Tuesday, December 13, 2011

EU Commission melts Swiss Rubik plans

By a non-TJN guest blogger familiar with European tax issues, who wishes to remain anonymous. (TJN has added the links.)
To all intents and purposes, Switzerland’s ill advised attempt to use its Rubik tax agreements to alleviate EU pressure for automatic exchange of information seem to have failed before it could get off the ground.

The EU Savings Tax Directive which commenced operations in 2005 had so many loopholes that tax returns in every country electing the withholding option was less than 10% than what was expected. Potential taxpayers in some countries were so efficient at avoiding the directive that less than 1% of interest was subject to withholding tax.

Consequently, some Member States such as Germany, France and Italy began demanding automatic exchange of information from the usual suspects. The Swiss bankers' association, rightly sensing the demise of their industry (see here, for an example of their terror) if they were obliged to spill the beans, devised a scheme to “fix” the loophole-riddled EU saving tax directive. They said that the low withholding tax results were due to the narrow definition of which income should be taxed. So they proposed that the withholding tax should be expanded to include capital gains, dividends and other investment related income. As a sweetener, they also proposed a withholding tax on amounts held in the past.

Beware of Swiss bearing 'gifts.'

The whole purpose of offering to “fix” the savings tax was to stave off pressure for automatic exchange of information. Therefore, the crucial condition for EU member states accepting this "gift" was that the withholding tax should be a full and final settlement of any taxes owed. In effect, the Swiss would get to keep their sacred banking secrecy.

The EU Commission, no doubt peeved about Switzerland’s divide-and-conquer strategy against future improvements to the savings tax directive, and against demands for automatic exchange of information, has now warned any EU Member State contemplating a Rubik deal, that the EU already has legislation regarding withholding taxes on interest. As EU legislation has primacy over bilateral agreements, no EU member State can enter into agreements that impinge on the EU savings tax.

The withholding taxes levied under the EUSD are merely advance payments against what would ultimately be owed by the taxpayer. Therefore Rubik cannot be regarded as a full and final settlement. The tax evader client can still be liable to penalties, etc. This defeats the one and only purpose of Rubik. Rubik is crippled.

Rubik's Loopholes.

The amendments to the Savings Tax Directive, still to be introduced, are a far more ferocious set of provisions which, while still containing some loopholes, will nevertheless capture large revenues. Even though the proposed saving tax amendments were published in 2008, however the Swiss ignored these improvements and inexplicably introduced a loophole-riddled agreement, such as explicitly exempting discretionary trusts, foundations, establishments and all other entities and arrangements without an immediate identifiable beneficiary.

Furthermore, all offshore entities and arrangements that can show they have commercial purpose is inexplicably and spectacularly exempt (remember those shoes you shipped to your Uncle in Malta or that “consulting” invoice you gave your cousin in Spain for helping him set up a facebook page”? Well, you have a commercial operation, then, and you are henceforth exempt. And it's not as if Swiss bankers, who are supposed to police these agreements, will be falling over themselves to check up on you!).

And the much touted "inclusion" of insurance wrappers only relates to Swiss insurers. Therefore all you have to do is to use an Irish, Liechtenstein or a Luxembourg insurer, for example, which can offer Swiss banks bancassurance wrappers till the cows come home, without being in scope.

All those trustees in Geneva managing Bahamas trusts with Bahamas accounts can breathe a sigh of relief as Rubik didn’t even contemplate their inclusion.

The intervention by the EU Commission that EU Member States must not touch withholding tax legislation on interest plus the fact that the EU savings tax amendments would close Rubik’s loopholes means Rubik is melting before our very eyes.
TJN: See our recent article making similar points, here, an independent analysis on the political aspects of the disagreement between the EU and the Rubik participants here, a good FT editorial on the subject here, For more details on the loopholes in Rubik, see our report here, and note that our subsequent efforts to find anyone, anywhere, to find a single fault in our report have so far proved fruitless.


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