Sep 03 2012

Euro countries still falling for Swiss Rubik tax deals even though it will fail

Posted by: Nick Shaxson in: Thoughts
Cross-posted from my EU Observer blog:

Switzerland’s useless “Rubik” tax deals seem to be nudging their way back into the news again. These deals, which have so far been signed by Britain, Germany and Austria, but have not yet come into force, ostensibly offer tax evaders a chance effectively to pay a bunch of back taxes and ongoing taxes, while preserving their anonymity — though we have demonstrated repeatedly that they will not raise even a tenthof what the politicians and the Swiss bankers have been promising. In this sense, the agreement will be a total failure – whatever happens to Rubik in the political arena. And we recently saw official confirmation from the Swiss bankers’ side that the core purpose of Rubik is – as my colleagues and I have long argued– is to kill progress on financial transparency in Europe, by sabotaging political progress on strengthening the European Savings Tax Directive. That Swiss goal is now explicit.

But there are signs of hope. It seems as though enough people in Germany are finally — finally — waking up to the gaping holes in the Rubik deals (not to mention the ethical and democratic implications of guaranteeing secrecy and impunity for wealthy criminals) and finding some backbone: Germany now looks quite likely to scupper the whole thing. A stream of leaked Swiss banks data purchased by German states has not exactly helped the German mood. Germany’s highbrow newspaper Die Zeit reports, in an article entitled Back to Square One:

“Most likely, the [Swiss] tax agreement with Germany is doomed to fail.”

German speakers would also do well to read this Tages Anzeiger report. Even the Swiss are increasingly recognising how ridiculous the arrangements are; the article quotes the head of the head of Switzerland’s Basler Kantonalbank as saying that Rubik is a waste of time, and that ”

“The automatic exchange of information would be more favourable to us”

In fact, Switzerland is already looking to engage in automatic information exchange with the United States, through negotiating a framework agreement over the U.S.’ FATCA programme, which is a form of automatic information exchange. The former head of the Swiss National Bank, Philipp Hildebrand was more forceful, in general terms saying that:

“The Swiss fiscal refuge is over.”

Swiss bankers are certainly sweating. From Swissinfo:

“Today I met several bankers in Zurich. They were all shaking their heads saying, ‘In 40 years of operations we’ve never had a crisis like this one – a war like the one being waged against the Swiss banking system. We’re in the artillery sights of every country and every day there are new attacks’,” recounted Paolo Bernasconi, a business law professor at St Gallen University and former Ticino public prosecutor.

“Many bank directors are unable to leave Switzerland because they risk being arrested.”

Those attacks, led most forcefully by the United States at this stage, with a powerful supporting role for the European Commission, are of course entirely justified. Swiss bankers have been strutting around in the lion’s den for decades – and now they are complaining that there are lions in there – with real teeth.

Here is a quick reminder of what is wrong with Rubik. In a nutshell, the deals are riddled with of holes, which are not present in the (currently stalled, because of Rubik shenanigans) amendments to the EU Savings Tax Directive. The main holes are these:

  • Foundations, discretionary trusts and companies without shareholders are deliberately outside the scope of Rubik. These are extremely common and extremely slippery structures where — even though someone (a German, say) will benefit from the asset, they are set up through legal contortions so that no beneficiary can officially be identified: the assets are, legally speaking,  ‘ownerless.’ They are not officially identified as German, so they slip the net. (Read more here, Section 3.1.)
  • Non-Swiss insurance ‘wrappers.’ Rubik claims that it includes insurance wrappers. What the Swiss bankers fail to advertise is that only Swiss insurance wrappers are in scope. Non-Swiss ones slip the net! And of course everyone is using non-Swiss insurance wrappers! (These ‘wrappers’ are a bit like trusts, where the assets are held by an insurance company, which becomes the beneficial owner. The German remains entitled — through a slippery agreement — to the economic benefits from the assets, but is now legally separated from them, and therefore won’t be identified as the owner.)
  • Commercial companies. Only domiciliary companies falling under Swiss definitions are in scope – and that excludes pretty much any untaxed Cayman company, for instance.
  • Fees, donationsloans, royalties. Rubik only includes investment gains on bankable assets. So if you distribute your profits as, say, a ‘consulting fee’ or a rental payment, or some such – you are out of scope.
  • Foreign bank accounts. Move your assets from LGT Zurich to LGT Singapore, and hey, presto! You are out of scope.
  • Defer, then move. Rubik will let you defer all your income until you move to another country. So you might set up a deferred pension – then retire to sunny Portugal! You have an untaxed pension pot, which Rubik cannot touch.

