Will the new double taxation agreement (DTA) with India trigger an avalanche of legal requests to Switzerland to help track possible tax dodgers?
So-called “black money” stashed abroad and the fight against corruption remain hot political issues in India. The new DTA came into force this week, but a Swiss critic says it will not change much.
Under the revised DTA India will be able to request specific information on potential tax evaders from Swiss banks referring to tax years which start on or after January 1, 2011.
The Indian DTA is one of 70 that have been renegotiated since March 2009, when the Swiss cabinet eased banking secrecy rules granting legal assistance not only in cases of tax fraud but also tax evasion to bring it into line with Organisation for Economic Co-operation and Development (OECD) standards.
Now that the treaty is in force, Alexandra Storckmeijer Sansonetti, an international tax expert with the Swiss finance ministry, said she expected “quite a few requests” from India.
Mark Herkenrath, a tax specialist at the Swiss non-governmental organisation Alliance Sud, said Switzerland and India wanted to show they were doing something against black money.
“India was one of the first countries to request a DTA with Switzerland. It’s eager to seize the opportunity, which counters the impression you have that India is not doing anything,” he told swissinfo.ch.
But he felt the new agreement would not change very much.
“The black money issue in India is complicated, as most cases discussed in the Indian media are not typical cases of simple tax evasion but rather involve corruption and money laundering, which are not covered by this new treaty,” he said.
“It was always possible to file requests for mutual legal assistance for such cases [corruption and money laundering] even before the new tax evasion strategy was signed.”
India has filed ten requests for judicial assistance with Switzerland over the past five years.
He said despite a recent relaxation of conditions for the exchange of information on foreign taxpayers, the filing of requests had not become that much easier, although the Swiss ambassador to India, Philippe Welti, had hinted as much in July.
“It’s a Catch-22 situation,” he said. “It remains difficult, as you need to already have lots of information to get the information you need, such as a customer name, strong evidence of evasion and details of bank contacts, such as the bank branch.”
And the problem goes further, he said.
“As seen by the recent cases of Germany and the United Kingdom, a good DTA is not enough. These powerful neighbours have already negotiated new agreements which provide easier access to tax information. The Indian government got the maximum it could as an emerging market but influential industrial countries can get more information.”
The Alliance Sud specialist said it would be extremely difficult for India to get the tax information it needs via a DTA and the Indian government would have to request an additional agreement for a withholding tax and special information disclosure clauses.
According to the US-based group Global Financial Integrity, India has lost more than $460 billion in illegal capital flight since it gained independence in 1947.
Switzerland is seen as a prime destination, but the truth is shrouded in mystery.
“The figures circulating in India about $1.4 trillion stashed away in Swiss banks is totally fictitious, concocted to serve political interests,” Dev Kar, lead economist from Global Financial Integrity, told swissinfo.ch.
Herkenrath agreed that most figures in the Indian press were “outrageously misleading”.
He said Indian funds could represent a large share of the $360 billion of dirty money he estimated Swiss banks were holding from developing and emerging countries, “but not more than half”.
The Swiss National Bank says total deposits of Indian individuals and companies with all the Swiss banks was collectively about $2.5 billion at the end of 2010.
The Indian government is under intense pressure from opposition parties as well as the Supreme Court over the issue of black money allegedly stashed away abroad by businesses and the wealthy.
In January the government announced a raft of measures, including stronger agreements with foreign countries to curb tax crimes and repatriate illicit funds.
But complaints of inaction continue.
The Indian Supreme Court, which in the past attacked the coalition government for failing to unearth illicit funds abroad, in July ordered the setting up of an investigation into such money.
Last month the Swiss ambassador told the Indian Headlines Today news site that Switzerland was ready to exchange tax information but, “it is for the Indian government to make a case that they want the details of tax evasion”.
And this week Bharatiya Janata Party opposition leader L.K. Advani accused the Indian government of suppressing details of those having accounts in Swiss banks “to save embarrassment” to a few people.
The cherished Swiss banking confidentiality laws have been under constant attack since the financial crisis of 2008-9.
With many developed – and indebted – countries seeing large holes blown in their tax revenues, cracking down on tax evasion suddenly became a priority.
In 2009, Switzerland was forced to concede to enhanced information exchange and renegotiate a host of double taxation agreements to get off an Organisation for Co-operation and Development (OECD) black list of tax havens.
Also in 2009, UBS admitted to aiding and abetting US tax evaders and had to pay a hefty fine. The Swiss government was subsequently forced to hand over the names of 4,450 US clients of UBS to the US authorities.
Several countries, including Britain, Italy, the US and Germany, offered tax amnesties in 2009 and 2010 to give citizens the chance to come clean about tax evasion.
The search for tax cheats was helped by the illegal sale of Swiss bank client data by a whistleblower. Germany and France were the main purchasers of the controversial data CDs, but information was passed on to other countries.
The US is currently pursuing its clampdown on other Swiss banks. Credit Suisse was recently informed that it was under investigation, and several other banks, including canton-owned enterprises, are thought to have also fallen under the spotlight.