Swiss banks face more pressure after German setback

Fri Dec 14, 2012 9:21am EST

* Germans hold an estimated 150 bln Sfr in Swiss banks

* Germany forfeiting 2 bln Sfr upfront by rejecting tax pact

* Switzerland faces U.S. crackdown, OECD implementation

* UBS puts European withdrawals up to 30 bln Sfr, CSuisse up to 35 bln Sfr

By Katharina Bart

ZURICH, Dec 14 (Reuters) - Switzerland's banks have suffered a major setback in their fight to maintain client secrecy after Germany rejected a key tax pact to sweep Swiss accounts clean of tax dodgers.

Switzerland is trying to protect its $2 trillion offshore banking industry by striking deals with European neighbours that allow their citizens to pay tax on secret Swiss accounts without revealing their identity.

The German deal's failure -- even as others with Britain and Austria go ahead -- is a big blow to the Swiss government because the northern neighbour has traditionally been the biggest foreign market for Swiss private banks, which hold an estimated 150 billion Swiss francs ($161 billion) in German assets.[ID:nL5E8NCH6H}

"Switzerland still hasn't solved the problems of its past, which means it should put together a Plan 'B' as quickly as possible," said Heiko Kubaile, partner at KPMG in Zurich and head of German tax and legal.

Swiss officials are struggling to reconcile strict national laws protecting banking secrecy with intense international pressure to get at lost tax revenue.

Switzerland remains embroiled in a long-simmering tax dispute with the United States targeting Credit Suisse and a host of other banks suspected of helping clients dodge U.S. taxes.

Switzerland has agreed to allow foreign governments to get information on groups of bank clients based on suspicious behavioural patterns, such as using a bank-provided mobile phone, bringing itself into line with standards laid out by the Organization for Economic Cooperation and Development on group requests.

But that isn't likely to stop influential European neighbours like France and Germany from doing everything in their power -- including purchasing leaked bank data -- to claw back tax income.

"International pressure will increase, and I say this without any ridicule, malice or an excursion into Western movies," said Germany's Peer Steinbrueck, the opposition Social Democrats' (SPD) candidate for German chancellor in next year's elections.

Steinbrueck famously referred to the Swiss as Indians running from the cavalry when he cracked down hard on bank secrecy as finance minister in Merkel's 2005-09 "grand coalition" government.

Switzerland is sticking with the withholding tax model to clean up its past, finance minister Eveline Widmer-Schlumpf said this week.

"We don't have another short-term option that conforms with the laws of our country to let the past be the past," Widmer-Schlumpf told Swiss television.

In saying so, she implicitly rejected again an automatic exchange of information, which is commonplace in parts of the European Union though some member states are resisting it.

Experts say the automatic option is a less attractive one because it means more work for cash-strapped foreign governments, many of which had hoped to fill budget holes quickly with advance payments from Switzerland.

A recent study by the European Policy Forum, a London-based think tank, argues that an outright exchange of information on taxing savings hasn't worked within the EU because data cannot be effectively used by fiscal authorities.

By contrast, Swiss upfront payments from withholding tax deals have allowed Britain's finance minister to say he expects to take in 5 billion pounds ($8.1 billion) over the next six years through the deal, part of an effort to counter a shortfall in tax revenue caused by economic weakness.

Germany is forfeiting 2 billion Swiss francs in upfront payments from Switzerland as a result of rejecting the deal.

Now, Switzerland faces scrutiny on how it deals with foreign pressure, and in particular how it puts the group request rules, laid by the OECD, into place.

NO WAY OUT

Swiss banks are suffering heavy outflows in Europe due to the tax pressure, though bigger players are countering the withdrawals with inflows from Asia, the Middle East and South America.

UBS has said it could see withdrawals of 12-30 billion francs from total European assets under management of over 300 billion, while Credit Suisse put its own outflows at up to 35 billion francs in coming years.

UBS has already taken steps: earlier this month, the bank said it will cut up to 35 German jobs when it closes branches in Dortmund, Essen, Rosenheim and Wiesbaden, part of efforts to bolster profitability.

The German deal's failure means there increasingly is no way out for wealthy Germans who are hiding money in Switzerland.

"Taking money elsewhere and continuing to hide is an illusion. Very few clients will choose that route for their money," said Hans-Joachim Jaeger, Zurich-based tax expert with Ernst & Young.

German officials are preparing for a flood of wealthy Germans -- who had held out the hope a withholding tax deal would regulate their undeclared assets -- to turn themselves in.

A flourishing trade in leaked bank client data to get at the names of alleged tax dodgers -- which has become commonplace in recent months -- is also likely to continue.

Switzerland is slated to unveil specifics of a clean money strategy to sweep undeclared assets out of the country, which could include beefed-up client disclosure requirements by banks.

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