And more. The EU Savings Tax Directive (which is itself currently full of holes and contains some of these same loopholes), is currently being beefed up though a series of Amendments which will decisively close these gaping holes, (though it will still contain some other, smaller ones).

The Swiss Bankers’ association always comes out with a weaselly answer to our pointing out of the loopholes.

It says that we are wrong, because every beneficial owner has to pay the tax.

Now that statemet in itself is mostly true, but absolutely misleading. The whole point is that you escape it by not being classed as the beneficial owner! (Their statement is a bit like saying ‘if you get caught in the net, then we will catch you’ – then whispering ‘psst! hey! the trick is: stay away from the net!)

The key point here is, as we have demonstrated beyond doubt: not only will Rubik fail to deliver a tenth of the promised revenues. It is worse than that: by killing the far far stronger European alternative – the Savings Tax Directive Amendments – the Rubik deals ultimately will be revenue-negative for the Germany, the UK and other countries of Europe.

So in light of this mountain of evidence against Rubik – and the fact that Germany, the main political player in this whole game, looks like it will pull out — it is extraordinary to see other countries lining up to sign new, useless deals with Switzerland.

Greece appears to be closing in on a deal. It will lose them tax revenue. Take these words from former Greek Prime Minister George Papandreou:

“Had this [tax havens] been tackled, Greece would have most likely never have needed a bailout.”

Greece will need another bailout if Rubik goes ahead.

The Italians appear to be moving towards a Rubik deal too.  They, too, will lose buckets of money as a result.

There are signs that the tax havens of Belgium and Luxembourg want to play the spoiler, and sign up to this. The deals will be extremely useful to their financial sectors, particularly Luxembourg’s – by cementing secrecy in Europe: their bread and butter.

But all is not lost – far from it. If Germany fails to ratify Rubik, as seems likely, then the main motor of the entire Rubik project is broken. A fascinating new detail from Swissinfo notes that if the German deal fails, then Britain’s may unravel as a direct result:

If the treaty with Germany fails then “the idea of a withholding tax is dead”, according to Zurich banking expert Hans Geiger, who believes that the deal with Germany formed the basis of a similar treaty with Britain.

The treaty contains a most favoured nation clause “which means that if Germany improves its position then Britain’s outlook would also be improved”, Geiger told The failure of the German deal would mean that “the foundation of the British treaty, at least in its current form, would be lacking.”

Ultimately, what is playing out here is a series of chess moves in a great global game. An important recent paper by Itai Grinberg of Georgetown University Law Center, a former US Treasury official, paints the picture:

“The international tax system is in the midst of a contest between automatic information reporting and anonymous withholding models for ensuring that nations have the ability to tax offshore accounts. . . .the contest . . . implicates broad questions about the future of tax sovereignty in a globalized economy and the treatment of the wealthiest vis-à-vis other taxpayers.”

(A short discussion of that paper is available here.) With an estimated $21-32 trillion stashed offshore, the stakes could not be higher. In more fine-grained detail, Grinberg points out that financial institutions, which previously facilitated oceans of tax evasion and other financial crimes with near-total impunity, are now finally starting to get a little more attention:

“Four incongruent initiatives of the European Union, the OECD, Switzerland, and the United States together represent an emerging international regime in which financial institutions act to facilitate countries’ ability to tax their residents’ offshore accounts. The growing consensus that financial institutions should act as “tax intermediaries” cross-border represents a remarkable shift in international norms that has yet to be recognized in the literature.
. . .
The emergence of the EU, OECD, Swiss, and U.S. approaches to cross-border tax administrative assistance has shifted the discourse of international tax cooperation from a dispute about whether financial institutions should function as cross-border tax intermediaries to a dispute about how financial institutions should perform that role.”

Bit by bit, an international architecture of transparency is starting to take shape. The Swiss are doing their best to sabotage progress, with the collaboration of particular politicians in Germany, Britain and other countries. But it seems likely that Europe’s transparency initiative, while still under serious threat, remains on track.

Even if Rubik were to survive for now, it will not be very long before the participants realise they have been cheated by Switzerland, and will demand an end to the disaster.

Once the Amendments come into force, then European countries will start seeing much better transparency and collecting serious taxes from their wealthiest élites for the first time.

