Saturday, March 27, 2010

Germany-Switzerland tax deal: reason for caution

From the Wall Street Journal:

"German and Swiss finance ministers agreed Friday on the structure of a new double-tax deal aimed at repairing relations damaged by a tax-evasion dispute that culminated with German officials purchasing stolen data on suspected evaders' Swiss accounts."

The deal needs to be reviewed and ratified by the German and Swiss governments. There is, predictably, devil in the detail; Reuters adds that:

"Switzerland's Finance Department said on Friday Germany had recognised in the talks that the Alpine nation would not give administrative assistance in cases of bank data bought from a third party. It added that Switzerland was able to secure several advantages for Swiss business during the negotiations."

While this deal may have some positive aspects, the negative side is that with this deal Germany seems to have set in stone its acceptance that Switzerland does not need to provide Germany with administrative assistance in dealing with tax evaders. This is quite a concession. As a correspondent to TJN via email said:

"If I understand correctly, this new bilateral agreement will contain language which would in fact limit the possibility of the German government to counter tax evasion by putting limitations on what information they would be allowed to use."

One reason for this restriction of German powers to track down its citizens evading tax is that the agreement conforms to fatally flawed OECD standards of information exchange (which we explore here.)

All this raises a broader question about some of the problems with Double Tax Agreements (whose main purpose ostensibly is to stimulate trade by ensuring that tax is not applied to the same transaction twice - but whose effects, all too often, are to create the possibility for double non-taxation.) The problem is that unacceptable provisions are given a solidity that they would not otherwise have.

As a reminder of the enduring nature of this problem, a passage from Nicholas Faith's 1982 book Safety in Numbers: the Mysterious World of Swiss Banking, telling a story about the emergence of Swiss bank secrecy, underlined by a 1934 law creating criminal penalties for violation of secrecy (the law was triggered by a gigantic tax evasion scandal in France, involving investigations by a French politician, Albertin.)

". . . requests for credit made by France to Swiss banks in Autumn 1937. There was readiness on the part of the banks to accede to these requests but the credits were made dependent on two conditions of general interest: the French import quota system had to be modified in a manner favourable to Switzerland, and an acceptable double taxation agreement was stipulated as a conditio sine qua non.

Not surprisingly, the Treaty which emerged provided specifically that Swiss laws, regulations and administrative custom and practice would be scrupulously respected by the French. In the meantime the general problem of banking secrecy raised by M. Albertin's little list had been dealt with, in a form which has achieved an importance quite out of keeping with the modest political scandal which sparked off the legislative process."

In other words, it seems that the treaty became a mechanism to solidify Swiss banking secrecy. For anyone interested in this episode, one would do well, after consulting TJN's letter in the Financial Times a year ago about the origins of Swiss banking secrecy, a study by the Lausanne academic Sebastian Guex, "The Origins of the Swiss Banking Secrecy Law."


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