Banking Secrecy and Tax Evasion

Written by Chris Huhne MEP and published in the Financial Times on Wed 4th Dec 2002

The case for lifting Swiss banking secrecy in cases of tax evasion is very simple. Very few countries regard paying taxes as a voluntary activity that should result merely in civil penalties. On the contrary, one person's tax evasion is another person's higher tax burden. While there are collective functions to be funded - police, justice, defence and others - the idea that tax evasion should be regarded as an essential freedom is a libertarian nonsense that should be confined to the lunatic fringes of the American right.

Nor is this campaign to reduce international tax evasion an eccentric minority sport. The finance ministers of the Group of Seven leading industrial countries include the US Treasury secretary and the Italian, French and Japanese Finance Ministers, none of whom can be regarded as wild-eyed socialists or even left-leaning. At their Halifax meeting, they called upon all countries to "permit access to, and exchange, bank and other information for all tax purposes" and said that member countries of

the Organisation for Economic Co-operation and Development (which include Switzerland) should lead by example.

So the defenders of Swiss banking secrecy fall back on the right to

privacy combined with the efficacy of the withholding tax applied to

interest, profits and dividends for non-residents in deterring tax

evasion. However, even a 35 per cent withholding tax on interest, profits and dividends provides an incentive to move money to Switzerland for higher rate income tax payers in a relatively low top rate jurisdiction like the UK (where the top rate is 40 per cent). For other EU member states, where the top rate ranges up to 51 per cent (Germany), 55 per cent

(Finland and Sweden) and 59 per cent (Belgium and Denmark), the incentive is considerable. Any realistic withholding tax is still an invitation to tax evasion, as the Swiss know.

Indeed, the recent report on Switzerland from the OECD pointed out that foreign investors need not suffer the inconvenience of paying any Swiss withholding tax if they play their cards right. They can circumvent withholding taxes, and evade taxes in their own country, by opening fiduciary accounts which are offered by all Swiss private banks. The truth

is that the Swiss are not trying very hard to stamp out tax evasion

amongst their neighbours, because the Swiss financial industry has long thrived on it.

Lugano has catered to the Italians, Geneva to the French and Zurich to the Germans. When the Swiss held a referendum on joining the european economic area, capital flows stalled. Private bankers were mightily relieved when the vote went against. In this respect, Commissioner Frits Bolkestein and EU finance ministers are quite justified to insist that Switzerland co-operates on tax evasion. A vast amount of the capital in Swiss accounts and under Swiss management is avoiding the proper payment of tax.

The Swiss opposition to co-operation with its EU neighbours is particularly hypocritical since the Swiss banks - including UBS and other staunch defenders of the principle of banking secrecy - have already signed agreements with the United States Internal Revenue Service either to hand over client information or close their accounts. In theory, this respects banking secrecy. In practice, it is exchange of information or no banking service,

secret or otherwise. Switzerland should treat its EU neighbours with as much consideration as it treats the Americans.

If Switzerland does not, the EU will have every right to defend itself against tax evasion as best it can. In the short term, this might involve an amnesty on black money in Switzerland that could see a flight of capital back to the EU. Once that amnesty had taken effect, it would also

make sense for the EU countries to insist on proper checks on people

visiting Switzerland to see whether black money is being run across the border. This would certainly involve all travellers to and from Switzerland undergoing longer inspections, and might involve the suspension of the existing arrangements for speedy access to the EU for Swiss citizens.

What is clearly unacceptable is the idea that a state that wants friendly relations with its surrounding countries can grow fat by encouraging their citizens to break their laws. We would not put up with such behaviour concerning terrorism or money laundering. Tax evasion is no different.

Everybody in the EU who pays taxes honestly is paying more tax than they should in a surreptitious subsidy to the Swiss financial industry. Personally, I greatly admire Swiss banks but I have a long list of more deserving causes.

Chris Huhne is a member of the European Parliament's economic and monetary affairs committee, and is the economic spokesman for the European Liberal Democratic and Reformist Group.