Thursday, August 04, 2011

Swiss-German tax treaty on Aug 10 will undermine automatic information exchange

Note: this blog has been substantially updated, towards the bottom of the blog.

From Eurodad, a post (hat tip: Tax Research) that is basically spot on:
An imminent “withholding tax treaty”, will allow Germany to claw back some revenue from tax evasion, but it will also protect Swiss bank secrecy and undermine the prospect of automatic information exchange globally, and more specifically the EU European Savings Tax Directive (EUSTD).

Switzerland and Germany will conclude the deal on 10th August, according to German and Swiss newspapers. A final withholding tax will be charged on income from savings and investments of German citizens with Swiss accounts, i.e those who had previously evaded tax in Germany. There will be both a one-off payment for lost income in the past, paid initially by Swiss banks, and then an ongoing tax on interest and return on capital. However, the withholding tax will be returned anonymously, thereby protecting Swiss banking secrecy.

The one-off compensation for past lost earnings could raise between €1.8 Billion and €10 billion according to different estimates, and will be paid for by Swiss banks initially, who will be reimbursed if Germany can make individuals pay up.

Actually obtaining the ongoing revenue is likely to be difficult as in many cases account holders can dodge these rules by moving money between Switzerland and other tax havens. Equally, the German government is probably being naïve in trusting the Swiss authorities and banks to collect taxes for them. Tax Research UK point out that Switzerland is a country that “has a proven record of facilitating crime, and being utterly indifferent to it. And that has consciously and deliberately withheld information from other governments for decades.”

Britain has been in negotiations with Switzerland for a similar deal, and other countries might well follow suit, with France and Spain currently considering it.

The actual tax rate has still to be finalised but it is likely to amount to around 25-26%.
TJN: we'd add a couple of things here.

First, it's noteworthy that under the bilateral Swiss-EU Savings Tax Agreement, in force since 2005, Switzerland already charges a withholding tax (currently 35%) on savings income of EU citizens and returns the tax anonymously to the respective home country. What's new about the impending deal is that this extends the witholding tax beyond mere savings income to all kinds of capital income. Also, crucially, Germany and the UK will consider this withholding tax as 'final': that is, capital owners will no longer have the legal obligation to declare their Swiss income to the tax authorities in their home country.

Savings income will still be taxed at 35%, since the the new deals with Germany and the UK must not contradict the bilateral Swiss-EU Savings Tax Agreement. However, the deals undermine the potential for a unified move by EU member states to push Switzerland towards automatic information exchange. Germany and the UK, two very important member states, are effectively co-opted by these Swiss deals.

In the agreement with Germany, the (flat) tax rate will be equivalent to the final withholding tax rate that Germany levies internally on capital income - that is, slightly above 25%. With the UK, however, the tax rate will be much higher, to compensate for the fact that the UK taxes this income would be taxed at progressive rates (10 to 50 percent.) According to anonymous (but reliable) Swiss sources, the tax rate will be in the upper range of these rates. This means that for tax payers in the middle range of the progressive system, it might become more expensive to keep their assets in Switzerland (and pay the final withholding tax) than to return them to the UK.

Our correspondent states:
"Long-standing rumours that France and Spain are also interested in the Swiss proposals have not (yet) been confirmed. Yet, Swiss newspapers have very recently discovered that Greece is very much interested. The Swiss government has confirmed this, but also made it clear that official negotiations have not yet started.

The US government has strictly refused to even consider the Swiss proposal. The Swiss media have reported quite broadly on this 'diplomatic failure' by the Swiss authorities."

2 Comments:

Anonymous Anonymous said...

This treaty will still have to be approved in domestic legislative processes in both Germany and Switzerland so there will be opportunities to oppose it. However there could be negative amendments such as scaling back the annual limit on the number of information exchange requests that can be made.

9:29 am  
Anonymous Alex Eurodad said...

This treaty will still have to be approved in domestic legislative processes in both Germany and Switzerland so there will be opportunities to oppose it. However there could be negative amendments such as scaling back the annual limit on the number of information exchange requests that can be made.

9:33 am  

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