Archive for August, 2012

Euro countries still falling for Swiss Rubik tax deals despite its certain failure

Switzerland’s useless “Rubik” tax deals seem to be nudging their way back into the news again. These deals, which have so far been signed by Britain, Germany and Austria, but have not yet come into force, ostensibly offer tax evaders a chance effectively to pay a bunch of back taxes and ongoing taxes, while preserving their anonymity — though we have demonstrated repeatedly that they will not raise even a tenthof what the politicians and the Swiss bankers have been promising.What is more, recently we finally saw official confirmation from the Swiss bankers’ side that the core purpose of Rubik is – as my colleagues and I have long argued – is to kill progress on financial transparency in Europe, by sabotaging political progress on strengthening the European Savings Tax Directive. That Swiss goal is now explicit.

But there are signs of hope. It seems as though enough people in Germany are finally — finally — waking up to the gaping holes in the Rubik deals (not to mention the ethical and democratic implications of guaranteeing secrecy and impunity for wealthy criminals) and finding some backbone: Germany now looks quite likely to scupper the whole thing. A stream of leaked Swiss banks data purchased by German states has not exactly helped the German mood. Germany’s highbrow newspaper Die Zeit reports, in an article entitled Back to Square One:

“Most likely, the [Swiss] tax agreement with Germany is doomed to fail.”

German speakers would also do well to read this Tages Anzeiger report. Even the Swiss are increasingly recognising how ridiculous the arrangements are; the article quotes the head of the head of Switzerland’s Basler Kantonalbank as saying that Rubik is a waste of time, and that ”

“The automatic exchange of information would be more favourable to us”

In fact, Switzerland is already looking to engage in automatic information exchange with the United States, through negotiating a framework agreement over the U.S.’ FATCA programme, which is a form of automatic information exchange. The former head of the Swiss National Bank, Philipp Hildebrand was more forceful, in general terms saying that:

“The Swiss fiscal refuge is over.”

Swiss bankers are certainly sweating. From Swissinfo:

“Today I met several bankers in Zurich. They were all shaking their heads saying, ‘In 40 years of operations we’ve never had a crisis like this one – a war like the one being waged against the Swiss banking system. We’re in the artillery sights of every country and every day there are new attacks’,” recounted Paolo Bernasconi, a business law professor at St Gallen University and former Ticino public prosecutor.

“Many bank directors are unable to leave Switzerland because they risk being arrested.”

Those attacks, led most forcefully by the United States at this stage, with a powerful supporting role for the European Commission, are of course entirely justified. Swiss bankers have been strutting around in the lion’s den for decades – and now they are complaining that there are lions in there – with real teeth.

Here is a quick reminder of what is wrong with Rubik. In a nutshell, the deals are riddled with of holes, which are not present in the (currently stalled, because of Rubik shenanigans) amendments to the EU Savings Tax Directive. The main holes are these:

  • Foundations, discretionary trusts and companies without shareholders are deliberately outside the scope of Rubik. These are extremely common and extremely slippery structures where — even though someone (a German, say) will benefit from the asset, they are set up through legal contortions so that no beneficiary can officially be identified: the assets are, legally speaking,  ‘ownerless.’ They are not officially identified as German, so they slip the net. (Read more here, Section 3.1.)
  • Non-Swiss insurance ‘wrappers.’ Rubik claims that it includes insurance wrappers. What the Swiss bankers fail to advertise is that only Swiss insurance wrappers are in scope. Non-Swiss ones slip the net! And of course everyone is using non-Swiss insurance wrappers! (These ‘wrappers’ are a bit like trusts, where the assets are held by an insurance company, which becomes the beneficial owner. The German remains entitled — through a slippery agreement — to the economic benefits from the assets, but is now legally separated from them, and therefore won’t be identified as the owner.)
  • Commercial companies. Only domiciliary companies falling under Swiss definitions are in scope – and that excludes pretty much any untaxed Cayman company, for instance.
  • Fees, donations, loans, royalties. Rubik only includes investment gains on bankable assets. So if you distribute your profits as, say, a ‘consulting fee’ or a rental payment, or some such – you are out of scope.
  • Foreign bank accounts. Move your assets from LGT Zurich to LGT Singapore, and hey, presto! You are out of scope.
  • Defer, then move. Rubik will let you defer all your income until you move to another country. So you might set up a deferred pension – then retire to sunny Portugal! You have an untaxed pension pot, which Rubik cannot touch.

