Swiss agreement: the international ramifications

THE INTERNATIONAL ASPECTS of the Swiss/UK tax deal go beyond the two countries themselves. The announcement of the agreement, which imposes a withholding tax just below the top rates of tax, follows swiftly from a deal between Switzerland and Germany, while the US has gone for an altogether different route of legislating at home. The European Union’s Savings Directive (EUSD) has been in place since 2005 and already includes provisions for a withholding tax, so there might be implications on future negotiations.

Financial institutions in Liechtenstein will also be readying themselves for the next phase of its disclosure facility, with plenty of clients making calculations as to whether to stay in Switzerland or move to the Liechtenstein Disclosure Facility (LDF).

And there are the other tax havens, perhaps preparing for an influx of new customers, but wary that the net is closing in.

So how will these other actors react and what will it mean for the UK?

European Union

The UK deal followed a week after Germany had agreed a similar deal with Switzerland. There are similarities: the UK deal includes a withholding tax slightly below the top rates of income, capital gains and dividends tax in the UK; Germany has a withholding tax of 26.375%, corresponding to the current flat tax rate for income from capital; both deals include a one-off taxation of between 19% to 34% of the value of the account at a given point in time; and the UK can request details of 500 accounts a year, Germany can request 750 to 999.

On the withholding tax, there are more complications for Germany than there are for the UK. Germany’s tax of 26.73% is below the 35% that Switzerland – and others – already pay on savings income as part of the EUSD. It is unclear how the German agreement interacts with the EUSD, but Deloitte suggests the provisions of the EUSD might have priority over the final withholding tax regime.

However, the UK will not have such difficulties. The agreement takes precedence over the EUSD. Not only will savings income be taxed at 48% (perhaps reducing if the top rate of UK tax is abolished), the agreement covers more than just savings – it covers shares, commodities, interest, dividends or capital gains brought about in Switzerland.

There has been concern that these agreements could scupper many reforms to the EUSD. Proposals are currently being discussed in the EU to bolster the agreement to compel Switzerland to commit to full information sharing. These have reportedly been agreed by 25 of the 27 member states and it is likely that one of the two that have not agreed is the UK. Swiss and UK officials have said this does not change negotiations on any reforms of the EUSD.

But the European Union (EU) is not entirely happy with the UK/Swiss agreement and has said it would review the legality. An European Commission official was quoted by the Financial Times as saying discussions with Switzerland at an EU level “will have been made harder by this… we usually get better terms with our partners when we 27 stick together.”

It is unlikely it will scupper proposals, says James Guthrie, tax partner at E&Y, but it will “change the landscape” of any deal. “It shows that the EUSD is not the panacea and governments will always look to raise revenue in other ways.”

Another important point is that “this deal is now”, says PwC tax partner Peter Cussons. The EUSD in both its current form and reformed will carry on in tandem but negotiations at an EU level are slow.

Also, HM Renue & Customs (HMRC) does not seem too hopeful that reforms to the directive will prove effective. Senior sources have told Accountancy Age that the EUSD, as it stands, is full of holes and brings in only £25m per year to the Exchequer. Any further reforms will still be full of hopes, it adds – there is no suggestion that capital will be taxed, as is the case with the UK agreement.

If the EU does develop a package that bolsters the savings directive, this is likely to take precedence if agreed by all member states and the UK would, of course, like full disclosure from Switzerland if that were possible. Whether the unilateral agreements by Germany and the UK will weaken the EU’s hand might now be a moot point, but it would still be in their best interests to strengthen the directive.

US approach

The EU is not the only overseas institution casting a critical eye over proceedings. These deals come at the same time the US is stepping up its pressure on Swiss banks. The US has made it clear that it is not interested in a deal with Switzerland for a withholding tax, as it wants full disclosure of US citizens’ accounts instead.

The US Foreign Account Tax Compliance Act (FATCA), which requires all foreign banks to disclose information about accounts held for US citizens or businesses, is going to be unilaterally imposed on 1 July 2013. Foreign banks that do not comply will face sanctions, including large financial liabilities that will severely affect Swiss banks operating in the US. This follows an inquiry by US authorities into UBS, the Swiss bank that allegedly helped US citizens evade taxes, that has been ongoing since 2007. The US has been able to gain access to the names of more than 4,500 customers from UBS and received a settlement from the bank of $780m.

As well as targeting the institutions, the US is also putting pressure on its citizens to make full disclosures. A federal appeals court last week ruled that the Fifth Amendment, which gives US citizens the right to remain silent on issues that incriminate themselves, did not apply to the non-disclosure of offshore accounts.

There were murmurings in the US that the UK deal will harm efforts to open up secrecy in Switzerland. As the US taxes its citizens regardless of residence, it does have an interest in US non-doms in the UK. George Bull, head of tax at Baker Tilly, says that US objections “are driven by a feeling that allowing people to remain anonymous will hinder their tax efforts”.

However, this is unlikely to be a hindrance, he adds. The US will be in the same position regarding its citizens’ tax affairs as it would had the UK not signed the deal.

So could the UK have taken the US’s approach? This is unlikely, says James Guthrie. There is a question over the legality of the FATCA legislation, as it is extra territorial. But the US has the might to force this through as Swiss banks need to operate in the US. The smaller boutiques in Switzerland would be safer from disclosing details, however.

