Germany, Switzerland rush to seal bank tax pact

Fri Mar 23, 2012 3:00am EDT

Related Topics

* Germany, Switzerland pact seen as litmus test for Swiss strategy

* Germany back at the negotiating table with Switzerland

* Automatic exchange information looms for Switzerland

By Katharina Bart and Sarah Marsh

ZURICH/BERLIN, March 23 (Reuters) - Germany and Switzerland are rushing to revise a tax deal on offshore accounts by the end of March in an effort by Swiss officials to preserve the secrecy underpinning the country's $2 trillion banking industry.

The pact is meant to form the cornerstone of Switzerland's efforts to maintain its long-held banking secrecy by taxing Swiss accounts and levying a punitive rate of interest for undeclared money.

However, opposition from German lawmakers still threatens to derail the agreement, which was originally reached in August but has since been roundly criticised by the centre-left Social Democrats for being far too lenient on tax dodgers.

Bankers and politicians grudgingly agree in private that striking a deal boils down to money.

Switzerland has already agreed to pay Germany 2 billion Swiss francs ($2.19 billion) upfront to settle past, undeclared funds held in Swiss banks. With the euro zone crisis still uncomfortably close, Germany wants to cement a deal in time for it to come into force by next year's budget.

DEAL CLOSER

A parallel British-Swiss deal signed earlier this week has spurred hopes that agreement is drawing near.

German and Swiss negotiators met in Berlin at the weekend, and a person familiar with the Swiss side said Germany has returned to talks with a renewed will to seal them, although without backing down on demands for a higher rate of tax.

Still, the deal might still be torpedoed by centre-left lawmakers such as influential Social Democrat Peer Steinbrueck, who stirred up anti-Swiss sentiment in 2009 as part of a drive to root out tax dodging.

Steinbrueck, who has been vocal against the withholding tax deal in the past, has tapped into a popular nerve with his views. Some 86,500 Germans have so far signed a petition against the deal, according to lobby group Campact.

Should the talks collapse, it could mark a turning point in Switzerland's defence of banking secrecy.

With the Swiss and German governments struggling to salvage the pact, bankers and experts in Switzerland are increasingly talking about what previously had been unspeakable: opening Swiss bank account data to an automatic exchange of information.

"If Switzerland cannot persuade enough countries to agree to a withholding tax, pressure on banking secrecy won't let up. Let's wait a few months to see what the diplomatic negotiations have produced before evaluating whether there's a necessity to change strategies," KPMG consultant Joerg Walker told Reuters.

A Swiss government spokesman said Switzerland is seeking a resolution to the talks by month's end, a key date if both governments wants to push agreements through parliament in time for them to come into force in January.

Switzerland is seeking an agreement which does not alter the original, core terms of the deal, the spokesman said.

AUTOMATIC EXCHANGE

For Switzerland, the withholding tax represents what is now widely seen as an attempt to postpone having to exchange information automatically, as most European Union member states do.

"I think in 20 years, we won't be able to avoid automatically exchanging information," outgoing UBS chairman Kaspar Villiger told a business and political audience in Zurich this week.

As finance minister more than 10 years ago, Villiger backed a stiffer version of money-laundering regulation as a pre-emptive move against mounting pressure on banking secrecy, he said.

While withholding tax deals represent an opportunity for Switzerland to reposition itself as a haven for clean money, the British and German pacts are expected to cost Swiss banks as much as 47 billion francs in withdrawals by wealthy clients, according to Booz & Company analysis.

Bankers say it stands to reason that if the United States, with whom Switzerland is also locked in negotiations over alleged American tax cheats with offshore accounts, is able to prise thousands of sets of data out of Switzerland, other countries will follow suit with demands.

Cracks on the Swiss side emerged recently when finance minister Eveline Widmer-Schlumpf referred to a "Plan B" in the German talks, without elaborating.

Smaller Swiss banks may weigh up alternatives

DATA HERESY

Raising the issue of automatically exchanging data, as is common with the European Union bloc countries, was tantamount to heresy in Switzerland until very recently.

Raiffeisen boss Pierin Vincenz caused a stir last month when he broke ranks with fellow bankers to question whether an automatic exchange of client data would ultimately be less cumbersome than negotiating and implementing a host of deals.

"The exact costs aren't clear as long as long as negotiations are ongoing, but a series of individual agreements will translate into horrendous administrative and compliance costs to the point of threatening the existence of some smaller banks, which is why many of them have lost interest entirely in the withholding tax idea," said Boris Zuercher, Zurich-based chief economist for the pro-business think-tank Avenir Suisse.

Switzerland's banking lobby has estimated the industry-wide costs for Swiss banks to levy the German and British tax at 500 million Swiss francs, a sum which would rise if Switzerland is successful with its strategy of striking similar deals first across Europe, then further afield.

The Swiss bourse SIX has already set up a "tax messenger" platform based on securities trading, an effort to share the burden of additional costs as a result of the tax levy.

Earlier this month, the European Union effectively backed down on its resistance to the deals after their demands were met. Switzerland agreed to impose a 35 percent tax on the interest earned on interest income, far higher than the just over 26 percent the German agreement calls for.

The difference is a sort of "premium for anonymity": the taxpayer can ask for the difference to be reimbursed provided he or she comes clean and declares offshore funds at home. ($1 = 0.9142 Swiss francs) (Additional reporting by Matthias Sobolewski and Gernot Heller; Editing by Alexander Smith)

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