TAX NEWS - June 2010

US swagger and a Swiss surrender on banking secrecy

Switzerland is rightly proud of its democratic traditions, the US equally so. But recent events have done little to add to the credentials of either government in this regard. The US tends to project a "my way or the highway" version of democracy. The Swiss seem to ask little more than to be left in their own state of neutral self-satisfaction.

Given this, perhaps it has been no surprise to watch the swagger of one and the surrender of the other after the admission by Swiss bank UBS of the aiding and abetting of tax evasion by US citizens. Having caught UBS bankers red-handed, the US authorities then used the case to try to blow a hole in Switzerland's irritatingly successful global wealth management franchise. Using some distinctly totalitarian tactics, the US Department of Justice promised revenge against Swiss interests – including threats to close down UBS in the US – unless the Swiss government forced UBS to hand over the names of thousands of clients regardless of whether there was any real proof of individual wrongdoing. Last summer, the Swiss government rolled over and signed a deal to do just that.

However, in their haste to kow-tow to Washington, Swiss officials missed the fact that the agreement, forcing UBS to break its obligation of confidentiality towards its clients, was illegal back home. When a Swiss court had the temerity to confirm it earlier this year, the Swiss government dashed off an amendment to make good its surrender to the US.

The inconvenience of having to run this past parliament was regarded in Bern as a mere formality until this week when the lower house of the Swiss parliament pluckily voted down the amendment.

No doubt this is probably political gamesmanship by the right and left wings of Swiss politics rather than a Swiss version of Custer's last stand. The left wants a tax on bankers' bonuses as its price for agreement to the amendment, while the right wants a promise that no such tax will be passed.

In the end, one or other wing will get its way and the law will pass. However tempting it may be for the parliament to land a punch on the Department of Justice, this would ultimately be an own-goal for Switzerland's fantastically successful financial sector, UBS aside. More important to wealth managers are negotiations with fiscally challenged neighbours in Europe to resolve once and for all the disputes over tax evasion.

The breakdown of the US-UBS deal would stall negotiations with Germany, France, the UK and Italy for a Swiss-administered withholding tax on gains from assets held by European Union citizens in the privacy of their Swiss accounts. A deal here would provide these cash-strapped countries with urgently needed additional tax revenues. The quid pro quo would see the best-managed Swiss private banks freed to operate throughout the EU and better placed to consolidate the smaller players at home, who have only survived thanks to what is coyly termed as "tax neutral" money.

With the tax stigma removed, the best-in-class Swiss private banks could then steam ahead in pulling in the tax-compliant savings of the world's wealthy now looking for a safe haven.

Once they have banked a deal with their neighbours, Swiss voters might like to turn their attentions to their political leaders. After all it was their spectacular negligence that allowed an Americanised UBS to run amok, tarring all Swiss banks with the same dirty brush. Their rush to sign away the country's sovereignty in the face of US intimidation has also been nothing to write home about.‬


Orange squash

Stéphane Richard, France Telecom's new boss, wasted no time on Tuesday squashing suggestions that his Orange network was considering joining the bidding for Le Monde, the venerable French newspaper desperately searching for fresh funds.

The telecom group denied reports it was thinking of teaming up with the Nouvel Observateur magazine to make an offer for Le Monde. But Mr Richard did admit an interest in an eventual industrial partnership with the loss-making newspaper to help develop its digital operations. Yet he also insisted Orange had no intention of investing in the press and would take no part in any recapitalisation of Le Monde.

In any case, even if Mr Richard did nurture some secret fantasy of owning Le Monde, it is difficult to see how the journalists, who control the newspaper, would ever accept entering the France Telecom fold. After all, the telecom group is still 27 per cent government owned and Mr Richard is known to be close to President Nicolas Sarkozy – two excellent reasons to disqualify him in the eyes of the journalists.