PRESS RELEASE - Liechtenstein

Germany, Europe and the OECD must now act decisively on tax haven abuse

Tax Justice Network, Februry 20, 2008

Germany is in the throes of its biggest ever tax scandal. On the occasion of the visit to Berlin of Liechtenstein’s Prime Minister Otmar Hasler, the Tax Justice Network demands that Germany and Europe now act decisively against Liechtenstein and close it down as a tax haven forever. As a first step, Germany should publicly commit itself to handing over all relevant tax information that it now possesses to the authorities of all the other jurisdictions that have been victims of Liechtenstein’s activities. This scandal must also spur decisive efforts by Germany and Europe to invigorate hitherto feeble international efforts against tax havens by the OECD and others.

Worrying signs are emerging that Germany’s response risks being as weak-kneed as other international schemes. Torsten Albig, a spokesman for German Finance Minister Peer Steinbrück, recently said that

The problem is not the possibilities in Liechtenstein, but the problem is the criminal energy of German tax evaders.

Tax evasion and other forms of financial crime have a demand side – in this case German tax evaders – and a supply side, the international infrastructure that promotes and harbours evaded taxes and other criminal money, and the lawyers, bankers, accountants and others who make the secrecy work. While the wider context for Albig’s statement is more nuanced, the comment itself is unambiguous. The Finance Ministry must repudiate it and declare that it is the “possibilities in Liechtenstein,” not the German tax evaders’ criminal energy, that are the main problem.

Liechtenstein’s tax system harms not only Germany, but the whole world. Many billions of dollars of dirty money have fled Africa and elsewhere into Liechtenstein in pursuit of its secrecy, leaving poor governments starved of tax revenues and draining local economies of vitally important investment capital. Liechtenstein, for example, played a central role in the “Elf Affair” where French investigating magistrates discovered money from France’s former African colonies being used for illegal, corrupt purposes around the world. Bribes have been allegedly funnelled through Liechtenstein foundations by American oil companies in pursuit of lucrative oil licences in Kazakhstan. But these and several other cases cases are just the tip of an iceberg. If Germany has to use its intelligence services to bribe an insider to obtain basic tax information then weak nations in Africa and elsewhere are especially vulnerable: they effectively have no chance of securing the information they need to prevent corrupt politicians and others undermining their states’ revenue bases.

The right political climate for a serious worldwide crackdown on tax havens is now at hand. Public revulsion in Germany at this emerging scandal will promote action in Europe, and the recent co-sponsoring by U.S. Senator Barack Obama of the Stop Tax Haven Abuse Act reflects a fast-changing political climate in America. In Britain, arguably now Europe’s leading tax haven, a dramatic public backlash has emerged recently weeks against legislation allowing wealthy “non-domiciled” citizens to escape proper taxation. Germany, Europe, the OECD and others should take this opportunity to start cracking down seriously on tax havens at last.

John Christensen, director of the Tax Justice Network, said:

It is an international disgrace that these tiny jurisdictions continue to abuse their privileged status. Liechtenstein is a clear example of a pirate state. We have a prince running his own bank, and Lichtenstein where he wields power is clearly and systematically abusing its offshore secrecy status to undermine other nation states and abuse their citizens. When élites remove themselves from the tax regime, they subvert democratic processes and undermine respect for the integrity of laws and institutions. Evaded taxes are stolen public assets, and tax evasion is corruption at its worst.

Richard Murphy, senior adviser to the Tax Justice Network said:

This affair shows that tax havens set out to create structures whose only use is to subvert the taxation and regulatory systems of other countries. That’s a form of international aggressiuon to which the states affected must respond. But they have to go beyond that. They must also tackle the lawyers, accountants, banks and trust companies providing these services. Many of these are household names, facilitating corruption and yet still expecting to be held in high regard in the states that suffer the cost of their actions.


NOTES:


International initiatives on tax havens are inadequate.

The European Union has made some progress on tackling tax havens. But its current efforts focus on business taxation and the taxation of interest income. This leaves enormous gaps such as trusts, which are notorious vehicles for tax abuse and which are widely exploited by tax evaders and other criminals.

The OECD in 2000 identified 35 jurisdictions as uncooperative tax havens but only three remain: Liechtenstein, Andorra and Monaco which refuse to exchange even limited tax information with other jurisdictions. Some progress has been made. Yet many countries effectively declared clean by the OECD, like Switzerland and the UK, still offer of tax structures that facilitate large-scale tax abuse. (See an in-depth research report into Switzerland by the American research organisation TaxAnalysts here.)

What is a tax haven?

The OECD in 1998 defined a tax haven as a place that offered at least two of: a) No or only nominal taxes. b) Lack of effective exchange of information. c) Lack of transparency. d) No substantial activities in the location recording a transaction.

Thinking has moved on since 1998 but these definitions remain broadly relevant. A simpler way of thinking about tax havens is:

A tax haven creates laws and other measures that it knows can be used to evade or avoid the tax laws or regulations of other jurisdictions and which have little or no other purpose.

How is Liechtenstein a tax haven?

Using the OECD criteria Liechtenstein is a tax haven. In fact, it is one of the world’s most secretive jurisdictions. Tax evasion is not a criminal offence in Liechtenstein so normal international cooperation agreements on criminal matters do not apply.

The Liechtenstein foundation is its main tax haven product. There is almost no official record of its activities as long as it is set up for personal or family use by a non-resident. The name of the person creating the foundation is not recorded. The foundation must have a constitution but many foundations do not require registration to acquire their legal identity: they are known only to the lawyers and bankers supplying services to them, who are legally bound by absolute secrecy. Even where registration is required, no information about the foundation is available to the public. Liechtenstein foundations trading only outside Liechtenstein are not required to keep accounting records, and no accounts ever have to be sent to any authority. A small tax charge is paid annually. Liechtenstein is part of the EU Savings Tax Directive whereby jurisdictions either exchange tax information with others or they require paying agents to apply a witholding tax (currently 15%) on interest income which is then mostly passed in bulk to the relevant national authority. Liechtenstein has taken the witholding tax route, so it does not have to exchange tax information with other authorities.

About the Tax Justice Network.

The Tax Justice Network is led by tax experts and economists and it campaigns for greater transparency in international finance and opposes abusive tax practices. It advises and works with governments, international bodies and non-governmental organisations in matters of international taxation and corruption.

www.taxjustice.net

Financial Secrecy Index - news coverage

When we launched the 2011 FSI, we brought you some links on early news coverage. Media commentary on the FSI has abounded far and wide, so now we are bringing you a list of many of the articles that have appeared around the globe. We'll bring you more links as they arise, and you can also see media coverage on http://news.financialsecrecyindex.com/. As a reminder, our blog posts bringing you the FSI launch are here and here. We've blogged on some of the predictable counter-claims in the press of secrecy jurisdictions here and here.

