Swiss face growing EU pressure over banking secrecy

The issue of taxing savings income has clouded Switzerland's relationship with the EU Keystone

Swiss banking secrecy is facing new pressure under European Union measures to force third countries to report income on assets held by EU citizens.

EU finance ministers meeting in Luxembourg on Tuesday cleared the way for Brussels to start talks with third countries, including Switzerland. Negotiations between Bern and Brussels are expected to start before the end of the year.

The finance ministers agreed that their citizens should not be able to avoid paying tax on income from assets held in third countries. They said these countries either had to fall into line by implementing the EU’s own reporting system, or by taking “equivalent measures”.

The EU’s position, which is now official, leaves the door open for Switzerland’s proposal to introduce a withholding tax as an alternative to abolishing banking secrecy, which Switzerland says is “not negotiable”.

The issue of taxing savings income has clouded Switzerland’s relations with the EU in the past year, chiefly because it threatens Swiss banking secrecy laws.

The forthcoming negotiations are aimed at preventing the six countries concerned (the United States, Switzerland, Liechtenstein, Monaco, Andorra and San Marino) from undermining the EU’s efforts to harmonise its taxation of savings income.

At the moment, EU citizens have an edge over the taxman, which the Brussels authorities would like to do away with. Income such as interest derived from a bank account cannot be taxed within the EU if the savings are held in a foreign country.

A proposed EU directive would force the authorities of all member states to exchange information about such savings. Individual member states such as Luxembourg and Austria, which have banking secrecy laws similar to Switzerland’s, may introduce a withholding tax on savings income during a seven-year transition period before they, too, will have to join the EU’s procedure for reporting savings.

In the view of the EU, the proposed measures are only effective if account holders have no incentive to transfer their savings from EU member states to third countries, for example Switzerland. Consequently, the EU’s position agreed on Tuesday requires the six countries to abolish their traditional banking procedures where they are in conflict with EU policies.

Swiss negotiators have made it clear in preliminary talks with the EU that Switzerland’s banking secrecy laws are not up for discussion during negotiations. “Banking secrecy is not negotiable”, Finance Minister Kaspar Villiger has said.

But observers say Switzerland’s financial sector will come under increasing pressure in the long-term to fall in line with the EU’s reporting procedure. They also say that Switzerland’s position sits awkwardly with the cabinet’s political strategy of wanting Switzerland to join the EU.

The EU decided at a summit in Portugal last year that EU policy on the taxation of savings income must be harmonised, but agreed on a so-called “co-existence model”, which left member states free to participate in the EU’s reporting procedure or introduce a withholding tax. But last June, a meeting of EU finance ministers agreed that, ultimately, only the reporting procedure should survive.

Tuesday’s decision seems to have given the “co-existence model”, held dear by Luxembourg and Austria and possibly other EU member states, a new lease of life. A source in the ministry of finance in Berne told swissinfo that the EU had reverted to their earlier position, which left some hope that the two sides could find an agreement.

by Markus Haefliger