TAX NEWS - June 2010

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Liechtenstein Tax: Liechtenstein Makes Pitch to Tax Evaders as Swiss Guard Secrecy

Liechtenstein is luring wealthy Britons by offering them the chance to "come clean" on unpaid taxes, while lawmakers in neighboring Switzerland attempt to block the handover of suspected tax evaders to U.S. authorities.

British citizens with accounts in Liechtenstein who disclose assets to the U.K. face penalties of as little as 25 percent of the usual amount, said Olivier de Perregaux, chief financial officer of LGT Group, the principality's biggest bank. U.K. tax authorities expect to net revenue of 1 billion pounds ($1.46 billion) from the agreement.

Liechtenstein has held talks with the U.S., France, Germany and Italy about similar arrangements as Crown Prince Alois, who surveys his Alpine realm from a 12th-century castle in the capital Vaduz, sees growing interest in the deal. Swiss banks, seeking to retain the biggest share of the world's offshore wealth, are proposing a tax that would allow them to keep their clients' identities secret.

"A number of Swiss banks are completely in denial," said Philip Marcovici, a lawyer who helped draft the Liechtenstein accord. "A younger generation may think of Switzerland as the place where my grandmother used to hide her money."

Switzerland's lower house rejected a settlement this week that would require the government to hand over data on as many as 4,450 UBS AG clients to U.S. tax officials. The decision opens the door for further talks between both parliamentary chambers. A final vote is scheduled for June 18. Failure to back the treaty may result in the U.S. pursuing charges against Zurich-based UBS, the country's largest bank.

After Zumwinkel

Liechtenstein started to unwind secrecy after data stolen from LGT, the bank owned by the royal family, was used by Germany to prosecute tax evaders in 2008. Former Deutsche Post AG CEO Klaus Zumwinkel was convicted of tax evasion and received a two-year suspended prison sentence plus a penalty of 1 million euros ($1.2 million).

Client assets in Liechtenstein fell 30 percent in 2008 as financial markets slumped, the biggest decline since the nation's banking association began keeping records 13 years earlier. The drop spurred authorities to devise a plan to rescue a financial-services industry that accounts for one-third of the economy and employs almost 2,000 people out of a population of 35,600 German speakers.

"Only after the Zumwinkel case was it possible to say that we have a problem and that we need a quick solution," said Michael Lauber, chairman of Liechtenstein's financial regulator. "It has been like day and night."

'More Innovative'

In the agreement, which Liechtenstein says exceeds standards set by the Organization for Economic Cooperation and Development, British clients have until the end of March 2015 to make a voluntary disclosure or their accounts in the principality will be shut. Penalties for the past decade will be capped at 10 percent of taxes evaded and may be as high as 30 percent for tax years following April 2009.

While one in 20 of the principality's existing clients are British, the deal is open to any U.K. taxpayer who opens an account in Liechtenstein.

"Liechtenstein has to be more innovative and forward- looking than other financial centers," said Katja Gey, who helped negotiate the deal for the Liechtenstein government. "We have made offers along these lines to Germany, the U.S., France and Italy, though we haven't yet had official negotiations."

Money managers in Liechtenstein have reported asset gains since the accord was signed last August, said de Perregaux of LGT. Investment funds reported a 41 percent increase in assets under management to 37.3 billion Swiss francs ($33 billion) last year and assets at the principality's banks climbed 3.5 percent to 125.1 billion francs.

Promoted as Model

"The innovative approach has certainly helped our international reputation," said de Perregaux, adding that inflows from British clients are helping counter withdrawals from clients in Germany. "Liechtenstein is now promoted as a model."

Liechtenstein, whose financial industry helps to generate the world's highest per capita income, is using roadshows to promote the agreement in the U.K., said Alois, 41, who trained at the British Army's Royal Military Academy Sandhurst.

"I wouldn't be surprised if it takes another few months to achieve full speed," Alois said in a May 27 interview from Vaduz. "We have clients who inherited this problem and want to come clean."

The U.K. expects voluntary disclosures to accelerate as Liechtenstein banks demand evidence of tax compliance, according to an e-mailed statement from the HM Revenue & Customs.

Favorable Terms

"The long-term benefit to HMRC is improved U.K. tax compliance for Liechtenstein investors and increased tax receipts from those wishing to benefit from the favorable disclosure terms," the tax authority said in the statement, without providing figures for revenue collected during the past nine months.

The costs of hiring a U.K. accountant to undertake book- keeping for back taxes means the arrangement makes most sense for "wealthy clients," said Clemens Laternser, managing director of the Liechtenstein Association of Professional Trustees.

"There could be problems in the end, if clients don't want to disclose or can't give proof that they are tax compliant," he said. "You probably need to get rid of clients who you worked with for 10 or 20 years."

While Liechtenstein "had no choice," it has gained a head start on Switzerland, according to Adolf Real, chairman of the principality's bankers association.

Switzerland agreed March 13, 2009, a day after Liechtenstein, to cooperate with countries investigating tax evasion to avoid being blacklisted as a tax haven by the OECD. The decision came a month after the U.S. sued UBS.

Unrealistic Approach

"Switzerland lost maybe two years in this discussion," Real said. "They have a way to go because they've not come up with any ideas that would put Switzerland in advance."

Switzerland's private bankers association, which represents Pictet & Cie, Lombard Odier & Cie and Wegelin & Co., says Liechtenstein's deal with the U.K. is an "isolated bilateral act" and isn't a model for others to follow. "It's unrealistic" for banks to demand proof" that a client has paid taxes back home, the association said in its annual report published last week.

Swiss banks, which manage about 27 percent of the world's privately held offshore wealth, have proposed a withholding tax where client identities would remain secret. The lack of transparency doesn't meet OECD standards, HMRC said in December.

'Big Picture'

The tax on interest, dividends, capital gains and investment income could raise "billions per year" for foreign governments, according to the Swiss Bankers Association, which counts UBS, Credit Suisse Group AG and Julius Baer Group Ltd. among its members.

While Liechtenstein's solution sets an example, Switzerland probably can't go "the same way," said Urs Roth, president of the association.

"When you look at the big picture, yes, it is a model for Switzerland because this is a point in time when you go for tax compliant wealth," Roth said during a May 26 interview in Vaduz. "Countries will find different ways."

Talks are under way with Germany over the withholding tax, Swiss Economy Minister Doris Leuthard said last week, adding that the reaction of German Finance Minister Wolfgang Schaeuble was "fairly positive."

There is a risk that the Swiss banks are left behind, said Marcovici, who is also CEO of the Zurich-based training arm of law firm Baker & McKenzie.

"Switzerland seems to be failing miserably at leading the world on what is a global issue, not a Swiss issue," he said. "Swiss banks have this false impression that somehow after the financial crisis governments will forget about this. That's nonsense."

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