EU flexes its muscles against tax fraudsters

EU finance ministers came to a unanimous decision on taxation Reuters

European Union finance ministers have agreed on reinforcing their cooperation on tax matters but for Swiss bankers any automatic exchange of information remains taboo.

This content was published on December 9, 2010 - 21:32
Alain Franco in Brussels,

The EU’s Economic and Financial Affairs Council, meeting in Brussels, reached agreement on a draft directive aimed at strengthening administrative cooperation in the field of direct taxation so as to enable EU members to better combat tax evasion and tax fraud.

It’s a political accord that comes after months of wrangling over the sensitive issue because it affects tax revenues.

The new law when it comes into force in 2013 will ensure that the model tax convention on income and capital of the Organisation for Economic Cooperation and Development is implemented in the EU as regards the exchange of information on request.

Non-EU member Switzerland has been resolutely against an automatic exchange of information.

“Any system of automatic information exchange is anathema to the Swiss because they do not accept that the state should have an automatic right of forced entry into a citizen’s financial affairs,” James Nason, a spokesman for the Swiss Bankers Association told

“In March 2009 Switzerland announced it was adopting the OECD standard on administrative assistance in tax matters which means it will give assistance in all tax matters, including tax evasion, and not just for criminal tax fraud as was the case in the past.”

Double taxation treaties

Nason added that the assistance would be governed by the terms laid down in the respective double taxation treaty between Switzerland and a specific country.

“Switzerland, however, continues to reject any system of automatic information exchange: requests for assistance must refer to a specific named individual and they must also be justified,” he said.

In 2015, the automatic exchange of information will be carried out in the EU for a maximum of five categories: salaries, pensions, certain life insurance products, real estate and directors’ fees. It does not affect income on savings.

By July 1, 2017 the EU Commission may put forward a proposal to include income from dividends, capital gains and royalties.

“Banking secrecy [within the EU] will no longer be accepted as an excuse by a member state to refuse sharing important information with the tax authorities of another member state,” commented Algirdas Semeta, the European commissioner for taxation.

“It’s an important step in the fight against fraud. It’s an important step also in budgetary consolidation because in the majority of our countries we are trying to put in place more efficient rules on tax fraud or evasion,” commented Belgian Finance Minister Didier Reynders.

He chaired Tuesday’s meeting and succeeded in conquering the reluctance of several colleagues, including those from Austria and Luxembourg.

No “fishing expeditions”

But Luxembourg’s Luc Frieden managed to succeed on a number of important points, including a ban on “fishing expeditions”, and he said it was critical that the list did not include savings, “and therefore banking data”.

Frieden, who defends his country’s “banking secrecy” was also happy for another reason. The directive foresees a step by step approach to an automatic exchange of information. This is aimed at eventually ensuring unconditional exchange of information for eight categories of income and capital.

By July 1, the council will examine the possibilities for extending the number of categories from five to eight.

Italy has its own understanding of the accord and it is different. “That will put an end to attempts to conclude bilateral agreements,” commented Italy’s finance minister, Giulio Tremonti, in a clear allusion to the discussion Switzerland is holding with Britain and Germany  for a system of withholding at source, at the expense of an exchange of information.

Therefore, there are different interpretations from Rome to Luxembourg. “They are the usual internal political commentaries which aim to hide the concessions that everyone had to make to have the directive adopted unanimously,” noted a senior official of the EU Commission.

“Progressive approach”

“The EU has not changed its position on the automatic exchange of information. It opted for a progressive approach and in this context one can say Austria and Luxembourg succeeded in containing the path towards automatism and gain some time,” commented Jean Russoto, a lawyer who represents Switzerland as a finance centre in Brussels.

“But the aim remains the same – the automatic exchange of information.”

Semeta’s staff issued a warning. “The 27 [member states] had finally decided on a number of ambitious European standards. The Commission will show the same obstinacy in exporting these standards on non-member states.”

Nason at the Bankers Association noted: “While Brussels remains ideologically committed to automatic information exchange to fight tax evasion, a growing number of countries are expressing interest in the Swiss alternative but equivalent measure of imposing a final withholding tax on all investment income, thus making tax evasion virtually impossible.”

“The Swiss solution is far more comprehensive than the EU’s taxation of savings income directive because it covers all income from capital and, unlike the EU’s directive, it is not riddled with loopholes.”

Switzerland under pressure

February 2009: UBS is authorised by Bern to give to the United States the identity of 255 clients it helped evade US tax authorities, in violation of banking secrecy.

March 2009: Targetted by the OECD, Bern decides to relax banking secrecy by adopting standards on information exchange.

April 2009: The G-20 group of countries places Switzerland on a “grey” list of tax havens which are prepared to make efforts on the exchange of information.

August 2009: Switzerland and the US reached agreement on UBs, under which the Americans would no longer want the identities of 52,000 account holders. Administrative assistance is granted on 4,450 accounts.

September 2009: After having signed 12 revised double taxation accord, Switzerland is removed from the OECD’s “grey” list.

November 2009: The government proposes to parliament to submit the new double taxation accords to an optional referendum. The EU postpones until 2010 a project on savings taxation that implies an automatic exchange of information.

Official Swiss position: Switzerland is adamant in refusing the automatic exchange of information. Administrative assistance is granted on a case by case basis to concrete and justified demands. The exchange of information is limited to taxes covered in the double taxation agreements.

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