13 comments so far

Jason 9th September, 2012 10.32 am

It looks like you are trying to make three points here: one, that the expanded Savings Directive would be more effective than Rubik at combating tax evasion; two, that the Swiss are somehow preventing its implementation; three, that automatic exchange of information (AEI) is coming under US leadership.

Regarding item one, you may be right (or not) but that is somehow irrelevant. Rubik is not incompatible with the Savings Directive’s amendments. In fact, it is largely complementary. It is perfectly possible to have BOTH Rubik and the amendments.

The only aspect of the Savings Directive that Rubik is irreconcilable with is the passage to automatic exchange of information (AEI). But AEI is not even part of the amendments package, but was part of the original Savings Directive, which never included any commitment by Switzerland to move to AEI.

This brings us to item two. One reason for Switzerland to stay outside of the EU was to retain full authority over matters that member states have agreed to “pool” their sovereignty. It is tough to blame Switzerland for resisting an attempt by some foreign nations to impose treaty terms.

But that is even part of the story: Switzerland has not had to do any resistance to the Savings Directive’s amendments, because the EU itself cannot agree on how to implement them. Luxembourg and Austria don’t seem to object to the amendments themselves, but are using their introduction to re-trade their earlier commitment to AEI. The blame for the deadlock is squarely with the EU Commission, which has spent the last 3 years negotiating itself into a dead-end with both member states and is now completely side-lined.

Your third argument is interesting, and there is more to it than in the previous two. The US have definitely become more pro-active in the area of cross-border information sharing (they have had an agreement with Canada for some time). But there are some limitations: first, America is only interested to information sharing agreements on a bilateral basis; second, Federal authorities are restricted in their ability to force states to impose disclosure and reporting obligations; third, the wind can turn quite quickly, especially if the Republicans get back into the White House (there is already furious lobbying from Florida and Texas lawmakers to water down some of the reporting requirements).

So in summary, a bit of a fail on your analysis of the European situation, but a much more robust discussion of events in the US.

Nick Shaxson 9th September, 2012 9.06 am

I’m afraid that’s not how it works. Rubik is incompatible with the EUSTD amendments- partly (as you admit) on the issue of automatic information exchange (which in itself renders the whole thing incompatible) but also on taxes too. The thing is: the EU STD completely redefines the basis upon which responsibilities are handed out for implementing taxation (and information exchange.) The whole point of Rubik, from the bankers’ and clients’ perspective, is to shift stuff outside its scope; the major point of the amendments is to bring all these different people, structures and entities – into scope. Discretionary trusts and foundations, for instance, are (deliberately and explicitly) outside Rubik’s scope, while deliberately captured by the Amendments. The very definitions are in direct conflict with each other.

Item two: what you are saying is that it’s ‘tough’ to argue that tax havens should be criticised for their behaviour. No, it isn’t tough. When they declare war on other countries, they shouldn’t complain when others criticise them or take countermeasures.

Lux and Austria are in a complex chess game, in partnership with Switzerland, to kill transparency in Europe – with Rubik as their key weapon now. To say the blame is ‘squarely’ with the EC is simply false.

Three: America has explicitly said it wants to co-operate on multilateralising its approach to information exchange. A long way to go, and of course if the Republicans get in then secrecy will become much more popular.

Eric 9th September, 2012 3.39 pm

FYI – on Belgium

Rubik: Reynders appelle à une discussion sur la proposition suisse (2)
BRUXELLES 04/09 (BELGA) = Le ministre belge des Affaires étrangères, Didier Reynders, est favorable à un débat en Belgique sur la proposition suisse d’accord sur la fiscalité de l’épargne (“Rubik”). C’est ce qu’il a indiqué à l’issue de plusieurs entretiens dans la confédération helvétique, notamment avec la présidente Evelyne Widmer-Schlumpf.

