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Finding fraud


Will new Swiss tax law open black money floodgates?


By Matthew Allen



Amid much fanfare, a new Swiss law will enter into force on August 1 making it easier for other countries to extract information on tax dodgers. But what exactly does the revised Tax Administrative Assistance Act (TAAC) mean for countries like India?

Some sections of the Indian media immediately hailed the Swiss legislation as the answer to Indian Prime Minister Narendra Modi’s prayers to boost state coffers with the repatriation of ‘black money’ from abroad.

One of Modi’s first acts upon being elected this summer was to set up a Special Investigations Team to dig out the reputed multi-billion dollar stash of undeclared loot from countries such as Switzerland.

But other newspapers have pointed out that Switzerland’s TAAC revisions do not go as far as India would like. For a start, the new law does not in any way alter the most thorny of all tax information exchange issues between India and Switzerland: the use of stolen data to prise secrets from Swiss banks

Anyone hoping that Switzerland’s law change will automatically lead to the alpine state accepting the notorious stolen HSBC data from India is mistaken. Recent rumours that Switzerland was preparing a list of tax dodgers for India’s convenience were firmly rebuffed by the Swiss authorities.

In fact, the Foreign Banks in Switzerland Association recently told the Indian media that its government must step up its game to produce credible and watertight requests for information under the terms of existing Swiss-Indian agreements.

India has to demonstrate that any information it wants from Switzerland has ‘foreseeable relevance’ to a criminal investigation into tax dodgers in India, according to article 26 of Organisation for Economic Co-operation and Development’s Model Tax Convention, of which Switzerland is a signatory. 

So what’s changed?

So what do the TAAC revisions actually change? For one thing, they now make it possible for countries to make group requests on Switzerland. This could speed up the paperwork process considerably where there is evidence of multiple tax dodgers at a particular bank.

And secondly, it significantly waters down a Swiss law that requires account holders to be informed in advance that their data will be handed over to a third party. This greatly reduces the chance of tax dodgers simply withdrawing their assets and vanishing before they can be prosecuted.

These are reasonably significant changes, but they only haul Switzerland up to the level of many other countries.

However, all is not lost for countries like India. Switzerland did not change its laws for no reason, but was responding to criticism from the Global Forum on Transparency and Exchange of Information for Tax Purposes, a body set up to monitor the crackdown on tax evasion on behalf of the OECD and the G20.

In Jakarta last November, the Global Forum said the Switzerland could never meet international standards of transparency until it allowed group requests and stopped tipping off tax cheats about impending investigations.

The TAAC revisions should actually be put into the context of a whole series of reforms that Switzerland has been implementing in the last few years. These include erasing the legal distinction between tax evasion and fraud, loosening the standards of identifying suspected tax cheats and renegotiating dozens of double taxation agreements.

Put together, that makes for quite an impressive list. But Switzerland’s progress pales in comparison with the efforts of other countries to tackle the scourge of tax evasion.

All or nothing

The only real solution, for advocacy groups like Tax Justice Network, is to devise a multilateral system for automatically exchanging tax information. In other words, a global standard that compels all financial institutions around the world to automatically inform any country’s tax authorities when one of its citizens invests money abroad.

Here too, Switzerland has been making encouraging noises. In October last year, the alpine state signed the OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters, which could allow for the automatic exchange of tax information in certain circumstances. 

In May of this year, Switzerland went one stage further by expressly agreeing to take part in automatic information exchange provided that the recently-negotiated global standard governing the system is rubber stamped by all major financial centres.

The OECD presented the final draught outline in July. An important milestone in reaching general acceptance of standard rules would be reached if G20 finance ministers give the thumbs-up at one of their regular get-togethers in September.

And finally?

The TAAC revisions that come into force in Switzerland on August 1 lay the final foundation stones for the possible adoption of automatic information exchange by Switzerland.

But it still does not end there. Even if Switzerland finally accepts that its banks must automatically exchange information on the activities of its foreign clients, it looks more likely at this stage that the system will be bilateral (requiring a separate treaty with each partner country) than multilateral (a one-size-fits-all framework that every country abides by).

Back to the drawing board then for India and other countries that want to get their hands on Swiss banking secrets. Negotiators will have to thrash out yet another treaty with Switzerland based on new global standards.

And that leaves a few potential sticking points. How do you address the past behaviour of the Swiss financial system that used to shelter undeclared assets that are not covered by new deals, and what can India do with its prized CD of stolen HSBC banking data?

By Matthew Allen, swissinfo.ch