Switzerland is a famous offshore tax haven, renowned for its banking secrecy - but its status has been eroded and now it is having to transform itself to protect its economy.
Ever since the American tax authorities began a concerted crackdown on US citizens’ banking activities abroad in an effort to bring all wealth back onshore, heavy emphasis has been placed on Switzerland sorting itself out as a tax haven! Traditionally the one place in the world where everyone knows that banking secrecy is assured, Switzerland has inadvertently developed itself a negative reputation for facilitating tax avoidance.
UBS was the first bank to be accused of assisting clients to avoid tax - by the Americans. And since then, other institutions have been investigated, targeted and accused of enabling the non-tax compliant activity of clients. Employees of Swiss banks have allegedly sold off secrets about account holders, and now the German and French authorities are sifting through the records they’ve acquired looking for proof that some of their citizens have been using Swiss banks to evade and avoid tax.
However, significant change is now afoot in Switzerland, with one commentator stating: “We are in the midst of a transformational period both culturally and operationally. Tax-compliant wealth management will become the product in Switzerland, not bank secrecy and a tax haven.” So why is Switzerland cleaning up its tax haven status? Because it has to or because it can see the benefits of doing so?
There are those who are convinced that Switzerland has no choice but to bring about massive reform - after all, it has been hit from multiple angles by multiple authorities and bodies from multiple nations all accusing it of allowing non-tax compliant behaviour. Such a global and sustained attack cannot be ignored because it erodes the legitimacy of Switzerland as a place to do business and undermines the nation’s entire economy. So, perhaps it is a case that Switzerland has to clean up its act?
However, if you speak to those within the banks, they state that they are the ones taking the initiatives, and that they are tired of waiting for formal legislation to be created and brought in to regulate their behaviour. UBS is apparently forging the way when it comes to foreign tax compliance - despite the fact it has resulted in the bank losing some clients and some significant financial deposits. In explaining why the bank is taking the lead, Markus Diethelm the bank’s general counsel stated: “We have to act and cannot just wait for a political solution.”
Therefore, conceivably, the reason why Switzerland is cleaning up its act is in part because so much damage has been done to its reputation that changes are required, and in part because the changes can and will have a positive effect on the nation’s business and economic environment. The world needs a centre for tax compliant wealth management expertise - the world does not need the stress of another ‘dodgy’ tax haven.
Switzerland may have been backed into a corner and forced to make these choices and these changes - but the fact that banks are now pushing hard on the ‘know your customer’ due diligence front and working together to create legislation harmonisation is positive. Whilst banking secrecy is still high on the agenda of the institutions within Switzerland, they want to extend this right only to those clients who can prove that they are tax compliant.
It has certainly not been the path of least resistance for the jurisdiction to take - proven by the fact that UBS alone has witnessed clients withdrawing hundreds of billions of Swiss francs and taking their business elsewhere. However, if Switzerland wants to retain its status as a neutral global financial and business powerhouse, it needs to have develop this far ‘cleaner’ reputation.
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