Des auditions pourraient être organisées au parlement belge, ainsi qu’au ministère des Finances “pour que tout le monde puisse se faire une idée” sur cette question controversée, a dit M. Reynders à l’agence Belga.
La Suisse a déjà conclu des accords similaires avec l’Allemagne, le Royaume-Uni et l’Autriche, mais ils suscitent de fortes réticences et leur ratification est loin d’être acquise.
Avec sa stratégie Rubik, la Suisse espère se débarrasser de sa réputation de paradis fiscal, d’une part en offrant aux pays d’origine des fraudeurs un montant forfaitaire pour régulariser le passé et d’autre part en instaurant pour l’avenir un prélèvement à la source libératoire sur l’épargne placée dans les banques helvétiques.
L’accord est critiqué pour un certain nombre de dispositions qui permettraient aux épargnants de continuer d’échapper au fisc, en dépit de cette retenue à la source. En Allemagne, les sociaux-démocrates menacent de refuser la ratification au Bundesrat et demandent une renégociation.
En Belgique aussi, le projet est contesté. “Il s’oppose aux dispositions de la directive européenne sur la fiscalité de l’épargne, qui prévoit un échange complet d’information”, a réagi le député sp.a Dirk Van der Maelen sur son site web.
En outre, “les rentrées attendues ne seront jamais atteintes”, ajoute-t-il. “Au Royaume-Uni, il y a une grande discussion sur ce sujet. Là-bas, on qualifie d’emmental le projet d’accord, parce qu’il est plein de trous. On dépend du bon vouloir des banques suisses, sans avoir de contrôle. Les banques suisses protègent déjà leurs clients en transférant l’argent vers des filiales à Hongkong”.
Pour Didier Reynders, il serait “utile qu’on accepte d’examiner le dossier techniquement” en Belgique. Un échange avec les parlementaires et les experts permettrait d’obtenir des éclaircissements, selon lui.
A ses yeux, “si la Belgique devait avancer dans cette voie, ce ne serait qu’une transition”. A terme, l’échange automatique d’informations fiscales devra remplacer la retenue libératoire, estime-t-il, mais “il serait plus facile d’y parvenir si on arrive à régler le passé”.
“Ce ne sont pas des sommes dérisoires”, ajoute M. Reynders, en pointant les montants obtenus par les autres pays. L’Allemagne a par exemple obtenu deux milliards de francs suisses (1,6 milliards d’euros) au titre du règlement du passé dans le cadre des accords “Rubik”. /.WAE

Alien Edouard 9th September, 2012 1.08 pm

Nobody is declaring war on anyone. This type of language is absurd, and unproductive. There is a conflict of law that needs to be resolved, between some nations’ legitimate right to enforce their tax laws and other nations’ equally legitimate right to offer a constitutional guarantee of privacy. Rubik is an attempt to resolve the conflict.

Also, Luxembourg, Switzerland and Austria may be fighting tax transparency in Europe, but why would that not be their right? The purpose of any tax legislation is NOT to create transparency, but to raise revenues.

In fact, the objective of the Savings Directive is not achieve transparency but to combat tax evasion. Transparency may be at best a by-product. It may also be a tool in pursuit of the objective, but it is certainly not indispensable. It would be perfectly possible to have the Savings Directive amendments without AEI, just by continuing the withholding regime of the current Savings Directive. The EU Commission’s refusal to even discuss this possibility is the cause of current deadlock.

Regarding Rubik itself, your analysis does not work. You assume that because these various structures are not in Rubik’s scope, that they cannot be captured by the Savings Directive amendments. That is incorrect. It is true that they could have been included in Rubik, but this would have been legally difficult. As you very well know, all the trusts, foundations and other structures you describe are not set up under Swiss law (which does not recognise the separation of economic ownership and benefit), but under the (mostly common) laws of other jurisdictions.

It is for really these other jurisdictions whether they want to apply a disclosure regime and how to address the issue of ownership versus benefit.

Nick Shaxson 9th September, 2012 7.52 am

Sorry for the delay in approving your comment. You can state that ‘nobody is declaring war on anyone’ but that doesn’t make it any less true. This is economic warfare, pure and simple. The Brazilians call tax competition (to which this stuff is closely related, analytically speaking) “guerra fiscal” which is quite appropriate. So a country wants to become a drugs transhipment point, or a haven for child traffickers, or for other kinds of crime. Is that its right? You may argue so, but that doesn’t make your argument correct.

And your arguments about Rubik are completely muddled, I’m afraid. “You assume that because these various structures are not in Rubik’s scope, that they cannot be captured by the Savings Directive amendments.” What??? when did I ever suggest such a thing? I said the opposite: Rubik won’t catch them, but the Amendments will. And so what if these structures are set up under the laws of other jurisdictions? If Switzerland wanted to crack down on the abuse of these structures, it would be perfectly capable of legislating to that effect. The fact is, as we all know, Switzerland doesn’t want a crackdown. It wants to prevent a crackdown. Hence Rubik.

