Switzerland is trying to convince as many countries as possible to accept withholding tax deals in an effort to avoid an automatic exchange of information. The success of this strategy hinges largely on Germany’s response.
“The treaty with Germany is much like a blueprint. It could open doors to other countries. If it comes into force I could imagine that Italy would also sign such a treaty,” Peter V Kunz, professor of economic law at Bern University, told swissinfo.ch. “That in turn could awaken interest from France.”
Switzerland has already signed treaties with Germany, Britain and Austria that are planned to come into force on January 1, 2013. But the German deal faces the threat of being turned down by its parliament where the left leaning “red-green” political coalition holds a big majority in one of the two chambers.
The treaty would legalise the undeclared Swiss bank accounts held by Germans citizens. Swiss banks would deduct a one-off levy for backdated assets and then impose a withholding tax on future income earned for those account holders who do not want to reveal their identities to the German authorities.
It is estimated that these levies would yield up to €11 billion (SFr13 billion) to the German tax coffers, although no time frame was given for this bonanza.
German Social Democrats and Greens have criticised the “indulgencies” in the deal that would allow tax offenders to remain anonymous and various other “loopholes” in the text. They also argue that the treaty would favour cheats over honest tax payers.
The German parliament is expected to make a final decision in November, while voters in Switzerland are likely to have the final say on the agreement.
Two diametrically opposed political groups – the rightwing Campaign for an Independent and Neutral Switzerland (Cins) and the youth chapter of the Social Democratic Party are pushing for a referendum against the deal.
In the eyes of the rightwingers, the treaty would be “unacceptable and degrading” and a “further capitulation” to foreign pressure. The left leaning Young Social Democrats want to see an end to banking secrecy and the adoption of automatic exchange of tax information.
The deadline for gathering signatures expires at the end of September which could pave the way for a referendum on November 25.
Withholding tax is Switzerland’s response to increasing international pressure against banking secrecy. “We are hardly going to win a global round of applause because many countries are demanding an automatic exchange of information,” Michael Ambühl, head of the State Secretariat for International Financial Matters, told the Neue Zürcher Zeitung newspaper.
But he added that he knew of “hardly any experts in these countries that do not view withholding tax as an interesting alternative.”
“The difference between now and before is that Switzerland is no longer simply saying no,” Ambühl said. “We have offered a convincing alternative.”
Switzerland had held expert talks with the governments and other stakeholders at various countries, also outside of Europe, without gaining a concrete indication of which one would be willing to open negotiations.
It is clear that the highly indebted countries of Greece and Spain would be interested in such deals because it would allow them to collect revenues for their ailing coffers in the short-term, according to economics expert Kunz.
Beyond that Kunz could imagine that Switzerland could conclude similar deals with countries such as China, India and Russia. He believes that is “important” for Switzerland to establish a “new standard to automatic data exchange” with its withholding tax proposal.
The treaty with Germany could act as a spark, at least within Europe. Countries such as Russia or China are “less important”, but Germany could act like a locomotive within the European Union. Germans have deposited the most undeclared money in Switzerland, followed by Italy.
If the treaty with Germany fails then “the idea of a withholding tax is dead”, according to Zurich banking expert Hans Geiger, who believes that the deal with Germany formed the basis of a similar treaty with Britain.
Here to stay or gone tomorrow?
The treaty contains a most favoured nation clause “which means that if Germany improves its position then Britain’s outlook would also be improved”, Geiger told swissinfo.ch. The failure of the German deal would mean that “the foundation of the British treaty, at least in its current form, would be lacking.”
However, Sergio Rossi, economics professor at Fribourg University, does not think that the failure of the German treaty would necessarily influence other countries not to sign.
Nevertheless, Rossi believes that it is important both for Swiss banks and German clients to get the treaty in force. “If there is no agreement it would signal a capital flight of German clients to tax havens like Singapore or Hong Kong,” he told swissinfo.ch.
“Germany has an interest in agreeing to the treaty, but perhaps at a higher tax rate,” Rossi added. “There is already significant pressure in Germany to increase this rate.”
Rossi views the withholding tax treaties as “buying time” during a “transition phase” that would push “an automatic exchange of information as far away as possible”.