Guardian: UK's Swiss tax deal will fail

From the Treasure Islands blog, involving today's article in The Guardian:

Three weeks ago I promised something meaty on the UK-Swiss deal. It's taken me a little longer than I'd hoped, as the first real information about the deals only became available this week. But here it is: an article in The Guardian today, explaining how the whole thing is not just sordid, wrong, and all that - but that it's simply not going to collect the money that's promised. It is riddled with loopholes.

Britain's sordid Swiss tax deal will fail

The UK is about to sign an agreement with Switzerland under which Swiss banks levy taxes on secret Swiss accounts held by UK and German tax evaders, while keeping those accounts secret. The UK says the deals will raise billions.

It is bad enough that this sabotages major European efforts to tax their citizens properly and to penetrate secret banking, and that wealthy criminals will get impunity. But there is an even harder objection: the deals will fail. They will raise only a small fraction of what has been promised.

After all, Swiss banks are supposed to deduct up to 34 percent from their clients’ capital assets, then impose taxes of up to 48% on the subsequent income. Given how massive a chunk this will take out of these assets and income, it is astonishing that there has been hardly a murmur of protest from Swiss bankers. Indeed, they are purring about how ‘fair’ it is.

The details are not yet published (why is it being kept secret?), but we now have a good idea. Yesterday, Switzerland published the text of a parallel agreement with Germany, which the Swiss have said is essentially the same as the UK deal except for the tax rates concerned. Taking them at their word, we can now see how both deals will fail.

Banks are supposed to withhold taxes first on the initial capital, then on interest, capital gains and capital income owned by their UK taxpayer clients. But a Swiss bank would rarely hold John Smith’s account in the name of “John Smith” but in the name of, say, ABC Liechtenstein foundation or XYZ discretionary trust. Some private banks don’t hold a single account in an individual’s name.

The German deal claims to tackle these structures by saying that the tax will fall on the people that have the right to use these assets. But foundations and discretionary trusts are exceedingly slippery. Although somebody is always ultimately behind them, from a legal point of view nobody has the rights to their assets. That is the whole point of these things! And if you can’t identifiy who has legal rights to the assets, you can’t say if the person ultimately behind it is British, German, Nigerian or Martian. So the bank cannot apply the UK-Swiss deal to it and withhold the upfront capital tax.

They may, perhaps, find out who is really behind the structure when it finally makes a distribution, but this may be decades later and may be paid out as loans or consulting fees, say, or be paid to the client once he or she has moved to Spain to retire - and will therefore fall outside the agreement’s scope.

There is a much better way to go about all this.

European countries already have a multilateral agreement to collect tax and share information with each other about interest earned by each others’ citizens, to help each country tax its own citizens. The European Savings Tax Directive, as it is known, covers EU countries plus Switzerland, Liechtenstein, Britain’s Crown Dependencies (such as Jersey) and Overseas Territories (such as Cayman) and others. (The non-EU members have agreed to adopt equivalent measures.)

The Directive is full of holes, partly because of the above loophole, and has raised a tiny fraction of the amounts originally expected: Jersey, with £165 billion in bank deposits, paid out just £4 million last year under the scheme, a miniscule fraction of what you might expect.

But major EU amendments, coming soon, will make the Directive a very different, beefier beast with serious teeth, using concepts never previously wielded in international tax. It will make the management of the structure, rather than the bank, responsible for applying the tax provisions. It will either consider the taxpayer to be the individual who initially contributed the assets, or apply the tax provisions when the structure pays out.

The German deal misses these clever tricks, which are essential for success. It also loses a massive opportunity: it could easily have brought the foreign branches of Swiss banks in Singapore and other places into its scope – but, inexplicably, it does not. It has several other big loopholes. All of which probably explain why Swiss bankers are so happy with the deals.

The only upfront money the governments of the UK and Germany are sure to receive will be small payments from accounts in individuals’ own names. It would be surprising if this collects more than a tenth of the sums that have been promised.

In early 2010 Switzerland, under strong EU pressure, was showing signs – at long last – of considering serious moves towards transparency. The British and German deals sabotage political progress. Swiss shutters are down again.

As a tax adviser in Switzerland puts it: “Britain and Germany will destroy so much – for tuppence.”

The German deal faces massive political resistance and looks likely to get shot down in the German parliament, leaving the UK out on a limb. Britain should scrap this bilateral deal and throw its weight behind EU measures, which could raise major tax revenues and seek widespread multilateral information exchange as the long term goal. Nobody pretends this will be easy. But it is far better than the UK’s sordid deal, which won’t work anyway.

END

One other thing - confirming what is likely to be in the text of Britain's agreement with Switzerland, we can turn to the recent words of HMRC head Dave Hartnett:

"Where we have gone with the structures and trusts is that Swiss banks will require disclosure to them of beneficial ownership, and if that shows a connection to the United Kingdom, there will be withholding against those investments, and the Swiss tax authority will audit this in relation to the Swiss banks. It has a pretty fearsome reputation for the way in which it audits Swiss banks."

If he's talking about 'disclosure of beneficial ownership' - then there's clearly, as my article explains, a problem with structures that have no beneficial owner.

What have they been thinking?

For German speakers, a more detailed analysis of the deals is available here, with a basic web translation here. This has been reported in Germany in the Tages Anzeiger, Frankfurter Rundschau, Boersego, and elsewhere.