The German upper house of parliament, dominated by opposition parties, has rejected a tax treaty aimed at legalising undeclared assets held by Germans in Swiss banks. The accord is set to fail if no compromise is found next month.
The German Social Democrats and the Greens on Friday voted against the agreement, saying the accord has too many loopholes and that it goes against tax equity.
A mediation committee of the two chambers of parliament is expected to meet next month to thrash out a compromise, in a bid to pave the way for the accord to take effect from January 2013.
The lower house of the German parliament, where Chancellor Angela Merkel’s coalition has a majority, approved the deal in October.
The accord would impose a retroactive levy of up to 41 per cent on capital in offshore bank accounts held by foreign citizens, impose a tax on future interest income and allow the account holders to remain anonymous.
The German government estimates revenue from tax arrears under the deal at €10 billion ($12.9 billion) and an additional €700 million annually from withholding tax, but the opposition dismissed the figures as exaggerated.
Switzerland has already approved the tax accord with Germany despite some opposition from the rightwing and left.
The Swiss government said it had taken note of Friday’s vote in Germany.
A finance ministry statement said Switzerland was willing to cooperate with Germany to bring the ratification process of the deal to a successful end.
The main Swiss political parties are divided.
The rightwing Swiss People’s Party warned the government of making compromises, while the centre-left Social Democrats called on the government to change its current strategy and focus on an automatic exchange of information.
The centre-right Radical Party said it hoped the German parliament could find a compromise before the treaty falls victim to next year’s electoral campaigning. The Christian Democrats say the accord is still the best solution for both countries, despite Friday’s decision.
In a similar vein, the Swiss Bankers Association said a major opportunity was missed to “reach a fair, optimum and sustainable solution for all parties to definitively settle the bilateral tax issue”.
A strong German advocate of cracking down on tax cheats, Norbert Walter-Borjans, finance minister of the German state of North Rhine-Westphalia, welcomed Friday’s outcome.
“The end of the current tax treaty is not the end of talks with Switzerland, but rather a foundation for new negotiations for a truly fair treaty,” he said.
Speaking to activists he noted that the opposition was not about blocking a deal but about finding the right solution for the future. “This agreement is not a solution and actually undermines ways of closing international and European tax loopholes for fraudsters.”
Similar deals, known as Rubik accords, have been approved with Britain and Austria.
And negotiations for agreements are underway with Greece and Italy. The Swiss finance ministry said several other countries in Europe and elsewhere have expressed an interest in such tax accords.
The Rubik principle was devised by the Association of Foreign Banks in Switzerland. The idea behind it is to separate income from wealth and hand over tax at the source to third countries, while keeping the Swiss bank account holder's anonymity.
The inventors of the system say this strategy will also afford more protection to foreign bank employees in Switzerland from legal action by third countries.
It is hoped that guaranteed anonymity will encourage foreigners with assets being managed in Swiss banks not to close their accounts.
It is not clear what impact Friday’s expected setback - albeit expected - will have on bilateral ties between Switzerland and Germany. Opposition parties in Germany have called for new negotiations with Switzerland.
However, the Swiss finance minister, Eveline Widmer-Schlumpf, has stressed in the past that there would be no further concessions and that the text of the treaty will not be changed further.
The original tax agreement with Germany was already modified in the spring and was seen as a blueprint for similar deals with other countries.
For the past four years, the EU has been pushing harder and harder for the Swiss to automatically implement changes to European legislation.
Brussels has also demanded that the surveillance of bilateral accords be carried out by a common body and courts, stating that any new agreements would have to include these elements.
These demands collide with Swiss desires to remain a sovereign nation. But the Swiss exporters also want unfettered access to European markets.
In April, the Swiss government decided to take a step in the EU’s direction, but suggested that any monitoring be carried out by an independent Swiss body whose members would be chosen by parliament.