Rubik deals run into trouble

Will September’s agreement between Switzerland and Germany last? Keystone

The tax deals which Switzerland reached last year with Britain and Germany could yet fail in the face of opposition in Europe and in the countries concerned.

This content was published on January 22, 2012

The agreements use the so-called “Rubik” model for dealing with the undeclared billions held by foreign customers in Swiss banks.

It is quick and easy: the countries whose taxpayers have tried to hide their assets get an inflow of money straight away, and Swiss banks remain relatively attractive to the super-rich who prefer to keep a low profile.

It works by levying a withholding tax on the assets held in the banks. In other words, a tax is automatically levied on the interest they earn, and then remitted to the country concerned. But no information about the identity of clients is provided.

And that is the sticking point: the European Union is insisting on “automatic exchange of information”, so that tax evaders can be tracked down.

Even in Germany, which has reached a Rubik deal with Switzerland, the Social Democrats, the Greens and some of the country’s states have expressed opposition.

Brussels has already questioned the validity of the agreement, and France has made it abundantly clear that it’s not interested. It wants to be able to find and punish tax evaders.

Only Italy has made positive noises, with Prime Minister Mario Monti saying an agreement with Switzerland was a “possibility to be checked".
The German finance ministry has said that it will not completely renegotiate its agreement, but that it will consider making changes here and there.

For her part, Swiss Finance Minister Eveline Widmer-Schlumpf has said she is prepared to examine “specific technical questions”, but not change the core of the agreement.

Unhappy Swiss

It is now by no means certain that the two tax agreements will pass the hurdles of the Swiss parliament either.

The rightwing People’s Party says the negative aspects of the Rubik system outweigh the positive ones. And parties on the left of the political spectrum are in any case relatively sympathetic to EU demands for automatic exchange of information.
Some economists and tax experts have cast doubt on the effectiveness of Rubik. Sergio Rossi, a professor of economics at Fribourg University told Swiss radio and television that it was based on a philosophy that could have worked in the last century, when foreign capital “sat in Switzerland and did not move for decades".
But he sees things moving now in the direction of the automatic exchange of information; Switzerland will simply have to negotiate skilfully with the other side “to get the biggest possible advantages for our country”, he says.

Political shenanigans

Tax expert Paolo Bernasconi says he expects Germany to ask for changes in some points that are not entirely EU-compatible, but not all is lost. “The agreement is designed like the Rubik’s cube, with different blocks. If you take away one block, the whole thing doesn’t fall apart.”

Michel Dérobert, secretary general of the Swiss Private Bankers Association, says a “political game” is being played out between Brussels on the one hand and Germany and Britain on the other, as well as one within Germany. But he is sure that the agreement does not contradict European law.

“I believe the German government has the means to prevent the project failing, and thus to avoid the humiliation of signing an agreement with a third party country and getting rapped over the knuckles by Brussels for doing so.

“And if it works with Germany, I imagine that many other countries could be interested in a similar agreement,” he said.

A bird in the hand…

Switzerland could benefit from the fact that many European countries are in urgent need of a fresh injection of money, because that’s just what a Rubik deal would provide.

A study by the Booz & Company consulting firm showed that at the end of 2010 residents of Germany and Britain had SFr270 billion ($216 billion at the December 2010 rate) deposited in Swiss bank accounts, 60 per cent of which was untaxed capital.

To regularise these holdings, a withholding tax would be levied on them at a rate of between 19 and 34 per cent. This would bring several billions into the British and German state coffers more or less immediately.

Bernasconi describes the EU’s insistence on the automatic exchange of information as “ideological". ”I have every respect for concepts such as tax fairness, equality, and equality of treatment. But looked at pragmatically, the state must first of all get income without incurring extra costs.”

While automatic exchange of information would certainly put off potential tax evaders, there are also a lot of unknowns involved.

When information is received about a tax payer, that doesn’t mean that the money will immediately be handed over, Bernasconi pointed out. “The information has to be assessed, and that means embarking on a procedure that can last for years, with no guarantee of success.”

A losing battle?

Dérobert thinks that if the agreements are scrapped the situation will remain as it is now.

“The EU is the one that is under the most pressure because of its system for taxing savings, which it isn’t managing to reform,” he said.

“If Brussels ever agrees on the direction this should take, the EU will call on Switzerland to revise the existing agreements and accept automatic exchange. Bern will refuse. There will be fresh negotiations and one day an agreement will be reached.”

But Bernasconi thinks Switzerland could have problems in the long run. At the moment, when everyone else is calling for exchange of information, Swiss banks are offering an alternative: instant billions, at no cost, and with Swiss precision.

But if this alternative is rejected, Switzerland has nothing else to offer.

"I’m afraid that we are heading straight for automatic exchange of information. That would be a disaster for part of the Swiss financial sector, because it would lose much of its attractiveness," Bernasconi said.

Swiss banking secrecy

Banking secrecy was enshrined in Swiss law in 1934.
France and Germany launched an attack on Switzerland in October 2008 for allegedly helping foreign tax evaders hide their assets. 
The country has been under continuous attack over the issue ever since.
As a result of the attacks, Switzerland renegotiated more than 12 double taxation treaties, but has refused to transfer information about bank clients to tax investigators unless they provide proof of wrongdoing.

The most damaging tax evasion case involved the activities of UBS bank in the US. In February 2009, UBS was fined $780 million after admitting helping US citizens dodge taxes. It also handed over data of 285 account holders.
In September 2010, the Swiss government agreed to transfer the details of 4,450 UBS clients to the US – in effect violating Swiss banking secrecy to prevent a ruinous court case for UBS.
It was reported at the end of 2011 that 11 Swiss banks had been given an ultimatum by US tax authorities to hand over details of accounts held by US citizens.

Switzerland agreed to withholding tax deals with Germany in August and Britain in October that preserve banking secrecy.

However, the European Union says these agreements violate EU rules on the taxation of income on savings and wants them changed.

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The Rubik principle

It was devised by the Association of Foreign Banks in Switzerland. 

The project wants to separate income from wealth and hand over tax at source to third countries, while keeping the Swiss bank account holder's anonymity. 

The inventors 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 take them away.

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