Articles are grouped according to those in the international press, or by country of publication. Some of the headlines here have been roughly translated using Google

International:

Trouble island - Public anger and shareholder unease threaten tax havens’ tranquillity The Economist Oct 15

Havens above The Economist Oct 7 (We blogged this here)

Switzerland tops list of tax haven nations: network Reuters Oct 4

Where the Money Can Hide: The New Financial Secrecy Index was published today Transparency International - Space for Transparency Blog Oct 4

Ghana: Time to Dismantle Tax Haven Secrecy Jurisdictions allAfrica Oct 10

And the prize for most secretive tax haven goes to... Christian Aid Oct 4

Tax haven secrecy worsening, index reveals Christian Aid Oct 4

Switzerland Leapfrogs U.S. to Top Financial Secrecy List Bloomberg Businessweek Oct 4

Argentina:

Uruguay put on the list 'gray' of countries with smaller banking transparency diario uno Oct 6

Austria:

Austria's bank secrecy attracts money launderers Die Presse Oct 4

Ranking: Austria amongst the least transparent Financial Centres in the World APA-OTS Oct 4

Little transparency in the Austrian Financial Centre Der Standard Oct 4

Austria as a stronghold of the shadow financial system Wiener Zeitung Oct 4

Privacy? Transparency" Cheating is protected nachrichten Oct 5

Financial Secrecy Index: Austria is a haven for tax evaders news Oct 4

Switzerland is THE tax haven kurier Oct 4

Taxes: Austria is a secrecy jurisdiction Kleine Zeitung Oct 4- also reported in ORF news

Belgium:

Financial Secrecy Index: Belgium improves its position Le Vif Oct 4

Canada:

Tax Justice Network says Canada must do more to address financial secrecy National Union of Public and General Employees Oct 5

Cayman Islands:

Cayman 2nd in TJN's new secrecy index Cayman News Service Oct 3

Colombia:

Financial secrecy and legitimate confidentiality El Tiempo Oct 9

Costa Rica:

Costa Rica is in the middle of the ranking of tax havens El Financiero Oct 5

Denmark:

Denmark on the list of tax havens tv2 Oct 4

Denmark on tax haven blacklist The Copenhagen Post Oct 6

Finland:

TJN: The G20 has failed to address tax havens kepa Oct 5

France:

Protesters engage in the battle for financial transparency Secours-Catholique Oct 4

Campaigners for financial transparency point the finger at Switzerland Les Echos Oct 4

Financial secrecy: Switzerland, USA and Germany in the top 10 La Tribune Oct 10

Tax Justice Network published its list of tax havens novethic Oct 17

Germany:

Germany is a haven for money launderers Der Westen Oct 7

Tax haven Germany: Secrecy and lax controls KOPP Oct 7

Germany in the top 10 tax havens epo Oct 4

Germany in the top 10 of the world's shadow financial centres soz Oct 7

Germany in the network of money launderers taz Oct 5

Disclosure requirements in shadow financial centre Germany are criticized Frankfurter Allgemeine Oct 5

Ghana:

Ghana ranked 3rd haven for illegal fiscal deals GhanaWeb Oct 6

Illegal fiscal deals; Ghana ranked 3rd The Mail

Greece:

Tax havens Switzerland, USA and Germany tovima Oct 4

Hong Kong:

Switzerland still ranked first in the world's tax havens sina Oct 4

Switzerland ranks among the highest tax havens Yahoo Hong Kong Oct 4

Hungary:

A new list shows where Hungary is lagging behind napi Oct 4

Hungary ranks 56th on Financial Secrecy Index Portfolio Oct 10

Financial Secrecy Index: Hungary 56th fn24 Oct 10

India:

Financial Secrecy: Blame these 20 nations! rediff business Oct 7

Switzerland ranked at top in terms of fin secrecy Hindustan Times Oct 4

Ireland:

Ireland Ranks 31st Out of 73 Secrecy Jurisdictions in the Financial Secrecy Index Irish Left Review Oct 4

Italy:

Financial secrecy: Switzerland first, Cayman second, Germany ninth tempi Oct 5

Tax havens: three European countries in the top 10 Wall Street Italia Oct 11

Israel:

Switzerland leads the list of tax havens worldwide The Marker Oct 4

Liechtenstein:

Liechtenstein in the middle of the field Volksblatt Oct

In the shadow of the big havens Liechtensteiner Vaterland

Luxembourg:

Luxembourg continues to be popular for money launderers Privat Oct 5

Macau:

Macau not transparent enough: index macaubusiness Oct 11

Government slams financial secrecy report Macau Daily Times Oct 18

Netherlands:

Tax haven: Dutch hypocrisy in times of crisis Radio Netherlands Worldwide Oct 4

Norway:

Here are hidden billions Aftenposten Oct 4

Romania:

Top tax havens worldwide imopedia Oct 11

Russia:

Evading taxes will always find a refuge in the Alps BFM Oct 4

Swiss banking: the best offshore gazeta Oct 5

Switzerland has agreed to disclose the accounts of Russians on request for tax information Mail Oct 7

San Marino:

Tax havens: San Marino appears on the Financial Secrecy Index libertas Oct 7

Spain:

A study points to Switzerland, Cayman Islands and Luxembourg as the most active tax havens El Pais Oct 4

Switzerland:

New List of Tax Havens: Switzerland in 1st place Tages Anzeiger Oct 4 - same story also reported in Basler Zeitung

Swiss score the worst on financial secrecy index World Radio Switzerland Oct 4

Switzerland tops global tax haven ranking The Local Oct 5

Swiss Banking Secrecy is the best ticino news Oct 7

Taiwan:

Switzerland ranks among the highest tax havens Radio Taiwan International Oct 4

UK:

Bureau Recommends: Report names and shames global tax havens The Bureau of Investigative Journalism Oct 4

Tax haven network makes UK the top ‘secrecy jurisdiction’, says TJN Tax Journal Oct 17 (We blogged this here)

Tax havens: G20 has failed to crack down, says campaign group Guardian Oct 4

Tax haven activity 'rife', despite G20 crackdown promise The Telegraph Oct 4

Isle of Man drops down secrecy league iomtoday Oct 7

Isle of Man drops down Financial Secrecy Index BBC Oct 12

Jersey slams financial secrecy index as 'nonsensical' The Telegraph Oct 4

Luxembourg is the ‘Death Star’ of tax havens The First Post Oct 4

World leaders have broken promise to smash tax havens - report The Mirror Oct 4

Tax haven secrecy worsening, UK research shows Ekklesia Oct 3

Activists expose tax dodgers' Cayman Islands paradise Morning Star Oct 5

USA:

The Top 10 Tax Havens: Tax Justice Network The Huffington Post Oct 5

Uruguay:

Uruguay in the list of countries with least financial secrecy El Observador Oct 5

Swiss-UK-German tax deals: money, not transparency

Mark Herkenrath of Alliance Sud has kindly sent us the following briefing on Switzerland's opaque tax deals with the UK and Germany, which complements our earlier brief blogging on the issue. (A German version of this is available here.)

