Swiss bankers confess that their UK tax deal has failed

Adapted from the Tax Justice blog.

The Swiss Bankers’ Association has this morning admitted that its UK-Swiss bilateral tax-and-secrecy deal, which we have condemned from the start, has failed. This is of enormous importance, given that Italy is considering (again) the possibility of signing such a deal.

The deal, under a Swiss-designed model sometimes known as “Rubik,” is supposed to take a large capital chunk (and ongoing withholding tax payments) from the untaxed assets of UK residents who have been criminally evading tax via Swiss banks, in exchange for their being allowed to keep their tax affairs secret. Switzerland would pay the UK a one-off upfront payment of SFr 500 million – about £320 million or $500 million, and then, politicians promised, Britain would reap £4-7 billion, mostly from the hefty chunk being taken out of the capital in the Swiss accounts.

We said from the beginning that because of the giant loopholes in the deal — some of them deliberately inserted — they would raise only a small fraction of what they had promised. We sent our analysis to the Swiss Bankers’ Association, to the Swiss and UK tax authorities, and to private practitioners – and apart from this underwhelming response, none of them demonstrated to us how we had got it wrong. For a short discussion of our original analysis and the response from others, see this Guardian story – or the full analysis here.

Now a few days ago the UK balanced its budget with a promise of £3.2 billion from the Swiss tax deal. We showed how that was a fictional budget-balancing exercise, based on unrealistic projections.

Now, finally, we have been proved right. A new press release from the SBA says:

“First indications from selected banks in Switzerland show that there are fewer untaxed UK assets in Switzerland than had been previously assumed.

The possibility can therefore not be ruled out that either none or only a small part of the banks’ guarantee payment of CHF 500 million will be recovered.”

That is a devastating confession. This is very far from the £4-7 billion that the UK politicians have been promising.

The Swiss “withholding tax” model is now effectively dead. Dave Hartnett, David Gauke and the government that sanctioned this deal must now hang their heads in shame.

There are, admittedly, a couple of other details in the SBA’s statement today. Notably this paragraph:

“First indications from selected banks in Switzerland show that there are fewer untaxed UK assets in Switzerland than had been previously assumed. This is mainly due to the fact that many clients have resident non-domiciled status. These clients are not liable to taxation in the UK and thus do not fall under the Agreement. Furthermore, numerous UK clients have opted for voluntary disclosure, which comes as no surprise given the latest developments in Switzerland with regard to the announced adoption of a global standard for the automatic exchange of information.”

Now the Swiss Bankers’ Association has a long track record of obfuscation and secrecy, so we need to take this unproved, unsourced assertion with a cupful of salt. This is spin.

And this statement, to be honest, is ridiculous. For one thing, what on earth were those projection-makers in the UK thinking if they did not consider the assets of the so-called non-doms (who are resident in the UK but who don’t pay tax (or even have to report) their non-UK income? Did they somehow “forget” to factor them in? We asked them for the basis for their original projections, and they never provided any kind of detailed analysis. This statement is nonsense. (And if a “non-dom” doesn’t have to report their non-UK sourced income, then we wonder what is the point of then hiding their foreign assets in a Swiss bank?)

The second part of the statement, that some UK “clients” have opted for voluntary disclosure, may contain some truth. They may have transferred assets via the very generous (though technically much tighter) Liechtenstein Disclosure Facility, for instance – but this deal would have had almost no impact on the rate of those voluntary disclosures, because it is, as we demonstrated, child’s play to escape. If people with secret Swiss stashes wanted to disclose voluntarily they were going to do so, perhaps out of moral scruples or whatever. But there was no ‘pressure’ from the UK-Swiss tax deal to do so. Put your Swiss account into an insurance wrapper or discretionary trust or Liechtenstein foundation — or, more dramatically, put it in an account in Singapore – and you are home free.

What they don’t seem to want to admit is that there are “fewer untaxed UK assets in Switzerland” because so many of those assets, which from an economic point of view are assets that UK taxpayers have the power to enjoy, have been shifted outside the scope of the deal through becoming assets that are not, legally speaking, connected to a UK taxpayer. Many if not most of those assets achieved that trick by becoming what one might call ‘ownerless’ assets.

The most obviously egregious provision in the provision in this respect relates to so-called discretionary trusts. For anyone wanting to understand international tax evasion and avoidance, these creatures are worth understanding. Recently we quoted a practitioner in Jersey as saying that:

“Something like 90% of Jersey trusts we draft are fully discretionary ones.”

And we have heard those kinds of figures from other sources too. This is bread-and-butter stuff: see that blog for a brief explanation of how discretionary trusts work. In our original analysis, we noted that Article 2h of the UK-Swiss tax deal said:

“An individual resident in the United Kingdom is not considered to be a relevant person . . . if it is not possible to ascertain the beneficial ownership of such assets, e.g. due to the discretionary nature of the arrangement.”

Our emphasis added. That loophole explicitly carved out for discretionary trusts is a flag planted squarely in the agreement saying ‘escape me here.’ What reason can there be for this kind of deliberately inserted escape route? The only reason we can think of is that it was put there to protect people – not just from prosecution, but also from the inconvenient matter of having to cough up the money. And we know that whistleblowers had provided information on Swiss bank accounts to the UK authorities, so there were undoubtedly people to protect.

This is a truly sordid tale. And now there is a multi-billion dollar hole in the UK’s budget to explain.

Why would the SBA put that particular spin on the reasons for the failure of its deal? We think that the reason is likely to be because of the Amendments to the EU Savings Tax Directive, which does quite effectively tackle the problem of ‘ownerless assets.’ To oversimplify: by saying that the asset is deemed not to have been given away into the structure until a distribution to a beneficiary has happened.) These amendments are powerful tools for tracking down assets, and represent a threat to Swiss banking secrecy; they have been playing long and hard, in alliance with Luxembourg and Austria, to derail the progress of these Amendments. To confess that these kinds of loopholes are the reason for the deal’s failure is tantamount to an admission that the EU’s project, which is a mechanism for delivering automatic information exchange to the 43 jurisdictions covered, is far superior to the Swiss withholding model. (For a look at what is at stake here, take a look at this article by Itai Grinberg last year.)

We will end with an apt tweet from a UK tax expert. It kind of speaks for itself, revealing much about the where power and influence lies.