It’s a u-turn, but unavoidable: bankers and politicians are preparing for the automatic exchange of tax information. Switzerland has helped develop the new standard, which the OECD wants to fast-track worldwide.This content was published on February 21, 2014 - 17:00
The days when Swiss finance ministers said banking secrecy was non-negotiable and carved in stone are over. Switzerland has contributed to the OECD model agreement, which will be officially presented at the G20 ministerial meeting in Sydney over the weekend. Bern’s demands have also been taken on board.
“It was certainly right for Switzerland to be actively involved, even if it was opposed to the idea,” said Zurich-based bank expert Hans Geiger, who is a dedicated advocate of banking secrecy. “The demands make sense and they are in the interests of Switzerland,” he told swissinfo.ch.
Switzerland’s demands included the reciprocal exchange of bank customer data. This is how the OECD model treaty differs from the US anti-tax evasion legislation known as FATCA, the Foreign Account Tax Compliance Act.
In addition, with the OECD model, trusts must disclose the beneficial owners and data exchange is limited to the field of taxation and therefore respects privacy concerns.
“Spouse remains in the dark”
“Specifically, this means, for example, that if the German tax authorities are checking whether the account of Mrs Schwarzer or Mr Müller is really taxed in Germany, they cannot hand information [given to them by another country] to other authorities [such as the criminal courts investigating a non-tax related offence]," said Peter V. Kunz, professor of business and comparative law at the University of Bern.
If Mr Müller has a black money account, criminal proceedings will be opened, but the treasury could not “in a divorce case, for example, forward the information to a court or his wife. That was a major concern for Swiss banks.”
The disclosure of beneficial owners of trusts would “prevent the Swiss banking centre having a competitive disadvantage in relation to Anglo-Saxon establishments”, said Kunz.
Tight time frame
The basic parameters of the automatic exchange of tax information were developed more quickly than expected, Swiss Finance Minister Eveline Widmer-Schlumpf said in an interview with the Neue Zürcher Zeitung newspaper.
As a result, she said, “time is tight to find a solution with EU member states for the issues which really concern us – market access and a solution to regularise untaxed existing assets.”
Because all foreign assets are to be disclosed under the new standard, Switzerland is aiming at a global solution for untaxed money with other countries such as Germany, France and Italy.
For the domestic implementation of the system, Widmer-Schlumpf is hoping to have a bill before parliament by next year.
Privileges for the USA
The OECD’s timetable for the introduction of the automatic exchange of tax information is ambitious and concrete. In September, the G20 ministerial meeting in Cairns will adopt the relevant standard. More than 40 countries including the US, Germany and France have already announced that they want to introduce it as quickly as possible.
It is becoming apparent that Washington is reserving some benefits for itself by refusing to offer full reciprocity and introducing exceptions for trust and offshore rules. The inevitability annoys Geiger. “The US is not adhering to the standard, which reflects its clout in the world.”
The OECD standard consists essentially of a model agreement, which serves as a basis for states to conclude relevant double-taxation agreements with each other. The automatic exchange of tax information cannot be applied retroactively and does not regulate the past – that is to say, it does not legalise illicit funds already stashed in Switzerland.
Hard work for the government
In Switzerland, adopting the agreement will require changes in the law and new international treaties, i.e., a parliamentary process and possibly a referendum.
“The domestic point of view plays a big role,” said Kunz. “It will require a lot of political effort by the government, which has to try, in its negotiations with other countries, to get something back in exchange for giving up banking secrecy.”
“A major challenge is the clean-up of old undeclared assets through tax amnesties, voluntary disclosure programmes or a withholding tax in the respective countries.” Negotiations will also focus on free market access for Swiss banks abroad.
If it is not possible to find a solution for the untaxed existing assets – i.e., for the legalisation of black money – then “Switzerland can count on assets flowing to tax havens before the introduction of the new system,” Kunz said.
Automatic exchange of tax information
The automatic exchange of tax information is a paradigm shift in the international fight for tax justice.
For the Organisation for Economic Cooperation and Development (OECD), it represents a further development of the exchange of information upon request.
Its goal is to shed light on illicit funds deposited abroad.
Switzerland is represented in the OECD Committee on fiscal affairs, which has brought the automatic data exchange standard to a position where it can be presented at the G20 ministers’ meeting in Sydney on February 22 and 23.
The cabinet commissioned the administration to work on the development of a standard in June 2013.
In June 2014, the OECD committee is due to approve the new standard. In September, the G20 is expected to adopt it at the political level.
The new system excludes any provision for existing assets.
U-turn by the banks
The government is keen on a speedy legislative and administrative process to introduce the automatic exchange of tax information. Domestic political resistance is mainly expected from the rightwing Swiss People's Party.
The banks, however, have given up the fight. “Since Luxembourg and Austria abandoned their reservations in the beginning of 2013 it is clear that we have to be open to it too. This is an international development, and we cannot shut ourselves off. We want and are ready to implement the system,” Sindy Schmiegel Werner, a spokeswoman at the Swiss Bankers Association, told swissinfo.ch.
Switzerland “was forced to accept the new system because we saw it would become the international standard. It did this faster than we thought. But it makes no sense to fight the inevitable,” said Kunz. “It is not only the banks which have made a u-turn, but the official policy of Switzerland.”
In good faith
Geiger sees in the automatic exchange of tax information a “police state approach” which is in total contradiction to the “principle of good faith between the state and its citizens.” That is why at home Switzerland would retain the model of self-declaration, in effect retaining banking secrecy, he said.
Although in the international context Switzerland appears to have “given up” by accepting the standard, this was probably the right thing to do, according to Geiger, and corresponds to “practical reality”.
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