Wednesday, June 05, 2013

Switzerland seeks non existent 'level playing' field

Tax havens always, but always, give the same excuse for inaction in tackling their abuses. "We are ready - poised, even - to tackle these abuses. But we are just waiting for the teeny-weeny little detail of everybody else making the change first before we do so." And so the offshore world rumbles on, leaving havoc and misery in its wake.

We have Frank Grütter, Chargé d'affaires at the Swiss embassy in London, playing the same game, in a letter to the FT entitled Switzerland seeks ‘level playing field’ in tax transparency.
"Switzerland firmly believes in the importance of a “level playing field” where all financial centres are treated equally and follow the same rules. In this respect it will be interesting to see whether the Group of Eight members, including the UK and US, are ready to put their own houses in order and implement necessary reforms. This must, in particular, include the identification of beneficial owners of trusts and other financial constructs."
OK. First, it would be great to see the UK and the US getting their houses in order. But it's a mystery as to why Switzerland should not want to take a leadership role in cracking down on international crime. Second, though, he is asking for "the identification of beneficial owners of trusts and other financial constructs."

This is a worthy goal, as far as it goes. The problem is that many -- if not most -- of the assets held in offshore trusts have no beneficial owners. The assets held by a discretionary trust, for instance, are 'ownerless,' legally speaking. As we explained earlier:
"A trust holds assets for beneficiaries, to be managed by trustees (to understand the deviousness of offshore trusts, see this primer on trusts.)

The innovation in a discretionary trust is that the beneficiaries are not fixed. Instead, the question of who is to benefit from the assets is left to the 'discretion' of the trustees. So you might have several potential beneficiaries - some could even be children who have not even been born yet - and at least for now, nobody is entitled to the assets or their benefits until the trustee uses his or her 'discretion' and shells out to that particular person at some point in the future
. . .
So until the payout happens - which may be decades in the future - you cannot know or say that any given individual was entitled to that benefit: you cannot say who the beneficiary is. There actually isn't one: it's all up in the air, since the trustee's 'discretion' has not yet been exercised."
So Mr. Grütter is asking for the UK to identify the beneficial owners of trusts and other financial constructs -- when in fact these things don't have beneficial owners.

And here's the twist in the story. The European Union has prepared legislation - Amendments to the Savings Tax Directive - which would tackle discretionary trusts and their like, head on. In effect, the Amendments do not tolerate the idea of 'ownerless' assets and say that until a distribution has actually been made and someone else has actually received the asset, the original 'settlor' of the trust (the person who put all the assets in - the rich grandfather, for instance) is deemed not to have given the asset away, and remains the beneficial owner.

But these Amendments are being blocked. Why? Because Luxembourg and Austria inside the EU say they won't allow this to go forwards unless there is a "level playing field" - with Switzerland.

But all this is in the context of other moves now underway concerning the U.S.' Fatca project, which is in the process of being multilateralised, and will be the subject of our next blog (above this one.) 


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