Monday, October 24, 2011

Revealed: the loopholes which destroy HMRC’s claim that Swiss tax deal will see a £4-7bn Treasury windfall

  • UK/Swiss tax deal could see UK lose money
  • 10 loopholes identified that mean this agreement won’t deliver
  • TJN urges immediate cancellation of agreement
An agreement between the UK and Swiss governments, which permanent secretary for tax Dave Hartnett has stated will raise between £4bn - £7bn, is so fundamentally flawed it could actually lose the UK tax revenue.

A forensic analysis of the agreement by the Tax Justice Network reveals a series of fatal flaws in the two-week old tax deal. Though the analysis focuses on the UK, it is of great relevance to Germany, which recently signed a near-identical deal with Switzerland under similar false promises, as well as for other countries considering signing similar bilateral deals.

The UK-Swiss deal, signed on 6 October, is supposedly designed to capture assets held by wealthy UK residents who have evaded taxes by secreting their fortunes in Swiss banks.

But the 10 loopholes identified by TJN – and we believe there are more loopholes than that – means there is virtually no chance the agreement will raise anywhere near the £4-7bn suggested by Dave Hartnett.

The loopholes provide numerous ways for accountants, lawyers and bankers to help their UK clients escape the new rules.

Loopholes include:
  1. Provisions which allow UK wealthy individuals who hold their assets in so-called discretionary trusts, foundations and similar structures to evade the new rules. These structures are extremely popular with wealthy tax evaders and make it impossible to identify who currently owns the assets. Accountants and lawyers who set these structures up are poised to do a roaring trade.
  2. Wealthy UK individuals can side-step the rules by creating trading, manufacturing or commercial operations as these fall outside the scope of the new deal.
  3. Branches of Swiss banks in other countries are not included in the provisions so UK Swiss banks account holders can simply move their assets to a foreign branch of a Swiss bank to escape the agreement’s scope.
  4. While the new deal includes interest, dividends and capital gains on ‘bankable assets’, it crucially does not extend to:
    - Wages;
    - Royalties;
    - Income on property;
    - Directors’ fees; and
    - Loans
    This allows advisers to UK residents to siphon out benefits through these routes, untaxed.
The deal does not come into force until May 2013 allowing 17 months for advisers to make alternative arrangements and move assets to escape the deal.

These loopholes and more besides (see accompanying in-depth report) leads the Tax Justice Network to challenge claims by HM Revenue and Customs (HMRC) that this agreement will see a £4-£7bn inflow of tax receipts into the UK.

TJN regards this as a major over-estimation which misleads the British public. In fact, as we argue in our report, there is a real likelihood the serious loopholes, flaws and knock-on effects will actually reduce the already pitiful tax take from UK individuals keeping their assets in Swiss banks in the medium and long-term.

TJN fears this deal will also undermine ongoing efforts to improve transparency and tackle tax evasion through the European Union Savings Tax Directive. An initiative that Switzerland – along with Austria, Luxembourg and Jersey – are doing everything in their power to scupper.

John Christensen, director of the Tax Justice Network, said:
“It’s hard to see how the British public will benefit in any way from this flawed agreement. Worse, it will reverse years of progress made by the EU towards tackling tax evasion through automatic information exchange. It is impossible to see how the HMRC can describe this deal as being in Britain’s interests.”

Nicholas Shaxson, author of Treasure Islands - tax havens and the men who stole the world, said:
“There is a very strong likelihood that that this deal which guarantees tax haven secrecy, will spread like a cancer through the global financial system. This is because many countries are now considering similar agreements. They are either tax havens that want to copy Switzerland, or victims of tax evasion that want to copy the UK. This deal has to be killed.”

Dr David McNair, Economic Adviser at Christian Aid, said:
"This stunning analysis from the Tax Justice Network shows that the UK's deal with the global headquarters of bank secrecy is likely to undermine the UK's tax revenues as well as those across the developing world. It's no wonder Swiss bankers and their clients are delighted. But everyday people in the UK and developing countries will lose out. It is imperative that the UK now takes strong action on financial secrecy at the G20 in Cannes.”


Nick Shaxson +41 79 477 1070

John Christensen +44 797 986 8302

Richard Murphy +44 777 552 1797

Notes for Editors

1) The Swiss-UK tax deal retains the principle of Swiss banking secrecy. In return, tax evading UK citizens will pay a charge of 19% - 34% of the absolute value of their account. In addition, they will pay taxes on subsequent income of between 27% and 48% annually. Switzerland will pay the UK 500 million Swiss Francs (about £350 million) of this up front.

2) Estimates of the amount of UK taxpayer assets in Switzerland range between £40bn and £125bn. In 2010, the UK received £16.9m in tax from Switzerland under a withholding tax arrangement in the context of the EU Savings Tax Directive. That Directive is also full of loopholes, which are being patched up.

3) Historical revenues from the EU Savings Tax Directive are the only realistic benchmark against which estimates can be made for the UK-Swiss deal. Our calculations show that the absolute maximum revenue for this deal is £1 billion from the capital charge – but almost certainly it will be far lower than that. Future income will most likely be lower than under the current EU Savings Tax Directive. Britain’s only certain revenue from this deal is the CHF 500 million (£350 million) up-front payment.

4) Some loopholes stem from the fact that this is a bilateral deal, unlike the EU’s multilateral arrangements. Any countries considering similar deals should be aware that it is impossible to close these loopholes without a multilateral approach.

5) The analysis of the UK-Swiss Tax Agreement was conducted by Nicholas Shaxson, author of Treasure Islands - Tax Havens and the Men who Stole the World, in consultation with several people inside and outside TJN.


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