German parliament panel rejects Swiss tax deal ahead of election

Wed Dec 12, 2012 4:18pm EST

* Votes down pact signed by German, Swiss governments

* Deal would tax undeclared German accounts in Switzerland

* Opposition objects that account-holders would not be named

By Erik Kirschbaum

BERLIN, Dec 12 (Reuters) - A German parliamentary mediation committee failed on Wednesday to reach an agreement on ratifying a tax deal signed by the German government with Switzerland, a battle tinged by next year's federal election.

Chancellor Angela Merkel's coalition had approved the measure in the lower house, or Bundestag, to tax assets stashed by German citizens in Swiss bank accounts, but opposition-led states in the upper house, or Bundesrat, blocked the deal.

The mediation committee, made up of members of both houses, was trying to find common ground but the states led by the opposition Social Democrats (SPD) and Greens remained adamently opposed to any agreement.

The mediation committee said it rejected the tax deal by a 19-10 vote. Although widely expected, the defeat was a disappointment to Merkel, Finance Minister Wolfgang Schaeuble and their Swiss counterparts, who had hoped it would end an ugly chapter of German-Swiss relations.

The deal would have required Swiss banks to levy a punitive charge on an estimated 150 billion Swiss francs ($161 billion) in undeclared funds stashed away by Germans in Swiss accounts. The proceeds would have been passed on to Germany without the identities of the account holders being revealed.

The Social Democrats and Greens, keen to make taxation of the rich an issue in campaigning for next September's federal election, argued the legislation would have let off tax evaders too easily and flexed their muscles in the upper house.

The opposition, strengthened by a run of victories in German state elections the last two years, is eager to demonstrate to voters how ineffective Merkel's government can be without their support on issues needing passage in both houses.

"This is not something I would be able to explain to the honest taxpayers or could make them accept," Hannelore Kraft, the SPD state premier of North Rhine-Westphalia, told Welt newspaper on Wednesday ahead of the mediation committee meeting.

"The punitive tax has to be so high that tax evasion doesn't pay off," she added.

WHISTLEBLOWERS

SPD-led German states like North Rhine-Westphalia have resorted to buying Swiss banking data from whistleblowers in order to pursue tax dodgers, angering the Swiss and only catching a small fraction of the wrongdoers.

The Swiss government said it regretted that Germany would not be able to sign the agreement. It noted that similar withholding agreements reached with Britain and Austria would take effect on Jan. 1.

For Switzerland, the deal's failure represents a painful setback in attempts to sweep Swiss offshore accounts clean of tax dodgers and cheats.

Though the Swiss government is pursuing pacts with Greece and Italy, a deal with Germany was seen as the cornerstone because the country has traditionally been the biggest foreign market for Swiss private banks.

The German rejection is likely to prompt a flood of wealthy Germans turning themselves in during the coming months. According to Swiss bankers, scores of German clients who had been hoping for a Swiss deal to sanitise their past will now file voluntary disclosures to their tax authority.

A flourishing trade in leaked bank client data to get at the names of alleged tax dodgers - which has become commonplace as Germany and Switzerland wrangle over the pact details - is also likely to continue.

UBS has been hit worst, with German prosecutors alleging last week that the Swiss bank helped German clients evade around 204 million euros in taxes.

The undeclared funds were revealed after a data CD bought for 3.5 million euros ($4.56 million) by authorities in North-Rhine Westphalia was evaluated, uncovering information on investments worth more than 3.5 billion Swiss francs. [ID: nL5E8N4B21]

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