Wednesday, November 28, 2012

Unpicking the illogic in Switzerland's "White Money" strategy

Switzerland, now recognising that its poisonous "Rubik" spoiler strategy to protect financial secrecy is dying, has rapidly swiveled its position, and its politicians and bankers are now pushing hard for what is being calling a "White Money" (Weissgeld) strategy to try and persuade other countries to go easy on the secrecy that it provides (the strategy isn't new, but the renewed emphasis seems to be, on our interpretation). The clear and regular message now is 'don't worry about our secrecy: we're going to take care of this ourselves.' Trust us.

Now who could argue against a "White Money" strategy for Swiss banks? Not us, certainly. Unless, of course, that label is merely a fig leaf: a dose of reassuring Alpine spin layered over a world of business as usual.

So which is it? Alpine spin, or real change?

Start with this headline from a Swiss online newspaper, which reflects the thrust of a number of articles currently out there. Tax evaders become pariahs for Credit Suisse. The mighty Swiss bank is going to be turning away tax evaders from its doors, apparently:
Credit Suisse does not intend to allow tax evaders to remain on as clients, he stressed. If potential clients refuse to report their assets to the tax authorities in their countries, "the bank will clearly tell them that it does not want their business," Rohner said, adding that the bank would also ask existing clients to leave if they did not declare their assets.
It sounds good, but consider the first problem. What happens when the "client" is, say, a Liechtenstein foundation or a (more Anglo-Saxon-style) discretionary trust? Under Swiss rules, there is literally no beneficial owner at all for these structures. Germans who stash money in these things -- which are bread and butter structures for the tax evasion industry -- place themselves firmly outside the scope of legislation that is supposed to relate to Germans. These assets are not, from the Swiss banks' perspective, "German." They are, to be precise, legally "ownerless", even if ultimately some Germans have the power to enjoy the income. (For a further explanation of the slippery nature of these structures, see Section 3.1 here). So if this money has no owner, who is going to declare it to their tax authority? Nobody: ownerless money doesn't have a home tax authority. That is, of course, the whole point.

But one can go a lot further than this.

Consider how, exactly, the Swiss banks are supposed to refuse tax evaders (who haven't made their assets 'ownerless' as above.) Look at this, from Suddeutsche Zeitung (translated here):
"Not all banks go so far. Especially smaller private banks are balking at a self-declaration, and they are supported by the Swiss Bankers Association. According to the trade association, this system [self declaration] does not exist anywhere else in the world. It also offers no guarantee against new black money. If someone is prepared to deceive their own tax offices, then it will not be hard for them to lie to the bank. The banks have to take the information provided by their customers at face value: they cannot, may not and should not check the declarations."
That bit in bold is key. And this brings us to the following wonderful piece of logic.
Take a European tax evader with assets in a Swiss bank. Under the European Savings Tax Directive, they have two options: either they submit to the 'declaration' option whereby information about their income will be transmitted automatically to the home country's tax evader, or they choose the 'withholding tax' option, where tax is withheld but their identity is kept secret from their home tax authorities.

Consider each option in turn. First, if the client opts for 'declaration' under the current system, then the 'self declaration' described by Credit Suisse is quite pointless. They are already declaring.
As for the 'withholding' option, consider this. What client is going to want to declare their income to their home tax authorities (and hence be taxed) - then get the Swiss bank to withhold taxes on it? What ever would the point of that be? If you choose the information exchange option, you don't get the taxes withheld.  So you would certainly not do this for tax reasons, and you would not do it for non-tax confidentiality reasons either: the client has already declared that they have broken confidentiality by self-declaring.

To conclude: if you see Switzerland subsequently handing over any money to Germany from this withholding tax option, you will know that the white money strategy is a hoax.
So what ever could the point of this white money strategy be?

Not a whitewash, surely!

If Switzerland were serious about having 'white money' in its banks, the solution would be very simple indeed: sign up for full automatic information exchange under the EU Savings Tax Directive.
And why not renounce banking secrecy while they are at it? Then we can start talking about white money.


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