And more. The EU Savings Tax Directive (which is itself currently full of holes and contains some of these same loopholes), is currently being beefed up though a series of Amendments which will decisively close these gaping holes, (though it will still contain some other, smaller ones).

The Swiss Bankers’ association always comes out with a weaselly answer to our pointing out of the loopholes.

It says that we are wrong, because every beneficial owner has to pay the tax.

Now that statemet in itself is mostly true, but absolutely misleading. The whole point is that you escape it by not being classed as the beneficial owner! (Their statement is a bit like saying ‘if you get caught in the net, then we will catch you’ – then whispering ‘psst! hey! the trick is: stay away from the net!)

The key point here is, as we have demonstrated beyond doubt: not only will Rubik fail to deliver a tenth of the promised revenues. It is worse than that: by killing the far far stronger European alternative – the Savings Tax Directive Amendments – the Rubik deals ultimately will be revenue-negative for the Germany, the UK and other countries of Europe.

So in light of this mountain of evidence against Rubik – and the fact that Germany, the main political player in this whole game, looks like it will pull out — it is extraordinary to see other countries lining up to sign new, useless deals with Switzerland.

Greece appears to be closing in on a deal. It will lose them tax revenue. Take these words from former Greek Prime Minister George Papandreou:

“Had this [tax havens] been tackled, Greece would have most likely never have needed a bailout.”

Greece will need another bailout if Rubik goes ahead.

The Italians appear to be moving towards a Rubik deal too.  They, too, will lose buckets of money as a result.

There are signs that the tax havens of Belgium and Luxembourg want to play the spoiler, and sign up to this. The deals will be extremely useful to their financial sectors, particularly Luxembourg’s – by cementing secrecy in Europe: their bread and butter.

But all is not lost – far from it. If Germany fails to ratify Rubik, as seems likely, then the main motor of the entire Rubik project is broken. A fascinating new detail from Swissinfo notes that if the German deal fails, then Britain’s may unravel as a direct result:

If the treaty with Germany fails then “the idea of a withholding tax is dead”, according to Zurich banking expert Hans Geiger, who believes that the deal with Germany formed the basis of a similar treaty with Britain.

The treaty contains a most favoured nation clause “which means that if Germany improves its position then Britain’s outlook would also be improved”, Geiger told swissinfo.ch. The failure of the German deal would mean that “the foundation of the British treaty, at least in its current form, would be lacking.”

Ultimately, what is playing out here is a series of chess moves in a great global game. An important recent paper by Itai Grinberg of Georgetown University Law Center, a former US Treasury official, paints the picture:

“The international tax system is in the midst of a contest between automatic information reporting and anonymous withholding models for ensuring that nations have the ability to tax offshore accounts. . . .the contest . . . implicates broad questions about the future of tax sovereignty in a globalized economy and the treatment of the wealthiest vis-à-vis other taxpayers.”

(A short discussion of that paper is available here.) With an estimated $21-32 trillion stashed offshore, the stakes could not be higher. In more fine-grained detail, Grinberg points out that financial institutions, which previously facilitated oceans of tax evasion and other financial crimes with near-total impunity, are now finally starting to get a little more attention:

“Four incongruent initiatives of the European Union, the OECD, Switzerland, and the United States together represent an emerging international regime in which financial institutions act to facilitate countries’ ability to tax their residents’ offshore accounts. The growing consensus that financial institutions should act as “tax intermediaries” cross-border represents a remarkable shift in international norms that has yet to be recognized in the literature.
. . .
The emergence of the EU, OECD, Swiss, and U.S. approaches to cross-border tax administrative assistance has shifted the discourse of international tax cooperation from a dispute about whether financial institutions should function as cross-border tax intermediaries to a dispute about how financial institutions should perform that role.”

Bit by bit, an international architecture of transparency is starting to take shape. The Swiss are doing their best to sabotage progress, with the collaboration of particular politicians in Germany, Britain and other countries. But it seems likely that Europe’s transparency initiative, while still under serious threat, remains on track.

Even if Rubik were to survive for now, it will not be very long before the participants realise they have been cheated by Switzerland, and will demand an end to the disaster.

Once the Amendments come into force, then European countries will start seeing much better transparency and collecting serious taxes from their wealthiest élites for the first time.

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