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The International Battle Towards Banking Transparency


The International Battle Towards Banking TransparencyIn recent years, in an effort to crack down on international money laundering and tax evasion, nations like the United States, Germany and the UK began investigating just how widespread the practice was. With the assistance of international organisations like the Financial Action Task Force (FATF) and the Organization for Economic Co-operation and Development (OECD), US and European Governments began putting pressure on not only the Swiss, but also tiny Liechtenstein and small Caribbean island nations.

Initial Roadblocks

Authorities in Switzerland were slow to cooperate. Government officials conceded the problem regarding foreign tax evasion, but cited centuries of confidentiality as the main attraction for foreign investors. Swiss authorities however, knew they had to act when the pressure continued to mount. Switzerland’s banks quickly became the intermediaries – protecting the privacy of their foreign account holders while simultaneously negotiating how they might collect foreign taxes from them.

Also in 2009, America’s Internal Revenue Service (IRS) issued guidelines that relied on voluntary disclosure. According to the IRS, “the objective is to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws.” In reality, without any real cooperation from Caribbean and Swiss banks, there was little more they could do.

Making Progress

Over the past few years, Switzerland began buckling under the international pressure. Swiss authorities suddenly found themselves cooperating in international crime investigations rather than shielding their banking customers, as was always their practice.

They've also been in negotiations with numerous countries such as the US, Germany and the UK. The goal is a permanent tax deal that outlines the responsibilities of Swiss banks regarding their foreign depositors. Sticking points quickly arose over tax rates and confidentiality.

Liechtenstein also finds itself under pressure. In 2009, the country created the Liechtenstein Disclosure Facility. The LDF enabled anyone to pay foreign back taxes at a flat rate of 10 percent. They could not do it anonymously however. In 2010, Liechtenstein agreed to use the same tax rates as their Swiss neighbors.

Final Tax Agreement

While the Swiss continue to negotiate the details of their respective tax agreements with the US and the UK, terms have finally been reached by Germany and Switzerland. Under the new agreement approved by both countries, taxation of German funds in Swiss accounts will begin in 2013.

Beginning in 2013, Swiss authorities will begin collecting German taxes from German account holders. It will be a flat tax rate of 26 percent on all capital gains. That’s roughly the same rate Germans would pay at home. Retroactive rates for past years would range between 19 and 34 percent. Most importantly for German account holders, the deal allows them an option of paying the Swiss directly, who would pass the tax revenue onto the Germans without any accompanying details, thus guaranteeing the privacy of German depositors.

With the Germans and Swiss having finally reached an agreement, it shouldn’t be long before the US and the UK also come to terms with the Swiss.

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