Bloomberg News

Swiss-U.K. Tax Agreement May Be ‘Revenue-Negative,’ Group Says

October 25, 2011

Oct. 25 (Bloomberg) -- Switzerland’s decision to impose withholding duties on untaxed British funds may generate only a “fraction” of anticipated revenue, the Tax Justice Network said.

A series of loopholes means the U.K. government is likely to recoup just 10 percent of between 4 billion pounds ($6.4 billion) and 7 billion pounds envisaged by the bilateral treaty, the campaign group said in an e-mailed statement today. The agreement may even be “revenue-negative,” with Britain’s government pulling in less from Switzerland than it does today.

The two countries settled a long-running dispute about tax evasion on Oct. 6 and Swiss banks agreed on a one-off payment of 500 million francs ($568 million), with future income from interest taxed at 48 percent and capital gains at 27 percent. In practice, there are plenty of “escape routes,” according to Nicholas Shaxson, the report’s author.

“Some of the biggest loopholes are explicitly carved out of the deal,” said Shaxson, who this year published a book on tax havens. “If these deals are ratified they will constitute a massive victory for Swiss bankers.”

Similar flaws undermine a near identical treaty between Switzerland and Germany, Tax Justice said.

‘Escape Routes’

The report outlines 10 “escape routes” for U.K. taxpayers with Swiss accounts. One is to dodge authorities by shifting funds to foundations, discretionary trusts or companies whose activities are classified as “commercial.” None of these are covered by the deal, Shaxson said.

To get through the “simplest loophole,” clients need only switch their funds to a branch of a Swiss bank outside Switzerland, also not covered, according to the report.

“Because they are an integral part of the parent company, it would have been technically fairly straightforward” to bring foreign branches into the deal, Shaxson said. “This missed opportunity is extremely important.”

Other strategies could include declaring deposits as “non- capital” income such as wages, royalties and directors’ fees, or using a Swiss trustee to manage the funds in a tax haven, he said. Loans taken out against insurance wrappers and weak provisions for inheritance tax could also be exploited, according to the report.

Tax Agreement

The Swiss Bankers’ Association, an industry body that held talks with authorities during drafting of the treaty, disagrees.

“There is no legal way for a British person to remain entitled to his or her assets in Switzerland in any way while at the same time evading identification,” Sindy Schmiegel Werner, head of U.K. communications at the SBA, told Bloomberg News by e-mail.“There is no possibility to sidestep the scope of application of the existing tax agreement.”

While Shaxson also criticized the delay before the treaty comes into force in January 2013, saying it could give tax evaders the chance to work out ways to circumvent the new rules, the SBA says that won’t happen.

“Banks will not actively support their clients to withdraw their assets from Switzerland,” Schmiegel Werner said. “But the discretionary power on their assets remains with the client.”

--Editor: Simone Meier

To contact the reporter on this story: Leigh Baldwin in Zurich at lbaldwin3@bloomberg.net

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net


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