Archive for November, 2012

Logic falls apart in Switzerland’s “Trust Us” 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 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 me, certainly. Unless, of course, that label is 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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A better way to tax corporations: my article in the Financial Times

There have been major debates in Britain in recent weeks following a series of stories showing how multinationals including Starbucks, Amazon and Google have been using the international system of tax havens to cut their UK tax bills, often down to zero, while reporting big profits to their shareholders there.

I have a comment article in the Financial Times today, co-authored with Professor Sol Picciotto, entitled Make Corporate Tax Rules Fairer For All. It’s  about corporate tax avoidance and a proposal for reform, known as unitary tax. The article is a fair bit shorter than what was submitted but still they did a good edit. It states:

“The world’s tax rules have not kept pace with profound changes in the global economy.”

Then it goes on briefly to describe the hocus-pocus of international corporate income tax avoidance, and our original article (though not the published version) went on to say:

“The rules, dominated by the OECD club of rich countries, are supposed to tackle this prestidigitation by pretending that it is possible to set an “arm’s length,” market-determined price for these transactions, based on comparables elsewhere. But multinationals generally produce unique products and services and enjoy economies of scale and scope, so even the world’s most sophisticated tax authorities cannot find appropriate comparables. Developing countries find it nigh on impossible.”

The OECD’s methods are, as former top US international tax official Michael Durst explains, “based on a fundamental misunderstanding of practical economics.” The published version then notes a better, simpler alternative: unitary tax.

“Instead of taxing multinationals according to the legal forms that their tax advisers conjure up, they are taxed according to the genuine economic substance of what they do and where they do it.”

Europe’s proposals for a Common Consolidated Corporate Tax Base (CCCTB) is a version of this, but its scope is too narrow, as the article continues:

“Tax experts have long argued that this approach is better. It is proved, too: most US states already use it successfully for state taxes. The EU’s proposal for a common consolidated corporate tax base goes a long way towards this, though its geographical focus should be expanded to require a worldwide combined report. It is possible to move towards unitary taxation without widespread international co-ordination, though that would certainly help.”

If you want to know more about unitary tax, see Prof. Picciotto’s draft paper here. It has some discussion of the CCCTB, but it far broader. A substantially edited final version of the paper will be available soon.

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