Hundreds of billions of dollars could be moved out of Swiss banks as clients attempt to flee a coordinated crackdown on tax evasion, UBS’s Jürg Zeltner told magazine Schweizer Bank on Sept. 17. The crackdown will likely cost Switzerland its tax-haven status.
The head of the UBS wealth management unit predicted that his bank will lose about 12 billion to 30 billion Swiss francs (US$12.8 billion to 31.9 billion) of the 783 billion francs in assets under management for wealthy clients. “As a consequence of the realignment of the financial center and the planned withholding tax, we assume that a total of hundreds of billions of francs will flow out of Switzerland,” he told Schweizer Bank.
Credit Suisse, the other big player in wealth management, estimates it will lose over $37 billion over the next few years as European clients withdraw their money. German business consultants ZEB estimate that out of the total 2.8 trillion francs ($3 trillion) that the roughly 300 Swiss banks have under management, 800 billion francs could be untaxed funds from European citizens. ZEB predicts that 200 billion of those funds could be withdrawn due to several tax treaties and investigative breakthroughs.
European Tax Treaties Plan Automatic Withholding Tax
Switzerland is likely to lose its tax-haven status because of several breakthroughs European countries and the United States have made in prosecuting tax evaders.
Germany was able to procure the names of tax evaders by buying the data from bank employees for a fee ranging in the low single digit millions. A compact disc with the names of 35,000 tax evaders obtained by the state of Lower Saxony in 2010 is expected to yield 1.8 billion euros in repayments ($2.35 billion), according to German magazine Der Spiegel. In addition, many tax evaders have self-indicted themselves, hoping that they will get away with a fine and not be criminally prosecuted.
These investigative breakthroughs have ultimately led to the signing of a German-Swiss tax treaty last September. The treaty will have “black” German assets taxed retroactively at a rate of 21 percent and Swiss banks will apply the standard capital gains rate of 25 percent in the future. On the other hand, Germany will abstain from obtaining more records—a transaction that is illegal in Switzerland and has been prosecuted there—and will facilitate market access for Swiss banks in Germany.
The European countries are preparing to accept money on an anonymous basis and the U.S. is not prepared to do that.” —Scott Michel, law firm Caplin & Drysdale
The deal still has to be ratified by the German Parliament and some opposition parties claim that the tax rate is too low and that Switzerland should disclose the names of people who shifted funds from Switzerland to other tax havens since the signing of the treaty.
Other European countries, including Britain have signed or are in the process of signing similar treaties, which have one important caveat: Switzerland will withhold taxes, but it won’t disclose the names of account holders and tax evaders, another act that can be illegal under Swiss banking secrecy laws.
United States Wants Release of Names
While some German parliamentarians might think Switzerland and German tax evaders are getting away too easily, the United States is increasing the pressure to get its own tax agreement with the Alp republic. The United States is pushing for the disclosure of the names of account holders, including historic data, reaching as far back as 10 years.
“The European countries are preparing to accept money on an anonymous basis and the U.S. is not prepared to do that,” Scott Michel, president of law firm Caplin & Drysdale told The Epoch Times.
Bruce Zagaris, who is a partner at the law firm, Berliner, Corcoran, and Rowe in Washington, says that the European accord was a “gentle” solution.
Michel, a veteran tax lawyer who follows U.S. and Swiss negotiations closely added: “The U.S. is trying to get account information from these banks, going back probably 10 years,” and that “I do think this retroactivity issue is quite important to [the Swiss].”
U.S. Playing Hardball to Get What It Wants
Ever since U.S. prosecutors managed to obtain a Deferred Prosecution Agreement with UBS, which saw the bank releasing information on 4,450 U.S. citizens, paying $780 million in penalties and having some employees indicted for assisting U.S. persons to evade taxes, the United States has been on the offensive.
They are pursuing a “scorched earth approach” according to Zagaris, who publishes and edits the respected International Enforcement Law Reporter and represents governments and professionals “who want advice going forward,” given that the negotiations present a very “dynamic situation.”
The New York Times reported that the Justice Department is investigating Credit Suisse and 10 other banks. In February, Switzerland communicated some concessions, but demanded that in a potential agreement, the United States would stop prosecuting Swiss banks and professionals.
Days later, Switzerland’s oldest private bank Wegelin was indicted by the Justice Department and the owners decided it was best to dissolve the bank instead of facing prosecution. “An indictment is so severe it could mean millions of dollars [in losses]. Once you get indicted, your reputation is tarnished,” comments Zagaris.
This was a powerful demonstration that the Justice Department will use the information it obtained in several investigations to go after Swiss banks and their employees, much to the detriment of Switzerland, as its reputation as a tax haven suffers and its companies are facing severe penalties and longer-term economic losses.
To add insult to injury, complying with the demand to indiscriminately disclose the names of Swiss bank account holders is a criminal offence under Swiss law. “The U.S. knows the only way the Swiss institutions are going to robustly cooperate … is to prosecute or threaten to prosecute,” says Zagaris.
In August, Swiss Finance Minister Widmer-Schlumpf lamented in an interview with the Zurcher Regionalzeitungen that “if Switzerland did as the United States’ wanted, a global solution would be decided tomorrow,” and that “new demands are constantly being made that we cannot accept.”
United States Tipped to Win Power Game
Zagaris believes that the United States will not give in, however, and will ultimately get its way, securing the release of the names of tax evaders and retaining the privilege to prosecute Swiss companies and their employees. “This is primarily a power game and the U.S. has disproportionate power to Switzerland, the Swiss financial institutions and the U.S. depositors.”
As far as the consequences are concerned, the experts have different opinions: “I’m not a banking expert, I turn on my many trips over there and my many conversations with people over there that the U.S. business is not as a significant component of the portfolios that are maintained by the banks [in Switzerland]. It’s Russian, it’s Persian, it’s Chinese, it’s Middle Eastern, and to some extent European. If all the Americans pull their money out of Switzerland tomorrow, that would not be significant even in and of itself,” says Michel, conceding that his assessment is based on his personal experience only.
Zagaris on the other hand, who also declined to cite any numbers, said that he believes the loss for Switzerland would be quite substantial. He also thinks that U.S. citizens will face repercussions, as banks worldwide will deem it too expensive to cater to U.S. clients due to the high regulatory costs and might even refrain from investing in the United States because “it’s nothing but problems.”
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