Germany is building a gateway for criminal money

TJN has repeatedly written about Switzerland’s divide-and-rule strategy to undermine the European Union’sefforts to construct a properly functioning system of automatic information exchange. The Swiss Finance Ministry, together with its banks, has deployed a strategy to head off efforts to end financial secrecy, with a system that it calls the “final withholding tax”. This is designed to preserve banking secrecy while buying off the most vocal and powerful foreign governments by transferring to them the fruits of a final tax on foreign citizens’ financial account’s income (details here).

The German-language Swiss newspaper Tagesanzeiger is now reporting on spokespeople from the German and Swiss Finance Ministries, signalling their willingness soon to finalise the negotiations. Last week, German Finance Minister Schäuble caused confusion saying that this would happen by the end of 2011, while Swiss Finance Ministry spokesman Mario Tuor said it would happen within two months.

Yesterday, the foreign ministers of both countries followed suit with a PR tour, keen to portray an image of happily restored relationships, with and end to the acrimonious fall-out over the banking secrecy scandal under former German Minister of Finance Steinbrück.

Two fresh and particularly worrying details, though, now stand out.

The first involves technical matters. It seems that formerly hidden funds that have been on deposit for at least 10 years will face a mere 20% tax rate -- with a proportional discount for deposits that have been held for a shorter period. The tax rate for future interest income that has been legalised this was is said to be 26% -- far lower than the 35% withholding tax agreed in the third stage of the European Savings Tax Directive, which begins in a few weeks. (July 2011).

As we have often argued, this approach of applying a final withholding tax, instead of having proper transparency, cementing two-tier justice in two ways. First, it solidifies the flat taxation of interest income, in contrast to labour income which is taxed progressively. Second, those evading their taxes through Switzerland receive privileged treatment as compared to those who have been evading taxes, say, through the United States. Moreover, the rules for voluntary disclosure for tax evasion have only recently been tightened in Germany - and now this treaty offers routes to circumvent these changes. That’s absurd and creates all sorts of perverse incentives. The Tagesanzeiger reports:

“Interesting, too, is the question of how one should react to clients who suddenly bring their money from offshore centres to Switzerland and intend to legalize the money under the discounted rate. The rate of 20% only applies for monies that are here for 10 years; for what arrived later, accordingly the rate will be even lower.”

The withholding tax appears to create the incentive for tax dodgers to move their hidden money from other tax havens to Switzerland, leave it there for a while, then be taxed only at the preferential rate - and then get exonerated from any criminal prosecution!

They reduce the risk of their assets being discovered in other jurisdictions, as Swiss Secrecy is being preserved, being offered a safe refuge from legal consequences. Meanwhile, Switzerland's and Germany's governments are strutting around saying how cooperative they have now become bringing tax revenue back to the German people.

Apparently, such movements of funds have already happened in response to the announcement of such a withholding tax scheme and is a feature German’s bureaucrats dislike. In response, they came up with the idea of allowing a “simplified” upon request information exchange in cases of fresh black money. Now, it begs the question how this should be implemented: Will Germany deploy buses full of tax inspectors who are sniffing in UBS & Co.’s IT-systems to find out about if a German taxpayer's bank balance is fresh or old, and therefore the request can be simplified, or not? What if she or he took a few million out of the account a few years ago, and now refilled to the original sum: is that fresh money? This process is a declaration of bankruptcy of sanity and reason.

The truth is: nobody can prevent that an institutionalized exonerating withholding tax will be abused badly. The naivety is unsurpassable with which Germany appears to be willing to hand over taxation capacity to a country whose banks have an outstanding record of notoriously helping to break foreign country’s laws. Richard Murphy comments on the corresponding treaty between the UK and Switzerland: “Let’s just call it an endorsement of criminality, or a slap in the face for honest taxpayers” .

The second kind of novelty relates to the bigger strategic picture. As we have argued before, these negotiations by Switzerland are intended to weaken the common EU-position. It is likely that they played a part in the recent fallout by Italy’s Finance Minister Tremonti during the last ECOFIN-session, where he ranted against the Swiss, saying they wrote the EU-Savings Tax Proposal (some preceding history here ). The harmful impact of the negotiations with the Swiss on the European project has been confirmed indirectly by German Foreign Minister Westerwelle’s response on a question has been asked yesterday by a journalist. Again, the Tagesanzeiger notes (rough TJN translation):

“Asked about the amounts of the withholding tax, to be transferred in the future to the German tax coffers, Calmy-Rey and Westerwelle remained evasive.

Similarly, on the question about the consequences of the agreement between Switzerland and Germany on the negotiations at the EU-level, they did not want to comment: “You want to know more than I am prepared to say”, said Westerwelle answering the corresponding question of a journalist.”

Sometimes silence speaks volumes (and good on Westerwelle for being that honest!). Now, the real shocking news is to come. The same article announces a meeting of German-speaking countries next Wednesday in Vaduz, Liechtenstein. The Ministers of Finance of Germany, Liechtenstein, Austria, Luxembourg, and Switzerland will meet up there. This group includes the countries in Europe who continue to cling most tightly to banking secrecy. This very much looks like a follow-up on the shiny PR-hand-shaking-event between Westerwelle and Calmy-Rey yesterday to enthrone a new Entente. It has the taste of old Germanic banking secrecy connections revived to replace European solidarity. This does not bode a bright future, especially given Germany’s past.

Just because dirty money is driven through an inter-state laundry-“Autobahn” does not make it clean. Citizens will easily understand this.