Final withholding tax: money instead of transparency

The UK and Germany have committed to negotiations with Switzerland on a final withholding tax. The planned tax would cement Swiss banking secrecy and undermine the EU's common struggle for international tax transparency. Civil society urgently needs to oppose the proposed agreements, as they are not yet set in stone - and to send a warning signal to other countries that may be considering a similar capitulation to banking interests.

Mark Herkenrath, 28.10.2010

The declaration of intent issued on 27 October by Germany and Switzerland lays the groundwork for negotiations on a new tax agreement. According to a press release by the Swiss Federal Cabinet, what this entails is a one-off retroactive tax and a regular final withholding tax in the future. On the one hand therefore, the intention is to agree to a one-off retroactive tax on undeclared funds from the past, and on the other, to a recurrent withholding tax on all future income on capital in Switzerland.

The declaration of intent by Switzerland and Germany is not accessible on the websites of the Swiss authorities. But what is clear is that Switzerland would transfer these two withholding taxes anonymously to the German tax authorities, thereby protecting banking secrecy. In return, the assets and income would be fiscally "covered" – in other words whitewashed – and would no longer need to be declared in Germany (see the Swiss Ministry of Finance Fact sheet on the matter). Switzerland expects that with such a solution "the automatic exchange of information will no longer be an issue in relations between the two States".

Opposition pays off

According to a press release by the Federal Cabinet, the UK concluded a similar agreement with Switzerland on October 25. Yet the Joint declaration does not mention the final withholding tax. It merely states that in the preliminary talks both countries had reached sufficient understanding on which basis to initiate formal negotiations on a new tax agreement towards the end of the year. The negotiating mandates are yet to be laid out in detail.
The situation is similar for the agreement with Germany. The Neue Zürcher Zeitung (NZZ, 28.10.2010, p. 27) notes that "the upcoming negotiations must still clarify some points and failure is still a possibility.“ Political parties and NGOs are therefore still in time to influence the negotiations and to generate critical public opinion. They should seize this opportunity as a matter of urgency. On the Swiss side, the appropriate Parliamentary Commissions are to be consulted about the negotiating mandate.

Undermining EU solidarity

The only express aim of the joint declarations agreed by Germany and the UK with Switzerland is extended cooperation on tax matters that has "an equivalent effect to the outcome which would be achieved through an agreement to exchange information automatically". This means that for those two countries, automatic exchange of information with Switzerland is off the agenda for the time being. They are thus undermining the joint EU approach to the struggle to achieve international tax transparency. The new model conflicts with EU Tax Commissioner Semeta’s recently expressed commitment to automatic information exchange as the most important policy goal. Rumours are that Spain and France are now interested in a final withholding tax. The new model could therefore spread rapidly.

According to NZZ-reports (28.10.2010, p. 27), however, the EU Commission is unruffled. It emphasizes that bilateral agreements between EU States and Switzerland might not infringe either the European Directive on Savings Income Taxation or the Agreement on the taxation of savings income between the EU and Switzerland. Bilateral arrangements concerning a withholding tax can therefore be made but the taxation of interest payments at source in Switzerland may not fall below the tax rates set in the existing agreement on the taxation of savings income (currently 20 per cent, and 35 per cent from mid-2011 onward). Neither was it being assumed that the UK and Germany would henceforth actively resist EU plans aimed at automatic information sharing.

Financial incentives

There are financial reasons why Germany and the UK are taking an interest in a final withholding tax on old undeclared assets and on new interest income. According to the Basler Zeitung (BaZ, 14.10.2010, p. 7) and the SonntagsZeitung (SoZ, 24.10.2010, p. 57), under the planned agreement with Germany, insiders assume a tax rate of 25 to 30 per cent for new interest income. The tax for undeclared assets will most probably consist of two components: a 15 per cent tax on the current value of the assets, and a 25 to 30 per cent tax on interest income over the last ten years (TagesAnzeiger 19.10.2010, p.43). This amounts to a total tax of about one quarter for undeclared assets that have been in Switzerland for more than ten years and, according to SonntagsZeitung (24.10.2010, p.57), to an average tax of about 17.5 per cent for all undeclared funds (including those that have been in Switzerland for less than 10 years).

Old undeclared German funds are estimated at 200 to 300 billion francs (150-220 billion euros). 17.5 per cent on 300 billion francs yields 53 billion francs (39 billion euros) in tax revenue that would flow into German government coffers at one go. Bank Sarasin nevertheless advises its German customers to make voluntary declarations (BaZ, 14.10.2010, p.7): for now, the applicable German penalty tax for those making voluntary declarations would cost them less than the planned retroactive withholding tax. SonntagsZeitung thus assumes that about one third of the existing assets would either be repatriated and declared, or simply shifted to other secrecy jurisdictions such as Singapore. Yet a one-off tax of 17.5 per cent on the remaining 200 billion francs would still yield 35 billion francs (26 billion euros) in German public revenues.

No substitute for automatic information exchange

Yet the final withholding tax cannot replace automatic information exchange. For there is the danger that it may be circumvented by shifting undeclared assets to financial centres such as Singapore or Hong Kong, where no such taxes are assessed. In the words of Professor Martin Janssen, professor of finance at the University of Zurich: "There will be some ways out, at least partially." The UK and Germany seem to suspect that there may be other possibilities for circumvention. They therefore want provision for extended administrative assistance – i.e. information exchange upon request – to be firmly anchored in the envisaged agreement.

Administrative assistance upon request is nevertheless associated with major administrative hurdles. The tax authorities must justify their suspicion of tax evasion and furnish detailed information about the suspect. They are generally able to do this only if they are in possession of "stolen" information. Switzerland has therefore built into its Administrative Assistance Ordinance – soon to be converted into a law – the rejection of administrative assistance when stolen bank data is involved. In many cases only automatic information exchange could produce the data that is made the prerequisite for information exchange upon request.

TJN comment: to see more analysis of the OECD's woefully inadequate "upon request" standards, click here.

Update: David McNair of Christian Aid has a good article in the Guardian's Comment is Free section, echoing this analysis. As he notes:

Such a deal would undermine the UK's commitments to start healing the damage that financial secrecy inflicts on the global economy – and especially developing countries.
. . .
The price for this secrecy is paid by all of us. But the gravest burden is borne by those living in poverty all over the world, who depend on schools, hospitals, justice systems and other public services being funded by tax revenues.

