Oct 25 2011

Revealed – the loopholes that mean the UK-Swiss deal will fail

Posted by: Nick Shaxson in: Thoughts
  • UK/Swiss tax deal could see UK lose money
  • 10 loopholes identified that mean this agreement won’t deliver
  • TJN urges immediate cancellation of agreement

An agreement between the UK and Swiss governments, which permanent secretary for tax Dave Hartnett has stated will raise between £4bn – £7bn, is so fundamentally flawed it could actually lose the UK tax revenue.

A forensic analysis of the agreement by the Tax Justice Network reveals a series of fatal flaws in the two-week old tax deal. Though the analysis focuses on the UK, it is of great relevance to Germany, which recently signed a near-identical deal with Switzerland under similar false promises, as well as for other countries considering signing similar bilateral deals.

The UK-Swiss deal, signed on 6 October, is supposedly designed to capture assets held by wealthy UK residents who have evaded taxes by secreting their fortunes in Swiss banks.

But the 10 loopholes identified by TJN – and we believe there are more loopholes than that – means there is virtually no chance the agreement will raise anywhere near the £4-7bn suggested by Dave Hartnett.

The loopholes provide numerous ways for accountants, lawyers and bankers to help their UK clients escape the new rules.

Loopholes include:

  1. Provisions which allow UK wealthy individuals who hold their assets in so-called discretionary trusts, foundations and similar structures to evade the new rules. These structures are extremely popular with wealthy tax evaders and make it impossible to identify who currently owns the assets. Accountants and lawyers who set these structures up are poised to do a roaring trade.
  2. Wealthy UK individuals can side-step the rules by creating trading, manufacturing or commercial operations as these fall outside the scope of the new deal.
  3. Branches of Swiss banks in other countries are not included in the provisions so UK Swiss banks account holders can simply move their assets to a foreign branch of a Swiss bank to escape the agreement’s scope.
  4. While the new deal includes interest, dividends and capital gains on ‘bankable assets’, it crucially does not extend to:
    – Wages;
    – Royalties;
    – Income on property;
    – Directors’ fees; and
    – Loans
    This allows advisers to UK residents to siphon out benefits through these routes, untaxed.

The deal does not come into force until May 2013 allowing 17 months for advisers to make alternative arrangements and move assets to escape the deal.

These loopholes and more besides (see accompanying in-depth report) leads the Tax Justice Network to challenge claims by HM Revenue and Customs (HMRC) that this agreement will see a £4-£7bn inflow of tax receipts into the UK.

TJN regards this as a major over-estimation which misleads the British public. In fact, as we argue in our report, there is a real likelihood the serious loopholes, flaws and knock-on effects will actually reduce the already pitiful tax take from UK individuals keeping their assets in Swiss banks in the medium and long-term.

TJN fears this deal will also undermine ongoing efforts to improve transparency and tackle tax evasion through the European Union Savings Tax Directive. An initiative that Switzerland – along with Austria, Luxembourg and Jersey – are doing everything in their power to scupper.

John Christensen, director of the Tax Justice Network, said:
“It’s hard to see how the British public will benefit in any way from this flawed agreement. Worse, it will reverse years of progress made by the EU towards tackling tax evasion through automatic information exchange. It is impossible to see how the HMRC can describe this deal as being in Britain’s interests.”

Nicholas Shaxson, author of Treasure Islands – tax havens and the men who stole the world, said:
“There is a very strong likelihood that that this deal which guarantees tax haven secrecy, will spread like a cancer through the global financial system. This is because many countries are now considering similar agreements. They are either tax havens that want to copy Switzerland, or victims of tax evasion that want to copy the UK. This deal has to be killed.”

Dr David McNair, Economic Adviser at Christian Aid, said:
“This stunning analysis from the Tax Justice Network shows that the UK’s deal with the global headquarters of bank secrecy is likely to undermine the UK’s tax revenues as well as those across the developing world. It’s no wonder Swiss bankers and their clients are delighted. But everyday people in the UK and developing countries will lose out. It is imperative that the UK now takes strong action on financial secrecy at the G20 in Cannes.”


Nick Shaxson +41 79 477 1070

John Christensen +44 797 986 8302

Richard Murphy +44 777 552 1797

Notes for Editors

1) The Swiss-UK tax deal retains the principle of Swiss banking secrecy. In return, tax evading UK citizens will pay a charge of 19% – 34% of the absolute value of their account. In addition, they will pay taxes on subsequent income of between 27% and 48% annually. Switzerland will pay the UK 500 million Swiss Francs (about £350 million) of this up front.

2) Estimates of the amount of UK taxpayer assets in Switzerland range between £40bn and £125bn. In 2010, the UK received £16.9m in tax from Switzerland under a withholding tax arrangement in the context of the EU Savings Tax Directive. That Directive is also full of loopholes, which are being patched up.

3) Historical revenues from the EU Savings Tax Directive are the only realistic benchmark against which estimates can be made for the UK-Swiss deal. Our calculations show that the absolute maximum revenue for this deal is £1 billion from the capital charge – but almost certainly it will be far lower than that. Future income will most likely be lower than under the current EU Savings Tax Directive. Britain’s only certain revenue from this deal is the CHF 500 million (£350 million) up-front payment.

