Friday, September 21, 2012

Agreement of Switzerland with Germany

www.bethelfinance.com

Proponents and opponents of banking secrecy will be locking horns on the afternoon of 24 September in Berlin, at a public hearing sponsored by the Finance Committee of the Bundestag (German parliament's lower house) on the Rubik bilateral taxation agreement signed by Germany and Switzerland in 2011. The agreement is criticised by the United States.

The Rubik deal has to be ratified by both houses of the German parliament – voting is set for 23 November, two days ahead of a possible Swiss referendum – to enter into force, at the beginning of 2013, hopes Berne. This will be less of a problem in the Bundestag, where the German chancellor and her allies have a majority, than in the Bundesrat (which represents the Länder), where they are in the minority.

Switzerland intend to play it safe, though. It will be sending some important people to Berlin, on 24 September: its State Secretary for International Financial Matters, Michael Ambühl, and the President of the Swiss Bankers' Association, Patrick Odier, among others. They will be facing determined opponents to Rubik, including US law professor Itai Grinberg and Zurich-based tax consultant Mark Morris. Twenty-three people will testify at the hearing.

Grinberg, one of the drafters of the Foreign Account Tax Compliance Act (FATCA) and a former taxation adviser in the Obama administration, will warn German MPs against the temptation of endorsing the Rubik agreement.

According to the text forwarded to German MPs, use of a system of automatic information exchange, on the largest scale possible, is the only way to effectively fight tax evasion, if only for reasons of fairness. Such a system also helps identify all funds hidden by fraudsters abroad.

Germany seems to have understood the message, since it has concluded precisely on this basis a "model intergovernmental agreement" with the United States on the application of FATCA, which will impose a transparency obligation on financial institutions, on pain of penalties. The United Kingdom, France, Italy and Spain have done the same.

Berlin committed in this context to promote the model of automatic information exchange in the international arena. So it would lose credibility by ratifying the agreement with Switzerland, which preserves Swiss banking secrecy. According to Grinberg, the confederation itself made serious concessions to the United States in June 2012. Germany could have made an effort to obtain the same concessions, argues the professor.
Meanwhile, Berlin risks "nipping in the bud the emergence of a multilateral automatic information exchange system". Not only Washington, but also most EU and even OECD states are now advocating for such a system. How can Luxembourg, Austria, Singapore or Hong Kong be convinced to abolish their banking secrecy if Switzerland is not placed under the same obligation? Germany would therefore shoot itself in the foot by ratifying Rubik, says Grinberg, since it would "diminish its ability to address its own tax evasion concerns" with other jurisdictions.

Morris, an international taxation expert, stresses the flaws inherent to Rubik. They concern first and foremost the provisions on the "effective beneficiary" of earnings on assets, which will only be partially addressed by the planned extension of the scope of EU regulations on savings taxation, limited to interest, to other sources of income. Foundations and trusts, among others, will remain a very attractive vehicle for those who wish to escape the reach of the German tax administration.

Morris estimates at €250 billion the amount of undeclared funds accumulated by German residents in Switzerland. In his view, Germany will not be able to recover more than €9 billion with Rubik, whereas it could see €120-130 billion pour into its coffers if it managed to convince Switzerland to abolish its banking secrecy.

Background
The Rubik agreement between Berlin and Berne, signed in August 2011 and amended in April 2012 due to certain objections raised by the European Commission, focuses on two areas: the anonymous regularisation of untaxed assets stashed by German residents in Swiss banks, and, for the future, the withholding of a tax at the source in full discharge of all tax liability on income earned on assets held in Switzerland. The Swiss have signed similar agreements with the United Kingdom and Austria and are holding negotiations with Greece. Preliminary discussions are under way with Italy, while Belgium's officials have been approached on the subject but are undecided.
A "single payment" in full discharge would regularise hidden assets: a tax of between 21% and 41% will be levied on all hidden assets.
In the future, Swiss banks will annually levy a withholding tax at the source on income paid on assets held by German residents in Switzerland. The proceeds will be turned over to the German tax administration. The rate of this taxation will vary depending on the financial products: 35% on interest on savings (as defined by existing and future EU legislation) and 26.375% on other income.
The agreement will preserve Swiss banking secrecy. Switzerland nevertheless had to make several concessions in this context: the payment in advance, in 2013, of €1.8 billion as a sign of its good faith, the possibility for German authorities to make sporadic checks, flexible application of OECD standards on information exchange on request, etc.
In return, Germany agreed to facilitate access for Swiss financial institutions to its market, to decriminalise Swiss banks, their employees and clients, and to no longer exploit stolen data on the clients of Swiss financial institutions.

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