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."

Swiss tax deals with UK, Germany - where is the EU going with this?

The European Union has said clearly that it does not like the UK-Swiss and German-Swiss tax deals - which we have demonstrated will raise only a fraction of what has been promised and would be profoundly harmful to democracy in both of the countries, UK and Germany, that will be victims of the deals. It has raised the clear possibility of legal action to strike these down.

Now World Radio Switzerland is carrying a useful interview with Jean Russotto, a partner in the Brussels office of Steptoe & Johnson LLP and a close observer of EU-Swiss relations, who gives his insider opinions on what is currently happening, and where things might lead. We provide a transcript of the interview:

WRS: What does the Commission see wrong with the deals?

For the last two months the Commission has been looking into these two agreements and has largely concluded that probably, not definitely, both the UK and Germany have gone beyond what is appropriate and legally possible in negotiating two tax treaties with a third country, Switzerland, whereas these competences are basically reserved to the EU. Therefore it is a very basic fundamental issue of EU law: do these two country member states have the right to enter into an agreement on a subject which is basically, said the Commission, reserved to the EU. That is the crux of the matter.

WRS: Are they within their rights to do this?.

The analysis is going on in Brussels, the commnuity machine has started, legal opinions are being issue right and left; and at the same time negotiations and discussions are going on between the EU namely the Commission and Germany and the UK at the same time.

WRS: what if the Commission does officially block these accords

Well, there is a rather lengthy procedure which is referred to as an infringement procedure. Whereby the Commission approaches member states, discussed the pros and cons, then after a few weeks or months, probably shorter, if no progress is being made on both sides, negotiations are failing, which is not the case right now by the way, the Commission prepares an issue: what is called a reason opinion - that is a writ sent to the two countries, here Germany and the UK, saying let’s assume you have 2 or three months to comply. The negotiation goes on, and if nothing happens after the expiration of the deadline, then the Commission begins proeedings before the European Court of Justice. But we are not yet there.

WRS: What is the status of accords between EU and Switzerland?

Right now you have two things, you have the EU STD which is a Directive permitting automatic exchange of info within the EU, with two exceptions Austria and Luxembourg. At the same time, in parallel, the EU has entered an agreement with switzerland, and four others, such as Monaco, San Marino etc.

These two bodies of laws which are essentially similar are part of harmonised European law, and that is why the Commission is saying ‘that does exist’ and Germany cannot go too far because there is already a body of law: that is why the infringement procedure is being considered. Germany is being considered to have somehow transgressed what has already been put together by the EU. And the core of the dispute is to know: 1) whether it is possible or not to enter into an agreement of that sort while EU law is being harmonised, and 2) assuming that is the case, which part of this agreement could be viewed as contravening European law - and that decision has not been made yet.

WRS: Where do you think the case will go in the end?

I think experience says that in really complex cases involving third countries and by the way, large sums of money for the future which are key to the EU member states right now, discussions are always a way to resolve a particular sensitive issue. My view is that the Commission, although its case sounds legally rather strong – there is no doubt about it – is not about I think to launch a formal procedure against two significant member states. Therefore were are heading I think towards a possible compomise where the agreement may continue to stay, but would have to be amended.

The real issue is: will Germany and the UK accept that. But the more complex aspect is whether or not this is satisfactory to Switzerland, and I don’t think it is. Because the deal is a very subtle, compex and very refined machinery and construct, and I don’t know how a negotiation could amend such a very refined machine. It will take time. So it will be on one hand a complex legal issue, and at the same time a question of generating additional income for the treasuries of the UK and Germany.

END

We also note, via Faisal Islam, that the UK's Office for Budget Responsibility has declined to endorse the UK's inflated estimate of the UK-Swiss deal. The Financial Times has seen through the deal too. More are waking up all the time.

We would be disappointed to see a weak mish-mash compromise come out of this. The deals should be scrapped.

Austria's and Luxembourg's Anglo-German fig leaf

The European presidency has just issued a note advocating a push to increase financial transparency in Europe through its Savings Tax Directive. As they say:

"The Presidency attaches crucial importance to gear up bilateral talks in order to reach political agreement upon the adoption of the Savings Tax Directive in the very near future."

Unsurprisingly, there are some rather large flies in this ointment. Austria and Luxembourg have long been holdouts on the European Savings Tax Directive, working hard behind the scenes to spike progress on transparency. Instead of agreeing to automatic exchange of information for tax purposes, they offer only an anonymous withholding tax (see previous blog). This arrangement, as we have just argued, goes against the spirit of just payment of due taxes by European taxpayers, and against a drive towards cooperation amongst member states in acting not to deprive fellow EU members of revenue. Furthermore, the relevance of the European Savings Tax Directive goes beyond Europe: it could become the nucleus of a multilateral agreement on automatic tax information exchange.

The current legal situation in the European Union is that this transitory arrangement for these two countries would end once the European Union signs treaties with a few (nearby but non-EU) secrecy jurisdictions for information exchange upon request (Article 10, Council Directive 2003/48/EC). The largest of these is Switzerland, others are Andorra, Liechtenstein, Monaco and San Marino. Remember, we're talking agreement by each of those non-EU jurisdictions with the full European Union.

The prospects for such agreements have increased since the G20 stated its intention to fight against banking secrecy, and Switzerland and a few others have been forced to remove their ultra-tight interpretations of OECD norms. But progress on negotiations with these few non-EU countries is being blocked within the European Council by Austria and Luxembourg. The reason, of course, is that if EU negotiations with Switzerland were to be successfully concluded (the other minnows would be expected to fall in line, if Switzerland did), their ability to preserve banking secrecy for EU countries would come to an end.

What can the Swiss do in order to prevent the unthinkable: an end to secrecy? They remember the Roman Empire's strategy of divide et impera (divide and rule; (see TJN Germany blog). Dividing Europe's key members on the issue of tax transparency would help them to prevent the dreaded automatic information exchange from reaching its borders.

So Switzerland has offered money instead of transparency to certain powerful EU members through an anonymous final withholding tax - see our previous blog commentary on Swiss-UK-German tax deals: money, not transparency. Germany and the UK began negotiations late last year. If key major players in the EU are lured into such preferential treatment with Switzerland, their incentives to put their weight behind the EU fully engage with the EU for a level playing field on tax issues beyond the EU-member countries (in order to include Switzerland) would be reduced.

An EU-wide coalition is necessary if the EU is to bring enough pressure to bear on Switzerland to reduce secrecy - and this new Swiss initiative seems aimed at removing the resolve of its two most powerful members. Others are increasingly indicating interest in this issue. Italy issued a ferocious warning recently that such behaviour undermines a common EU position towards increasing tax transparency via automatic information exchange.