Non-doms

Many of the non-doms in the UK are American and their status is perhaps the most intriguing. Unlike UK domiciled individuals, non-doms are not necessarily taxed on their whole worldwide income. Therefore, if they wish to maintain the secrecy of the account, the one-off charge might not be appropriate, as it would be taxing income that is not subject to UK tax.

Because of this, the agreement makes specific provisions for them. They have the option to fully disclose or retain their privacy and pay the one-off fee, the same as all taxpayers. However, non-doms have two more options. First, they can self assess their UK taxable funds in the account as of 31 December 2010 on which they will be charged 34%. The benefit of this is that they will not have 19% to 34% of their whole funds taken out. Second, they can also opt out of this part of the agreement. This is, of course, not without controversy. The Telegraph quotes one expert who says: “It’s no secret that Switzerland houses non-doms’ cash and this immunity looks very unfair for everyone else.”

HMRC has been keen to stress that non-doms who opt out of the agreement or self assess and are later found to have had undeclared UK taxable funds will be treated with severe penalties, including criminal prosecution.

There is no opt out on the withholding tax. Non-doms on the remittance basis will face a withholding tax on their UK-sourced income and remitted income. Of course, they would have to remove their privacy so that the taxman knows they are on the remittance basis. However, unlike UK-domiciled individuals, when non-doms remove their privacy, they will only be charged the withholding tax rates and not the UK top rate of tax – for example, 48% on income as opposed to 50%.

A point that has been slightly overlooked for all taxpayers paying the withholding tax is that the benefits of these small percentage differences might be negated by the timing difference. The withholding tax is taken at source whereas taxpayers who are foregoing the secrecy of their accounts can pay at the end of the tax year, with the interest it accrues.

Having said all this, non-doms are in a better position than UK-domiciled individuals as they have more choice available. But, contrary to some reports, this does not represent a complete immunity. Perhaps to hammer this point home, we can expect to see HMRC focusing on non-doms who have self assessed or opted out. More than anything, a prosecution along these lines would be a public relations coup and would dampen down the understandable criticisms of non-doms getting an easy ride.

Liechtenstein

Although there is choice available to non-doms, the overwhelming advice from the tax profession to all taxpayers is to fully disclose through Liechtenstein. The Liechtenstein Disclosure Facility (LDF) allows taxpayers to become fully compliant with a fixed penalty of 10% plus interest on all past liabilities since 1999 and, importantly, immunity from prosecution.

The LDF has been pretty successful since it came into being in September 2009. HMRC was hopeful that it would make £1bn until in closes in 2015, but this looks like it might be a conservative estimate, with the actual figure likely to be close to £3bn, despite only collecting £140m in its first 18 months.

This is partly because this figure is derived from only 475 completed disclosures at an average of around £200,000. But there were a further 875 disclosures that were being processed – if the averages hold up, this is a further £175m guaranteed. In the two years since the LDF opened, there has been a steady stream of around 75 registrations a month. If the average number of registrations stayed at that rate and the average figure remained at £200,000, HMRC would reach its figure of £1bn by 2015.

However, the LDF has been intrinsically linked to the negotiations over the Swiss deal. Since the Swiss deal was mooted last year, Swiss bank account holders have been waiting for the deal to be announced before committing to the LDF. Advisors are unanimous in declaring there will now be an upsurge in LDF applications.

As well as voluntary disclosures, Liechtenstein banks have a deadline of October to begin investigation into their UK resident clients. Much of this investigation has been held off until the announcement of the Swiss deal. How this will affect Swiss banks is uncertain, but Liechtenstein will no doubt be beneficiaries in this, as will the UK Exchequer.

Other havens

Now that Switzerland and Liechtenstein are no longer the safe tax havens they traditionally were, there is concern that sophisticated evaders will move their money once more.

The Swiss agreement does make allowances for this. Although secrecy remains, Swiss banks will have an obligation to inform HMRC where money is being moved to, allowing HMRC to focus attempts at closing further havens.

Fiona Fernie, tax investigations partner at BDO, says that these enhanced information powers will make it harder to move money from Switzerland and even if they do, the world is getting smaller with more deals with tax havens being made by the UK. “The entire financial climate lends itself to clamping down on further havens. They will see that it is better to be in the financial club than outside it.”

Those tax havens that remain will not be so attractive. Phil Berwick, head of tax investigations at McGrigors, says: “Nicaragua may well be an opaque tax haven, but few taxpayers would feel comfortable stashing their money there.”

The likes of Panama and the British Virgin Islands are next on the taxman’s hit list, as revealed by Accountancy Age.

A senior source at HMRC says the UK is looking closely at jurisdictions that allow businesses to register without operating an adequate level of scrutiny of where the companies are effectively active, such as Panama and BVI, and discussions are ongoing.

No place to hide?

The international ramifications of this deal are substantial. The UK has led the way, of sorts. HMRC has indicated that Germany followed the UK in setting the rate of the one-off tax.

This leadership has not been universally welcomed, though, with the EU expressing concern about how it is undermining an EU-wide approach, while the US has taken a significantly different approach.

Ultimately, the deal can only be judged on the merits of what it provides to the UK – a tax take of £6bn a year, if achieved, will help the UK deflect any criticisms.

But even in international terms, the UK and German agreements represent a significant step for transparency in Switzerland, the holy grail for G20 countries. With US pressure and ongoing EU attempts to make Switzerland even more transparent, this agreement could even prove to be a stop gap, bringing in much needed money until there is full transparency in what is traditionally the most secret of banking systems.