4) Some loopholes stem from the fact that this is a bilateral deal, unlike the EU’s multilateral arrangements. Any countries considering similar deals should be aware that it is impossible to close these loopholes without a multilateral approach.

5) The analysis of the UK-Swiss Tax Agreement was conducted by Nicholas Shaxson, author of Treasure Islands – Tax Havens and the Men who Stole the World, in consultation with several people inside and outside TJN.

9 comments so far

ivan chan 10th October, 2011 12.22 pm

article states US presidential hopeful wants to eliminate all taxes on overseas earnings… scary thought.

Alien Edouard 10th October, 2011 7.48 am

There are some very good things in this report. The “loopholes: in section 3 are well researched, and should embarrass some of the negotiators.

But you fail on the bigger picture. Your argument is essentially that the EUSD revision was likely to be unanimously accepted in 2011, and lead to better result for Germany. The latter is not in dispute, but there is absolutely NO WAY, EVER, that Luxembourg and Austria were going to allow the EUSD revision to go through WITH automatic exchange.

Luc Frieden made it very clear after the directive on administrative cooperation in the field of taxation was adopted in December last year, that the directive, combined with a permanent withholding regime for savings income was Luxembourg’s final and non-negotiable position.

Even Mark Morris agreed that automatic exchange was not going to happen in the context of the EUSD revision, when he wrote this during another conversation on this blog: (http://bit.ly/rrCZnH)

“The one thing I do wholeheartedly agree with you is the link of automatic exchange of info to the directive changes. I unsuccessfully recommended from early 2006 to regard this as a separate topic. There is indeed two opposing parties on this linkage within the EU Commission and EU Council…”

Seriously, do you think that the German government would have started negotiations with Switzerland and signed their deal if they had really believed for a minute that the EU had any chance of turning around Luxembourg and Austria (and Italy!). Brits are a little thick, but the Germans are definitely not.

The recurring theme throughout the document is that Switzerland (or rather its bankers) is sabotaging EU attempts to impose automatic exchange. Well, you cannot blame Switzerland for resisting EU policies; one of the reasons that it so wisely remained outside the EU is to retain full sovereignty. But you are giving Switzerland far too much credit for succeeding to in derailing EU policy-setting. The EU has demonstrated time and time again (and never as clearly as NOW) that it is perfectly capable of hitting the self-destruct button without any outside help.

Nick Shaxson 10st October, 2011 8.36 am

Thanks. You have a better reading and understanding of our document than, say, the FT did. However, you still miss the point. The analysis does not depend on what happens on the EU STD amendments. The would be more like the icing on the cake. If and when they come to pass, they may not represent a full move towards automatic information exchange, but the point is that they close most of the tax loopholes, and at least the easy ones, and would raise vastly more tax revenues (albeit through the withholding tax route.) And as regards Lux and Austria, they seem to be happy to accept a withholding tax option if it means no automatic information exchange. That is a massive step forwards, and the platform for future progress. That is how the EU STD has historically worked: progress has been slow, but it has held its gains and continued to progress.

Alien Edouard 11nd November, 2011 2.32 pm

Slightly tangential, but picking up on one of your postings on the TJN website (http://bit.ly/t3Yi6p).

Did you realize that while Semeta is busy moving air in front of the EU parliament regarding the Swiss bilateral treaty with Germany (http://bit.ly/tv5RbM), another EU official is telling the FT Deutschland that Greece and Switzerland should do exactly the same deal (http://bit.ly/nUt9tG)?

That may help you understand why nobody is taking the Commission, and Semeta in particular, very seriously.

Nick Shaxson 11rd November, 2011 9.51 am

Hmm, yes, the EU never put in place any Directives, and never got countries like Switzerland to agree effectively to implement them, did they? For the avoidance of any doubt among readers, I am joking. I hope your hatred of the EU and dismissal of everything they do doesn’t cloud your investment decisions. Bill Gross was similarly dismissive of the U.S. government and look where that got him. And as it happens, that post wasn’t one of mine, (though I’d have been quite happy to post it).

Alien Edouard 11rd November, 2011 10.21 am

Thank you for asking about our investment performance. The last few weeks have been rough but we are fine. We do a little sovereign rate arbitrage but it is not a core strategy.

I don’t “hate” the EU (hatred as a feeling or state-of-mind is massively overvalued).

However I have very little time for the Commission but that feeling is widely shared: isn’t the entire reason for Semetas’ tantrum that Germany (with no small help of the other EU and non-EU German-speaking nations) completely sidelined him and went to negotitate the bilateral agreements without even telling him?

Nick Shaxson 11rd November, 2011 10.22 am

Yes, he was quite annoyed about it, of course he was. On behalf of European (and even German) taxpayers, I should add.

Alien Edouard 11rd November, 2011 2.11 pm

a politician’s propensity to public displays of annoyance is very inversely correlated to their level of competence. In fact a comptent politician would rarely have any reason to be annoyed.

Writing as an EU taxpayer (although mercifully not a citizen), I categorically refuse the notion that Semeta, or any of his Commission colleagues would have any authority to do, or think, anything on my behalf.

Nick Shaxson 11th November, 2011 10.04 am

well you fit very nicely into my categorisation of people I describe in “The Life Offshore” chapter of my book then! Anti-government, anti-tax, libertarian, and so on. You are quite entitled to your views.

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