A few days ago, Austria started expressly using these ongoing bilateral negotiations by Switzerland with the UK and with Germany as an excuse to incur further delay within the European Council on progress on automatic information exchange (see TJN Germany blog, in German). Austria’s Finance Minister Pröll has said that bilateral agreements between EU member states and with Switzerland may result in an uneven playing field at the European level.

Austria seems to be creating a pretext for vetoing progress on getting the EU to negotiate with Switzerland. However, if the UK and Germany persist with negotiations on bilateral withholding tax agreements with Switzerland, they become complicit with Austria, Luxembourg and Switzerland: they will be presenting Austria and Luxembourg with the gift of a political opportunity to stall. While Austria's and Switzerland's newspapers report on this crucial subject, media in Germany and the UK have so far ignored this issue.

This political mess incurs a serious risk of derailing, or at least impeding, progress on tax justice within the EU.

If the UK and Germany were interested in transparency and the welfare of their citizens and of those in Europe, they would publicly announce the end of their negotiations with Switzerland on an anonymous final withholding tax, and publicly call on Austria and Luxembourg to end their veto in the European Council.

Secrecy is entirely, utterly incompatible with the economic needs of Europe.

Further, and crucially, there is great risk here of missing an opportunity for the construction of a fully functional information exchange system that could be implemented with an increasing number of countries - for the good of the majority of this planet's population.

Are the UK and Germany interested in this?

EU Commissioner Semeta calls for progress on the Savings Directive

Yesterday we sent a letter (see below) to Finance Ministers and EU Permanent representatives expressing concern about German government pressure on the European Commission to drop its opposition to the regressive bilateral deals with Switzerland being negotiated by Germany and the U.K. We have commented in depth on why these deals are shabby and against public interest, but Germany and the U.K. persist with putting the interests of their tax evading elites ahead of the 99 per cent who suffer from tax evasion.

Another letter on the same subject also dropped into European Finance Minister's letterbox yesterday, this one from European Commissioner Algirdas Semeta (pictured above). Semeta's letter re-iterated the EU's proposal, tabled in 2008, to amend the Savings Directive, notably by extending the definition of interest payment and by introducing improved mechanisms for identifying the beneficial owners of offshore structures. He also made clear that bilateral deals must be compatible with EU law. Concerning the bilateral deals with Switzerland, Semeta writes:

"In this context Member States should refrain from negotiating, initialling, signing or ratifying agreements with Switzerland, or any other third state, insofar as any aspects regulated at EU level might be touched upon. In practical terms, this means:

* Concerning direct taxes and the future, any bilateral agreement should include a carve-out of areas already covered by existing EU instruments and areas included in proposals for their modification. In board terms, Members States are free to agree upon tax measures regarding all other forms of income and capital."

Which brings us to the crunch point of Semeta's letter:

"In these difficult times I believe that it is important that we demonstrate the commitment of the EU and its Member States to improve tax collection and the respect of Member States' tax laws. The strengthened and proportionate provisions contained in the amending proposal (of the Savings Directive) provide a sound basis for a real improvement of the existing mechanisms and should be complemented by parallel agreements on equivalent measures with partner jurisdictions. Given the interest of all Member States in ensuring full respect of their tax laws, I feel it is more urgent than ever to give a high priority in the Council to mandating the Commission to open negotiations with our partners including Switzerland and I look forward to significant advances in this area in the near future." (our emphasis added)

In other words, stop blocking EU negotiations on the Savings Directive with Switzerland, get on with agreeing the proposed amendments, and make damn sure that any deals along the lines of Rubik do not in any way impact the effectiveness of the proposed amendments to the directive.

We heartily endorse the Commissioner's comments.

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TJN's letter to Finance Ministers:

5th March 2012

Dear Minister

On behalf of the Tax Justice Network, I am writing to express concern about a decision taken at the meeting of the EU permanent representatives on 14 February to remove a crucial issue from the agenda of ECOFIN’s last meeting on 21 February 2012. The issue involves giving the EU a mandate to negotiate with Switzerland and four other countries for technical amendments to the EU Savings Tax Directive.

Obtaining this mandate would be a first required step in a three-stage process that would bring about drastically improved automatic tax information exchange and tax collection across Europe and beyond, through amendments to the EU Savings Tax Directive.

As we understand it, Germany was the only country to demand that this issue be removed from the Agenda. Our sources tell us that this mandate would have been agreed at ECOFIN if it had been discussed, since Austria, Luxembourg and Italy are no longer believed to be prepared to veto it.

Over the past two years, Germany and the United Kingdom have negotiated highly controversial bilateral anonymous withholding tax deals with Switzerland. These are not yet ratified or in force and are currently being challenged, by the European Commission and others.

The European Commission has repeatedly made clear that the bilateral deals can only be accepted if those parts of the agreements that conflict with European legislation are removed.

This means that, among other things, the entire issue of savings interest is removed from the scope of the agreements (because the EU, through its Savings Tax Directive, has competence in this area.) This demand by the European Commission represents a major (and welcome) threat to these pernicious bilateral deals, as the removal of ‘interest’ from their scope renders them functionally ineffective.

Now it appears that Germany is demanding that the European Commission withdraws its opposition to these bilateral deals before it is willing to discuss the aforementioned mandate, which would allow for the technical amendments to the EUSTD to progress.

This is unacceptable and would be deeply harmful to European interests, since allowing deals that effectively conflict with EU legislation would allow countries such as Austria and Luxembourg to say that they do not face a level playing field, and thus provide them with a pretext for blocking further progress with the Amendments.

We understand that Germany’s Finance Ministry is trying again to remove the same issue from the agenda of the ECOFIN meeting on 13 March 2012.

We are extremely concerned about Germany’s actions.

In view of the threat to European and international tax cooperation, we ask your government to stand up against Germany’s position.

Yours Sincerely,

John Christensen

Director, Tax Justice Network

Major US leap on minerals transparency but Germany derails EU efforts

The Financial Times reports:

"Oil and mining groups with US listings will be forced to disclose details of their payments to foreign governments after US regulators rejected most of the industry’s efforts to water down new transparency rules."

This is very good news: essentially the US Securities and Exchange Commission yesterday published its implementing rules for transparency requirements in the extractive industry under the 2010 Dodd-Frank Act on financial report. This legislation is quite a piece of work. For instance, as the FT continues:

"They will also oblige manufacturers such as Apple to verify whether they use so-called conflict minerals from war-torn central Africa in their products."

