Monday, April 9, 2012

Swiss Continue Their Behavioral Patterns - Black is not White (4/9/12)

With the permission of Tax Analysts, I post a recent article by Lee Sheppard, a frequent tax commentator and critic.  Lee A. Sheppard, Don't Ask, Don't Tell: Swiss Behavioral Patterns, 135 Tax Notes 7 (Apr. 2, 2012), here.

Bottom line, Ms. Sheppard notes that the Swiss are up to its old behavioral patterns.  What it appears to give under international and, specifically, U.S. pressure, it takes away through the back door.  Specifically, the U.S. thought it had negotiated the power to make "behavioral pattern" requests for information from Swiss financial institutions about U.S. depositors.  Normally, treaty requests require that the requesting party (the U.S. here) name the individual for whom information is requested, but the nature -- by design -- of the Swiss banking system is that U.S. (and other countries similarly situated) will not know the names of depositors subject to its tax jurisdiction.  So the protocol allowing behavioral pattern requests seemed to be quite a break through.  So the U.S. could have reasonably thought.  But, the Swiss government has its ways.  As with religion (and cheating other governments may be a religious imperative for the Swiss), it is all about interpretation.

Ms. Sheppard also discusses issues relating to withholding and the EU savings directive, particularly in response to treaty protocols with Germany and the U.K.  The savings directive requires automatic exchanges of information regarding interest payments to accounts of EU residents or impose a withholding tax.

Finally, Ms. Sheppard notes the Swiss claim of promoting only "white money."  She says:
Switzerland is now telling the world that it is trying to get right as a financial center, while hanging onto its basic business of helping the world's rich hide their assets. The Swiss government plans to require bankers to apply due diligence to prevent untaxed funds from being banked there. This is called the "white money" strategy, in contrast to the "black money" that made the country rich.
Ms. Sheppard then goes on to discuss legislative proposals to put more teeth in compliance with respect to foreign accounts.

It seems to me that Switzerland has little competitive advantage as a financial center except in the world of secret money -- hidden by potentates from their subjects, hidden by tax evaders from their governments, and hidden by others from persons at least some of whom have a potential legitimate interest in knowing about the funds (e.g., spouses in divorce proceedings, partners who have seen  money disappear in the Swiss banking system, etc.).

Related Articles:

David Jolly, Germans and Swiss Reach Stricter Deal on Tax Cheats (NYT 4/5/12), here.
Discusses the German approach to the Swiss banks to pay 21 to 41% of the amount in the secret accounts, future withholding and tax on inheritance.  "Crucially, from the point of view of maintaining Swiss banking secrecy, account holders’ names will not be revealed to Berlin, and the Swiss authorities will be responsible for ensuring that taxes are paid on behalf of the account holder, who can remain anonymous if desired."  The estimate is a one-time payment of $10-15 billion and annual withholding of $750 million.


  1. A few quick comments on the article ...
    I question the author's claim that the Swiss want an inflow of foreign funds in order to have a strong franc. In fact the Swiss over the past year pegged the franc at a lower rate to protect exports and has done so before (1970s)

    There are safety reasons for keeping money in Switzerland (good bank supervision, lack of investments in risky/toxic assets such as US mortgages, derivatives, etc.)

    Foreigners (primarily from Latin America, former USSR, dictators from Africa) can keep money secret in the US. They fill out a W-8 form indicating they are neither US citizens nor residents and no tax is withheld on bank interest or on treasury bill/bond interest. The banks file no 1099s with the IRS because they are not required to. I posit that foreign money is safer from disclosure in the US than in Switzerland. The only country with which the US discloses info is Canada. Theoretically the US will respond to info requests, but if it has happened such causes can probably be counted with the fingers of one hand.

    Do bankers from major US banks travel to Latin American capitals and do exactly what UBS bankers did in the US? I have no proof, but I would bet that the answer is yes. Not offering this as justification, two wrongs don't make a right.

    I disagree that it's impossible to build a case against a foreign banker without Swiss government help or whistleblowers. The case would be built the same way as with any other crime (surveillance, undercover agents who open foreign accounts etc.)

    Bearer passbooks may still be available in Switzerland, I know they used to be available in other European countries. Such accounts typically have a relatively low MAXimum (such as $5K-$10K) and such accounts have not been anonymous for years; the account opener must still be identified to the bank as a normal account. All it means is that the bearer of the passbook can make deposits or withdrawals. Not much different in practice from lending your ATM card and PIN to someone to make withdrawals, or giving someone a deposit slip to your checking account and having him go to the bank to make a deposit for you. Due to the small amounts that can be involved in such accounts this is really peanuts and not worthy of mention.

    The US doesn't have bearer shares but in practice there is no reporting of beneficial share ownership in many Us states (perhaps most.)

    Swiss banks had outside lawyers create companies. A US bank would do the same and send me to a lawyer to create a US corporation or trust.

    Drop boxes for deposits at the Zurich airport? Many US banks have night deposits, or you can deposit cash in an envelope at an ATM.

    Not responding to requests based on stolen data? US law also prohibits use of stol;en evidence in trials, though this has loosened quite a bit over the past few decades.

    Switzerland didn't withhold tax on interest earned by companies or trusts? US banks don't report interest on 1099s for US corporations and trusts either. There was a big hubbub a couple of years ago about proposed (later rescinded) requirements for 1099s on payments to vendors.

    Austria/Luxemburg aren't tax havens. They do (still) have bank secrecy to a certain extent but this is not viewed as strong as Swiss bank secrecy.

  2. I am glad someone has pointed out the hypocracy in a lot of the US behaviour in this area.


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