. Furthermore, to benefit from the LDF solution, a proportion of the assets have to be transferred to Liechtenstein. The search for a suitable, trustworthy financial institution, however, requires time, and the transfer of assets results in additional costs.

This procedure stands in contrast to that of the Swiss withholding tax model. This model, which was agreed to within the framework of a comprehensive agreement between Switzerland and the UK, regulates the taxation of existing, non-taxed assets by means of a one-off payment, as well as a withholding tax to satisfy future tax liabilities. Similar agreements exist between Switzerland and Germany, as well as Austria. Under this model, British clients (and those resident in Austria and Germany) are identified by their banks, which will ask whether the client prefers to regularise their assets by way of an anonymous one-off payment or voluntary disclosure.

Presuming voluntary disclosure is not chosen, the bank calculates the amount due and transfers this to the Swiss tax authority. It passes the sums collected on to the UK tax authority. The process is carried out entirely by the bank, as per the client’s instructions, yet their tax liability has been met. There is no end-date for this model; it is a long-term, sustainable solution. The LDF, on the other hand, expires on 5 April 2016. The accounts of British citizens still in possession of untaxed assets in Liechtenstein after this date will be closed.

Transferring from one country to another incurs costs

The tax rate for the LDF is between 15 and 50 per cent of income and gains, while under the withholding tax model 21 to 41 per cent of assets are due as payment for the past. The formula applied for calculating this rate takes into account the amount of assets and how long the assets have been in Switzerland. It is estimated that more than three-quarters of clients will have to pay between 20 and 25 per cent. No further costs are accrued with the Swiss model. For future taxation, tax rates pursuant to UK tax law apply.

Hurdle jumping with an uncertain outcome

Many people balk at the hurdle of completing a complex tax procedure. A further issue is that the outcome of the procedure can be uncertain – clients risk unpleasant sanctions if the documentation is knowingly incomplete, if incorrect information is provided or if one small detail or another is intentionally not disclosed. Compiling documentation, coordinating consultations with financial institutions and discussing these with a well-versed legal specialist can cause significant stress for clients who have no experience in such matters.

“Transparency is simply a means to an end, the ultimate goal being greater tax compliance”
Future tax liability

In addition to taxation of the past, the Swiss withholding tax also regulates future taxation. This system allows British clients to fulfil their future tax liabilities effortlessly and anonymously. The LDF does not include any particular regulation for the future, as it is a disclosure programme for existing assets, which in the years to come are taxed together with the assets already known to tax authorities. Once the assets are known, they are subject to the same tax as assets invested in the UK. The tax burden for the future is determined according to the principles of the UK tax system for both the LDF and the Swiss model.

Financial circumstances remain private

The most important factor in the decision- making process is likely to be the importance of privacy. Clients who opt for the LDF disclose their financial circumstances. They will have to declare their financial situation in each tax return. The withholding tax model, on the other hand, operates anonymously: neither the tax authorities in the home country, nor business partners, family members or other persons close to the client are informed of possible assets in Switzerland. The client’s privacy thus remains completely protected, and the tax liability is nevertheless automatically fulfilled.

Opponents of the Swiss-UK agreement will doubtless have misgivings about initiatives that preserve client privacy. Such critics appear to argue for greater transparency regardless of whether the money was taxed or untaxed. It is important to address this criticism head-on. Transparency is often regarded as an end in itself, when it is, in fact, simply a means to an end, the ultimate goal being greater tax compliance. There is of course more than one way to achieve that goal. The agreement between the UK and Switzerland demonstrates that it is possible to give the UK tax authorities the necessary tools to enforce UK law while preserving the privacy of UK clients. Clients with assets abroad who have opted for the Swiss withholding tax model have fulfilled their tax liabilities in accordance with UK law. That they choose to do so anonymously should not be viewed negatively. Any moves away from the UK’s traditional respect for taxpayer confidentiality, such as the growing practice of ‘naming and shaming’ individuals, should be viewed as unwelcome.

Individuals who consider more than tax rates in the various pros and cons should conclude that the Swiss model has points in its favour well worth considering. Clients for whom the integrity of their financial privacy and an uncomplicated settlement of tax liability are important will opt for the withholding tax model.


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