TJN and particularly its Senior Adviser Richard Murphy have played a central role in getting traction for this concept, worldwide. As Murphy notes:

"This rule is directly inspired by my work on country-by-country reporting. I was the first person to link reporting payments in accounts in the extractive industries and financial reporting as a way to tackle corruption way back in 2005. So let me be honest: what the SEC has delivered is not country-by-country reporting and it’s therefore not all I want.

But it’s one heck of a big way forward."

Global Witness, who launched the Publish What You Pay coalition with help from George Soros in 2002 and has been a leading advocate of the concept ever since, has also published a quick, preliminary analysis of the rules. They came up with a mixed, but overall heartening first diagnosis. They note long delays in the rules, which were originally scheduled to be voted on 16 months ago but were stymied by a massive industry lobbying campaign. But among the positive things they note:

"We welcome the fact that companies will not be able to exempt themselves from reporting in countries where governments do not want revenues disclosed: exemptions represented a ‘tyrants’ charter’. The SEC’s announcement on de minimis requirements looks promising but requires further scrutiny."

On a less positive note, however, we note that the German Government under Angela Merkel has been playing a very different role, trying to trip up and block this transparency concept in Europe apparently under the influence of local industrial lobbies. Christian Humborg of Transparency International as more:

"The European Commission [has] presented similar proposals (called the Transparency and Accounting directives), adding the forestry sector which had been omitted in the Dodd-Frank Act, and also included large unlisted companies.

But Germany’s support is lacking."

What is more, Humborg notes, is that other European nations are baffled by Germany's reservations, since Germany does not really have any substantive extractive industries. The US administration, along with ex-BP boss John Browne, have publicly criticised Germany's blocking role.

He cites the existence of shady-sounding and recently formed German Alliance for Securing Natural Resources (“Allianz zur Rohstoffsicherung”) which includes big German companies such as BASF, Bayer, Daimler and Evonik ThyssenKrupp, and which will work to secure access to new mineral deposits abroad. He also cites the traditional secrecy of German Mittelstand companies as possibly another, more ideological factor behind Germany's spoiling tactics.

He concludes:

"It will be a major blow for the fight against corruption if [these interests] get their way and Germany (along with other governments that seem to be opposing the proposed transparency rules such as Austria, Finland and the Netherlands) helps to prevent transparency of payments of the extractive industries for each and every project they run."

For German readers, see more in the Frankfurter Runschau, and on the Tax Justice German blog, here and here.

Automatic Information Exchange: Will Germany follow the US in going the extra mile?

There is a very important project in the new US budget proposal for financial year 2014 supported by the Obama administration. If this proposal is carried through into law (or regulation), the odds for a truly effective global system of automatic information exchange on tax data about the wealthiest citizens would dramatically increase. Alex Cobham has identified the issue (see here) and the original text of the proposal can be found on page 202, of this pdf document.

It is worthwhile quoting at length and unpacking some of the detail:

"Provide for reciprocal reporting of information in connection with the implementation of the Foreign Account Tax Compliance Act (FATCA).—

In many cases, foreign law would prevent foreign financial institutions from complying with the FATCA provisions of the Hiring Incentives to restore Employment Act of 2010 by reporting to the IRS information about U.S. accounts. Such legal impediments can be addressed through intergovernmental agreements under which the foreign government agrees to provide the information required by FATCA to the IRS.

Requiring U.S. financial institutions to report similar information to the IRS with respect to nonresident accounts would facilitate such intergovernmental cooperation by enabling the IRS to reciprocate in appropriate circumstances by exchanging similar information with cooperative foreign governments to support their efforts to address tax evasion by their residents.

The proposal would provide the Secretary of the treasury with authority to prescribe regulations that would require reporting of information with respect to nonresident alien individuals, entities that are not U.S. persons, and certain U.S. entities held in substantial part by non-U.S. owners, including information regarding account balances and payments made with respect to accounts held by such persons and entities."

This legislative proposal is crucial for the effectiveness of any future multilateral system for automatic tax information  exchange for a number of reasons. First, the current regulations for reciprocating data exchange by the US under FATCA are a welcome first step away from the role of the US itself as a major tax haven (see background here), but are very narrow in scope (we have shown this in our analysis of bank account registries, on pages 41-42, in the chapter on the US, here). Most importantly, interest on government and corporate bonds as well as account balances and other crucial tax data is not currently available for reciprocating FATCA. This is the reason why FATCA model 1 agreements which the US has signed with many countries, among them key European allies, contain quite explicit langauge about the need for the US to improve its capacity to reciprocate under FATCA by additional legislation. For instance, article 6.1 of the German draft model 1 agreement states (full pdf here):

"Reciprocity. The [Government of the] United States acknowledges the need to achieve equivalent levels of reciprocal automatic information exchange with [FATCA Partner]. The [Government of the] United States is committed to further improve transparency and enhance the exchange relationship with [FATCA Partner] by pursuing the adoption of regulations and advocating and supporting relevant legislation to achieve such equivalent levels of reciprocal automatic exchange."

It is encouraging to see that the US administration appears to be willing to walk the talk. While it will be challenging to force this proposal through against a Republican dominated House, and it is doubtful if a modification of the US' QI program will be in the package of reform, the intention of engaging in this battle are a sign of decreasing hypocrisy currently embedded in many Western's fiscal policies (see background here).

This leads us the the second major reason why this initiative in the US may be decisive for a functioning global system. The long term effects of this political signal to earnestly fight for domestic reforms to reduce damages done in the rest of the world by the superpower may help restore and enhance its moral integrity and legitimacy to demand reform in other places. Recently, we heard Swiss, Austrian and also German politicians to (rightly) point out deficiencies in US and UK fiscal, anti-money laundering and transparency policies. The capacity to use those arguments as an excuse for defending the indefensible, the criminal and the opaque financial and tax arrangements in these German speaking nations would decrease dramatically if the US were to offer true domestic reform.

And here is where Germany still has some homework to do. German authorities at the moment do not collect from German banks, or German foundations or German Treuhand and trustees the information required for effective automatic information exchange (see page 29 here, and here, and here). There is a cloak of secrecy shed over any non-resident investor in interest bearing financial accounts and bonds, sweetened by tax exemption. Germany would need to modify, or better still, abolish its domestic "Abgeltungssteuer" and replace it by broad reporting obligations to the tax administration about financial account balances and payments. Now, they will need to do this for US accounts under FATCA. In the past, Germany's centre-right government has tried to do the opposite by fighting for the anonymous withholding deal with Switzerland (see here). And they may try to wriggle out of broad reform under the recently announced G5-initiative for AIE, e.g. by limiting exchange on interest on the narrow categories covered by the current EUSTD.