Jason 9th September, 2012 8.19 am

I don’t understand your response in regard to item one. The EU Commission has managed, at the UK’s great exasperation, to see any form of income already covered by the existing Directive removed from Rubik, so that the EU can retain the exclusive authority to legislate in their respect. Now you are also writing that Rubik does not cover many structures that would be in the scope of the Directive amendments.

The logical conclusion is that there is very little overlap between the scopes of Rubik and the Savings Directive, both current and as per the amendments. In fact, the two treaties look very supplementary of each other.

Frankly, the real reason behind your vocal opposition to Rubik is not so much that it makes the Directive amendments more difficult. Your real grief is that it pushes back AEI.

Nick Shaxson 9th September, 2012 7.44 am

I am not quite sure I understand your point. There is plenty of overlap between rubik and the current directive, in terms of loopholes, but very little overlap in terms of the amendments. The two aren’t complementary. There are, above all for political reasons, in direct conflict.

Alien Edouard 9th September, 2012 7.12 am

Politicians love blaming others for the shortcoming of their own policies, and often use inflammatory language. Brazilians are no exceptions. The “it’s the tax havens’ fault line” is already tired. Why, if that were the case, is there a massive difference in rates of tax evasion between countries? I am fairly certain that, to a banker in Panama or Geneva, an Argentinean (or Brazilian) Dollar of evaded tax smells exactly like a Chilean Dollar of evaded tax. But there seems to be a lot more going around of the former than the latter.

With respect to Rubik/ESTD, you are distorting my words: I was challenging your view that, when Rubik becomes effective (and it will, at least in the UK), it will prevent the implementation of the amendments, and therefore the extension of its scope to the products and entities currently omitted. This is incorrect; it is perfectly possible to have both Rubik and the amendments.

The one thing that Rubik will make very difficult is to implement is automatic exchange of information (AIE). Despite what you may think, this is not really Switzerland’s problem, but rather the EU’s. In any event, this does not prevent the implementation of the amendments themselves; it appears almost certain that the EU will have to at least extend, or even make permanent, the withholding regime enjoyed by Austria and Luxembourg to overcome their opposition.

Nick Shaxson 9th September, 2012 8.29 am

Look, the Rubik project is dead in Germany, and if the Germans kill it then the rest will follow. You said some odd things there, such as “the objective of the Savings Directive is not [to] achieve transparency”. Um, well, it kind of is. And if Rubik were to become embedded in Germany and elsewhere, then this would be Switzerland’s political crowbar to stop the Amendments. Which, so far, has been successful. Yesterday in the Bundestag I hear that the German government reps defending the Rubik project didn’t really have a leg to stand on.

Alien Edouard 9th September, 2012 5.33 pm

You may be right about Germany, where the government may not be able to get Rubik approved in the Bundesrat, until at least the next elections.

But Rubik will still go ahead in the UK and Austria (those agreements are ratified), as well as probably with Greece and maybe even Italy.

If the agreement with Germany, the question is ‘what’s next in Germany’? The Amendments don’t work because Austria and Luxembourg are blocking (unless of course they obtain an amendment of Article 10 of the ESTD), Rubik does not work because minority parties in Germany object to it, the OECD standards are not prescriptive, etc. etc. Switzerland will certainly do a serious effort at self-policing, but there will be no institutional or treaty framework for Germany to monitor compliance.

Be careful what you wish for.

Nick Shaxson 9th September, 2012 7.50 am

If the agreement with Germany were to succeed, we would face the prospect of no progress on the true goal which is the Amendments. If it fails, the political momentum for Rubik will die, and the other countries will eventually fall into line. It will take time. I am careful what I wish for. I wouldn’t ever want Rubik accepted by any country, for any reason. It it thoroughly corrupt, rotten – and ultimately doomed. As I have repeatedly said; beware of Swiss bankers bearing gifts. What they are offering these countries is indeed ‘Gift’ – but the German meaning of that word, not the English one.

David Bennion 12th December, 2012 10.08 am

My wife is Swiss and before marriage in 1968, worked in Swizerland and has a small savings account there. No money in it is from abroad and all interest remains in the account. Since 1968 she has a UK passport and has lived here.
How are her cicumstances involved in this
Her Swiss Bank has been of very little help.

Nick Shaxson 12th December, 2012 4.47 pm

she will, if she hasn’t set up any funny structures to own this account or made any other funny moves, be subject to a hefty withholding tax on the capital itself. it’s generally the ‘little people’ who will pay this withholding tax; the bigger fish who can afford tax advisers to get around this will be able to escape it easily.

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