Tax treaty heralds a brave new world

The fortunes of Switzerland’s private banks are picking up, helped by a ground-breaking deal on taxes with Germany, writes Tara Loader Wilkinson

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Spain is considering a similar tax deal with the Swiss, as tax authorities across Europe seek to boost their coffers by agreeing tax secrecy will continue.

Under the planned deal, expected to be signed next month, the Swiss would apply a withholding tax on German assets held in Switzerland and provide more co-operation in tax evasion investigations. By way of return, details on German client accounts would not automatically be shared with the German authorities, thus preserving Swiss bank privacy.
Switzerland’s private banks are relieved. A spokesman for Clariden Leu said: “Bank client confidentiality is intact and will remain in force. We believe Switzerland will continue to be an attractive place thanks to its high compliance standards, among other reasons.”

With €200bn of untaxed wealth squirrelled away in Switzerland, according to analysts, German individuals are the country’s biggest clients. A breach of secrecy would have given Germans – who benefit from zero banking privacy in their homeland – little reason to retain their Swiss bank accounts.

Patrick Odier, chairman of the Swiss Bankers Association, said in a statement: “There are grounds for optimism. We note with satisfaction that Wolfgang Schäuble, Germany’s finance minister, has announced in public that he agrees with our proposal for a flat-rate withholding tax.”

The SBA, which represents more than 300 banks including UBS and Credit Suisse, said the withholding tax could raise “billions per year”.

The development is a ray of hope for Swiss private banks: Berlin has paid for stolen data from a number of Swiss private banks. It raided the German offices of Switzerland’s second-largest bank, Credit Suisse, this year, severely denting trust.

Last year, the US tax authorities brought a civil lawsuit against UBS to gain details of some of its US client accounts. Switzerland’s number one bank went on to haemorrhage $200bn of assets from its Swiss and international wealth management arm, although the situation is now stabilising.

Christian Nolterieke, managing director of Swiss-based consultancy MyPrivateBanking, warned of the German deal: “Wealthy clients do not care what is written in a contract, if every few months another CD with client data pops up.”
Even if one country does a deal, another can continue to challenge the status quo. Despite assurances by UBS and the Swiss government that their privacy would not be breached, the Swiss bank was ultimately forced to hand over data on its American clients.

Nolterieke said: “Even if the Swiss can negotiate that no automatic information exchange is part of the treaty, the trust in the Swiss banking industry is gone.”

Others say Switzerland is well placed to bring in more business, particularly after the German deal. Christopher Wheeler, an analyst at Italian bank Mediobanca, cites factors in Switzerland’s favour including political and economic security, a strong and stable currency, a highly diversified banking sector, well-trained bankers and regulation.

The strength of the Swiss franc, up five percent this year against the dollar, suggests money is flowing its way. In an annual survey published by the World Economic Forum this month, Switzerland was named the most competitive nation in the world for the second year running.

Wheeler added: “Show me a good alternative to Switzerland. Monaco, Singapore and the Bahamas are all subject to OECD tax information exchange agreements. Most centres not covered by these protocols lack the sophistication wealthy clients require.”

Kinner Lakhani, an analyst with US bank Citigroup, said: “We believe that the new double-taxation treaty with Germany is a landmark deal which could potentially serve as a new template for Swiss private banking.”

Francis Rojas, partner at law firm Withers, said Spain could also benefit from the Swiss-German agreement. He said: “As Spain has a most favoured nation clause in its tax treaty with Switzerland, the revised exchange of information clauses in treaties with other EU member states indirectly also apply to Spain. Like other member states, Spain will be anxious to see how they can benefit from the precedent being created with Germany.”

Philip Marcovici, an international tax specialist on the board of Kaiser Ritter Partner, a Liechtenstein-based wealth adviser, said: “We are watching developments regarding Switzerland’s negotiations with Germany and other countries with fascination.”

But Marcovici said complications arising out of the bilateral agreement could lead to further taxation: “The reality is that many families own non-bankable assets that will also be of interest to tax authorities, making a withholding approach very difficult to implement and, possibly, expensive for the wealthy.”

Citigroup’s Lakhani said that although an automatic tax exchange agreement seemed unlikely, withholding tax levies could be extortionate: “While we believe the likelihood of automatic information exchange remains limited, further steps appear inevitable.”

He said the withholding tax option of the European Union Saving Tax Directive – to be increased from 20 percent to 35 percent in July 2011 – could be pushed higher over the years to head off pressure from authorities.