The question is: will Germany continue to do the minimum necessary not to be seen as a tax haven, and only require reporting about accounts of a few selected country's residents? Developing countries would be left out, and Germany would continue to finance its economy partly at the cost of the most vulnerable people on this planet. Or will Germany go the extra mile, as the US now appears willing to do, in order to collect the information of all non-resident accounts, so that Germany can support developing countries with collecting their fair share of tax from investments in the German financial market? Will it yield to supreme power, or will it use its power for the benefit of the "least among us"?

Why bank reporting is essential for information exchange

An interview with TJN's Markus Meinzer, in the International Tax Review, reproduced here with permission.

TJN’s Markus Meinzer looks at why bank reporting obligations are vital for AIE

21 August 2012 (Salman Shaheen - ITR) - The Tax Justice Network and CCFD-Terre Solidaire have a new report out today exploring lessons for registries of trusts and foundations and for improving automatic tax information exchange (AIE). International Tax Review talks to the report’s author, Markus Meinzer, on the deficiencies he uncovered, the positive examples he’s found and the challenges to increasing transparency over beneficial ownership.

International Tax Review: Why do you believe bank reporting obligations and bank account registries are a precondition to automatic information exchange?

Markus Meinzer: The overwhelming majority of financial wealth is ultimately held in a bank account or a safe deposit box. In the absence of bank account registries there is a risk that any AIE-system of banking data will not cover all relevant financial accounts, which invites creative non-compliance. The recent banking scandals have shown that some bankers were very creative in hiding subsets of accounts from reporting obligations, for example under the Qualified Intermediaries (QI) programme.

A more recent example concerns the life insurance wrappers offered by Credit Suisse Life Bermuda to German tax evaders. Credit Suisse ran bank accounts in Switzerland in the name of another financial institution, the Credit Suisse Life Insurance, without identifying any beneficial owner. Credit Suisse Life Bermuda in turn provided these life insurance wrapper accounts to their German clients using the disguise that the accounts belonged to a financial institution, thereby avoiding the European Savings Tax Directive (EUSTD) withholding tax. Such an arrangement would avoid the scope of the bilateral Swiss deals with little chance of remedying this problem without a multilateral platform or a bank account registry which allows checking for accounts held allegedly in the name of other financial institutions.

If regulators and tax administrations allow discretion over what kinds of account can be operated by banks, this invites bankers to devise new kinds of accounts which are beyond the scope of reporting obligations. Germany for instance operates 582 million financial accounts and the Financial Action Task Force estimates that around €1.3 billion ($1.6 billion) of wealth owned by non-residents is invested in German financial institutions. Without a minimal bank account registry recording basic data of all of these financial accounts in Germany, we would not be able to ascertain how many accounts there are, nor start any serious supervision of reporting obligations.

Countries which politically push most consistently for AIE, such as Australia, Denmark, Finland, France, the Netherlands, Norway and Spain, are countries which have far-reaching bank reporting obligations. There seems to be a tendency to bilaterally share with selected foreign tax administrations information that has been collected. Without information being collected, AIE is technically and politically more costly to implement.

ITR: What are the most serious deficiencies your study has uncovered in terms of reporting obligations?

MM: A principal finding is the wide range of observed differences in bank reporting obligations, ranging from the complete absence of reporting obligations to far-reaching registration requirements of bank accounts. This puts barriers in the way of reining in the financial sector and tackling excessive inequality because international differences in banking practices will slow down any coordination and cooperation.

Clearly, the absence of stringent reporting obligations such as in Austria and the US is a major problem. It is of paramount importance to ensure that countries have in place a system of bank account registration. Without such a system, it may be impossible to assess a bank’s compliance with reporting and anti-money laundering and similar obligations. This principle is fully in line with a recent recommendation issued by the UN and the World Bank.

While most countries except Austria and Germany require at least some interest payments on bank deposits to be reported routinely to the tax administration, only five countries operate one central database of bank accounts at the tax administration level: Argentina, Denmark, France, the Netherlands and Spain. Four countries do not operate such a database, but have sometimes multiple databases at bank level with very basic account information (Germany) or a database of taxpayers which incorporates all interest payments (Finland). Two countries do not operate any comprehensive system (Austria and the US).

In technical terms, the major problem seems to centre on the definition and identification of the “beneficial owner” of financial accounts and interest payments, the full details of whom are sometimes not covered by the reporting obligations even when banks are obliged to collect the information. Another weakness concerns the frequent absence of criminal sanctions for failure to correctly comply with reporting and registration obligations. Only Denmark, the US and the Netherlands have criminal sanctions for failure to correctly report. In Germany, a breach of the reporting obligations for the bank account registry is classified as a misdemeanor even in cases of willful misreporting and is punishable by a maximum fine of €150,000. Also, it is questionable whether the scope of the reported information is broad enough if only interest payments are included. The average account balance in addition to interest payments appears to allow better prevention of tax evasion in view of zero-interest accounts to hide wealth in a low interest environment.

ITR: Are there any particularly positive examples other countries could learn from?

MM: Of the six countries for which full information was available on all reviewed criteria (Argentina, Denmark, Finland, Germany, the Netherlands, US), Denmark stands out because it imposes identical reporting obligations for residents and non-residents. In all other surveyed countries, less stringent obligations apply when non-resident beneficial owners/recipients of bank accounts/interest payments are involved. This highlights the endemic nature of tax haven behaviour in today’s world – countries dispense with central beneficial ownership registration across the board, and/or they impose less stringent identification requirements for non-residents. Denmark’s bank account reporting and registry serves as the current benchmark for other countries.

ITR: Have there been any notable improvements since the OECD 2000 report?

I found that some of the reviewed countries have improved and expanded their reporting obligations and thereby enhanced financial transparency since the last OECD report in 2000. Important progress was made by Australia, Spain and the Netherlands. Modest improvements were made by Denmark and Germany, though Germany has subsequently backslid since 2009 when it narrowed access to bank account registries in the case of non-resident accountholders and beneficiaries.

No substantial and apparent improvements were made by Austria, Finland, France and Norway, with the important proviso that Austria has no bank account reporting or registry mechanism whatsoever, while Finland, France and Norway have far-reaching bank account reporting obligations.

Since 2000, the US has experienced an overall deterioration in the reporting obligations through the introduction of the QI programme in 2001. While in the year 2000, interest payments to non-resident aliens were not reported by failure to include them in the reporting obligations, the QI-rules were designed to bypass the usual reporting regime and created anonymous investment opportunities in financial assets and accounts by non-residents as a carrot to induce foreign financial institutions to cooperate with the IRS on US financial accounts. This situation with QI has not been remedied by recent 2012 IRS regulations to require the regular reporting of bank interest about certain non-residents from January 1 2013.

There is a risk that some countries, such as Austria, the US, and Switzerland, are attempting to exploit the general thrust of improving transparency by failing to engage in the race to the top and by continuing the disastrous race to the bottom instead.

