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News : EU Economy Last Updated: May 23, 2011 - 5:11 AM

The "honest Swiss"; tax secrecy and the cost of servicing wealthy foreigners
By Michael Hennigan, Founder and Editor of Finfacts
Aug 25, 2009 - 5:25 AM

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Sedate Switzerland has faced turbulence in recent times over tax secrecy and the cost/benefit of servicing wealthy foreigners. The clash between the influence of the austere religious doctrine of Frenchman John Calvin who had taken refuge in the Alpine country, which centuries later hosted the plunder of foreign dictators or hidden the wealth of Holocaust victims, was a far cry from the gripes of the main character Michel, in the 1902 novel L'Immoraliste, of renowned French writer, André Gide:"I detest these honest folk. I may have nothing to fear from them, but I have nothing to learn from them either. And they have nothing to say...Oh, these honest Swiss. Where do their good manners get them?...They have no crime, no history, no literature, no art...They are like a sturdy rosebush without thorns or flowers."

Last Thursday, as the former Libyan intelligence officer Abdel Basset Ali al-Megrahi, who was sentenced in 2001 to serve 27 years for the bombing of the Pan-Am Boeing 747 bound for New York from London, was heading to Libya, Swiss finance minister and current president Hans-Rudolf Merz, was in Tripoli, abjectly apologising to Libya over the arrest in 2008, of a son of Libyan leader Muammar Gaddafi, by Geneva police.

Merz said it was the only way to break a deadlock in economic relations with the north African country and secure the release of two Swiss nationals, held for allegedly violating visa regulations.

In July 2008, Hannibal Gaddafi and his pregnant wife were arrested in Geneva, and charged with assaulting two domestic employees.

The couple were freed after two days in custody on bail of SFr500,000 ($470,000) and the charges were later dropped, when the employees withdrew their complaint and were paid compensation.

An outraged Libya responded by suspending oil deliveries to Switzerland, withdrawing assets worth an estimated $5 billion (SFr5.3 billion) from Swiss banks, ending bilateral cooperation programmes, placing restrictions on Swiss companies and arresting the two Swiss businessmen.

Last Thursday, the Swiss finance ministry said the two countries would set up an independent arbitration panel to look into the circumstances surrounding the arrest, and that Switzerland was "prepared to apologise for the unjustified and unnecessary arrest of Hannibal Gaddafi and his family by the Geneva police."

To add insult to injury, Merz returned without the businessmen, and with only a verbal pledge that they would be allowed out by September 1st  - - when Libya will mark the 40th anniversary of Gaddafi's coming to power, and is expected to grant amnesties to a number of prisoners.

Also on Thursday, the US Department of Justice indicted a Swiss private banking executive and a Swiss lawyer, accusing them of selling tax evasion services to wealthy clients. The move signals US plans to take the fight against tax evasion to Swiss banks, beyond UBS.  

It was filed a day after the giant Swiss bank UBS said that it had agreed to disclose 4,450 American client names and account details.

Tax evasion is not a crime in Switzerland and over the decades, the Swiss have only modified their banking secrecy rules in response to international pressure. 

The notion of being an accomplice to crime, has always been a potential costly inconvenience.

Switzerland has prospered for on crimes committed beyond its borders. However, in recent decades, it has been forced to agree to disclosures on the proceeds of plundering by various dictators and the reputation of Swiss banking was tarnished by revelations that the banks had looted the unclaimed wealth of Nazi Holocaust victims.

Geneva, the Calvinist city that centuries ago had attracted wealthy French families fleeing the revolution, is dominated by about 140 private banks, accounting for almost one in five of jobs in a city of 180,000 people.

Bruno Gurtner, Chair of the Global Board, of the Swiss Tax Justice Network, in a letter to the Financial Times in March, disputed the claim that Swiss secrecy laws “date back to 1934, when they were enacted partly to protect German Jews and trade unionists from the Nazis”.

Gurtner said: "This is a big myth. The argument about it being set up to protect Jewish money first appeared in the November 1966 Bulletin of the Schweizerische Kreditanstalt (today Credit Suisse). The main reason bank secrecy was strengthened in 1934 was a scandal two years earlier, when the Basler Handelsbank was caught 'in flagrante' facilitating tax evasion by members of French high society, among them two bishops, several generals, and the owners of Le Figaro and Le Matin newspapers. Before that, there was professional secrecy (such as exists between doctors and their patients), and violation was a civil offence, not a criminal one as it is today. Swiss bank secrecy has always been an effective way to attract foreign money.

Many Swiss people are delighted that our country is going to stop blocking the exchange of information with other jurisdictions and will now follow Organisation for Economic Cooperation and Development standards. For Switzerland this is a huge step. Other important steps must follow, to tackle other loopholes in the offshore world, such as those provided by British trusts and by other damaging facilities offered in Britain’s Crown Dependencies."

Swiss Banking Secrecy: Origins, Significance, Myth (pdf)

There is intense legal tax competition between the 26 Swiss cantons and many are working to introduce a flat tax.

However, last February voters in Zurich decided to abolish tax breaks for wealthy foreigners.

The system, which is known as lump-sum tax, is not based on income and wealth, but on a minimum amount - - generally the equivalent of five times the annual rent or the rental value of the house the taxpayer lives in.

Only foreigners with a residence permit are eligible for lump-sum taxation. There are considerable differences in the lump sum tax levied by the cantons and the local authorities across the country.

More than 4,100 wealthy foreigners with residency status in Switzerland benefited from special tax treatment, according to 2006 official figures.

Obwalden with a population of about 34,000, cut corporation tax to 6.6% in 2006 and  in 2007, the country's highest court said the canton's degressive income taxes ran counter to constitutional measures designed to ensure taxation according to economic performance.

Obwalden had adopted a degressive income tax system which meant that the richer you are, the less you pay. Those earning over SFr300,000 ($233,000) per year, for example, had a tax rate as low as one per cent.

In December 2007, Obwalden became the first Swiss canton to adopt a flat income tax rate, with more than 90 per cent of the electorate voting in favour of the move.

The decision, was in response to the court ruling.

From January 2008, Obwalden imposed a rate of 1.8 per cent on all categories. The new model also exempts the first SFr10,000 ($8,700) of income from taxation, a measure designed to benefit those on lower incomes the most.

Voters also said yes to a proposal to slash corporate tax rates from 6.6 per cent to 6 per cent, the lowest in Switzerland along with canton Appenzell Outer Rhodes.

There was a 33.2 per cent voter turnout.

The message from the Swiss experience for Ireland is that while, tax competition is a strategic benefit for a small country, turning a blind eye to lawbreaking in other jurisdictions, can damage a country's reputation.

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