Deal reached on Swiss-German tax treaty

Switzerland and Germany have agreed to a taxation deal Keystone

Swiss and German negotiators have reached agreement on a tax treaty, the Swiss Finance Ministry announced, ending a long-running tax evasion dispute.

The accord, which includes an up-front payment to Germany of SFr2 billion ($2.76 billion) by Swiss banks, has been initialed and will be signed by both governments in the coming weeks.

The banks’ advance payment will only be reimbursed if and when the German authorities recoup enough back-taxes from Swiss accounts owed to them.

The Swiss authorities have been in talks with counterparts in Germany and Britain over tax deals for months. There has been no announcement to date on the British negotiations.

In a statement, Swiss Finance Minister Eveline Widmer-Schlumpf praised the hard work and “good result” of the negotiators and said the agreement was an important element in the government’s finance market policy.

“A policy which is resolutely based on tax compliant asset management. This move guarantees judicial security and will contribute to reinforcing the long-term competiveness and reputation of the Swiss finance market ,” the minister said.

In future, the Swiss banks will levy a withholding tax of 26 per cent on income earned on assets belonging to German customers. This rate is roughly equivalent to the current rate of tax charged on such income in Germany.

The withholding tax will allow Switzerland to preserve banking secrecy by forgoing the automatic exchange of information.

The Swiss Bankers Association has welcomed the tax agreement as being in the interests of clients.

“The bilateral treaty gives clients of banks in Switzerland who are taxable in Germany a path to compliance while maintaining their financial privacy.”

“A positive outcome is the fact that Germany has unequivocally acknowledged that the final withholding tax for the future is equivalent to the automatic exchange of information in the long term,” the association added.

Hidden treasure

Germany had become increasingly vocal in recent years in its claims that billions of undeclared German assets remained hidden in Swiss banks. Industry estimates put the figure at SFr200 billion ($276 billion).

Under the treaty, the German tax authorities will be able to make requests for information based only on the name of a taxpayer, without mentioning a specific bank. But the total number of requests will be limited (to 999 over two years) and each request must be based on a genuine reason, thus preventing so-called “fishing expeditions”.

As for regularising the past, German clients with long-standing funds held in Switzerland will have the option of paying a one-off flat-rate tax settlement of between 19 and 34 per cent. Alternatively the account holders can disclose their assets to the German authorities.

The specific wish of the Swiss banks to have access to the German market has been fulfilled, according to banking expert Martin Janssen of Ecofin. “Bankers from Switzerland can continue advising German clients or visit them in Frankfurt,” he told swissinfo.ch.

Janssen sees an advantage especially in German clients’ need for risk diversification. “Their anonymity remains protected. And if the mess in the EU carries on like this, people will be glad to have part of their assets in Switzerland. It could even come to forced loans [from the wealthy to the state] again as happened in the past.”

Stolen data

The treaty also deals with the problem of buying and selling stolen tax-relevant data.

Several cases emerged in 2010 of German tax investigators buying CDs of stolen client data from Swiss banks and using the information to pursue tax evaders.

Now the Swiss have pledged not to pursue such offenders any more while Germany has undertaken not to buy more data.

The tax deal also addresses the issue of employees of Swiss banks facing prosecution in Germany.

Under certain conditions Germany has agreed not to pursue new prosecutions. However a Düsseldorf tax fraud investigation implicating five Credit Suisse employees, in which several bank branches in German cities were raided last year, will continue.

Tax reform

The deal with Germany is part of broad and far-reaching reform in Switzerland regarding international tax relations.

In 2009, Switzerland bowed to international pressure by agreeing to provide administrative assistance to other countries in cases of tax evasion.

Previously, Swiss assistance had only been given when there was evidence of tax fraud.

To take this change into account, Switzerland embarked on renegotiating double taxation agreements (DTAs) with many countries.
 
The Swiss have renegotiated around 30 new DTAs since it agreed to comply with OECD rules on cross-border assistance in 2009.

The German-Swiss agreement will still have to be ratified by both countries’ parliaments.

Tax attacks

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.

The OECD placed Switzerland on a “grey list” of uncooperative tax havens in April 2009. The Swiss were removed in September after renegotiating more than 12 double taxation treaties, but they have refused to automatically transfer information to tax investigators without proof of wrong-doing.

Several countries, including Italy, France, Britain and the US, launched tax amnesties in 2009 in an effort to repatriate assets from tax cheats.

 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.

with input from Alexander Kuenzle