ITR: What are the main challenges to increasing transparency when it comes to beneficial ownership?

The key challenge is ensuring implementation of existing customer due diligence requirements by banks and the creation of registries of beneficial owners not only of bank accounts, but also of legal entities and arrangements such as limited liability companies and trusts and foundations. While it is a good start to impose strict beneficial owner identification requirements on banks for financial accounts, this is not sufficient by itself. The implementation, supervision and enforcement of these obligations are a great, unresolved challenge both with respect to the FATF recommendations and the EU-anti money laundering directive. Part of this problem consists of a lack of meaningful statistical data for instance about the numbers of accounts held in the name of legal entities, of accounts with beneficial owners different from the accountholders, or of accounts held by legal arrangements without a known beneficial owner.

Banks are not under sufficient pressure to ask searching questions about the real people hiding behind legal structures, and any single humanly designed system cannot be expected to perfectly overcome this problem. Therefore, there are good reasons to create a second line of defense by requiring beneficial ownership of legal entities and arrangements to be registered separately, and it would be wise to have properly staffed and resourced public registries in charge of this task.

If, as the current Global Forum standard does, private agents are made the responsible agents instead, the agents will almost invariably follow self-interest rather than public interest, which means the standard will inevitably fail.

The full report can be read here.

Germany is building a gateway for criminal money

TJN has repeatedly written about Switzerland’s divide-and-rule strategy to undermine the European Union’sefforts to construct a properly functioning system of automatic information exchange. The Swiss Finance Ministry, together with its banks, has deployed a strategy to head off efforts to end financial secrecy, with a system that it calls the “final withholding tax”. This is designed to preserve banking secrecy while buying off the most vocal and powerful foreign governments by transferring to them the fruits of a final tax on foreign citizens’ financial account’s income (details here).

The German-language Swiss newspaper Tagesanzeiger is now reporting on spokespeople from the German and Swiss Finance Ministries, signalling their willingness soon to finalise the negotiations. Last week, German Finance Minister Schäuble caused confusion saying that this would happen by the end of 2011, while Swiss Finance Ministry spokesman Mario Tuor said it would happen within two months.

Yesterday, the foreign ministers of both countries followed suit with a PR tour, keen to portray an image of happily restored relationships, with and end to the acrimonious fall-out over the banking secrecy scandal under former German Minister of Finance Steinbrück.

Two fresh and particularly worrying details, though, now stand out.

The first involves technical matters. It seems that formerly hidden funds that have been on deposit for at least 10 years will face a mere 20% tax rate -- with a proportional discount for deposits that have been held for a shorter period. The tax rate for future interest income that has been legalised this was is said to be 26% -- far lower than the 35% withholding tax agreed in the third stage of the European Savings Tax Directive, which begins in a few weeks. (July 2011).

As we have often argued, this approach of applying a final withholding tax, instead of having proper transparency, cementing two-tier justice in two ways. First, it solidifies the flat taxation of interest income, in contrast to labour income which is taxed progressively. Second, those evading their taxes through Switzerland receive privileged treatment as compared to those who have been evading taxes, say, through the United States. Moreover, the rules for voluntary disclosure for tax evasion have only recently been tightened in Germany - and now this treaty offers routes to circumvent these changes. That’s absurd and creates all sorts of perverse incentives. The Tagesanzeiger reports:

“Interesting, too, is the question of how one should react to clients who suddenly bring their money from offshore centres to Switzerland and intend to legalize the money under the discounted rate. The rate of 20% only applies for monies that are here for 10 years; for what arrived later, accordingly the rate will be even lower.”

The withholding tax appears to create the incentive for tax dodgers to move their hidden money from other tax havens to Switzerland, leave it there for a while, then be taxed only at the preferential rate - and then get exonerated from any criminal prosecution!

They reduce the risk of their assets being discovered in other jurisdictions, as Swiss Secrecy is being preserved, being offered a safe refuge from legal consequences. Meanwhile, Switzerland's and Germany's governments are strutting around saying how cooperative they have now become bringing tax revenue back to the German people.

Apparently, such movements of funds have already happened in response to the announcement of such a withholding tax scheme and is a feature German’s bureaucrats dislike. In response, they came up with the idea of allowing a “simplified” upon request information exchange in cases of fresh black money. Now, it begs the question how this should be implemented: Will Germany deploy buses full of tax inspectors who are sniffing in UBS & Co.’s IT-systems to find out about if a German taxpayer's bank balance is fresh or old, and therefore the request can be simplified, or not? What if she or he took a few million out of the account a few years ago, and now refilled to the original sum: is that fresh money? This process is a declaration of bankruptcy of sanity and reason.

The truth is: nobody can prevent that an institutionalized exonerating withholding tax will be abused badly. The naivety is unsurpassable with which Germany appears to be willing to hand over taxation capacity to a country whose banks have an outstanding record of notoriously helping to break foreign country’s laws. Richard Murphy comments on the corresponding treaty between the UK and Switzerland: “Let’s just call it an endorsement of criminality, or a slap in the face for honest taxpayers” .

The second kind of novelty relates to the bigger strategic picture. As we have argued before, these negotiations by Switzerland are intended to weaken the common EU-position. It is likely that they played a part in the recent fallout by Italy’s Finance Minister Tremonti during the last ECOFIN-session, where he ranted against the Swiss, saying they wrote the EU-Savings Tax Proposal (some preceding history here ). The harmful impact of the negotiations with the Swiss on the European project has been confirmed indirectly by German Foreign Minister Westerwelle’s response on a question has been asked yesterday by a journalist. Again, the Tagesanzeiger notes (rough TJN translation):

“Asked about the amounts of the withholding tax, to be transferred in the future to the German tax coffers, Calmy-Rey and Westerwelle remained evasive.

Similarly, on the question about the consequences of the agreement between Switzerland and Germany on the negotiations at the EU-level, they did not want to comment: “You want to know more than I am prepared to say”, said Westerwelle answering the corresponding question of a journalist.”

Sometimes silence speaks volumes (and good on Westerwelle for being that honest!). Now, the real shocking news is to come. The same article announces a meeting of German-speaking countries next Wednesday in Vaduz, Liechtenstein. The Ministers of Finance of Germany, Liechtenstein, Austria, Luxembourg, and Switzerland will meet up there. This group includes the countries in Europe who continue to cling most tightly to banking secrecy. This very much looks like a follow-up on the shiny PR-hand-shaking-event between Westerwelle and Calmy-Rey yesterday to enthrone a new Entente. It has the taste of old Germanic banking secrecy connections revived to replace European solidarity. This does not bode a bright future, especially given Germany’s past.

Just because dirty money is driven through an inter-state laundry-“Autobahn” does not make it clean. Citizens will easily understand this.