It will modify the coverage of banking secrecy with regard to fiscal matters, at least for the nationals of countries with which Switzerland will have amended the double taxation treaties to include the exchange of information.

This article retraces the circumstances which led to the Federal Council's change of policy, explaining the consequences it will have as well as discussing the accompanying measures which will need to be adopted for the financial centre to remain attractive.
 
A new policy
In March, the Swiss president, Hans-Rudolf Merz, announced that Switzerland was going to withdraw its reservations regarding article 26 of the OECD Model Tax Convention, relating to the exchange of information. In plain language, this means that in the future, when our country signs agreements with third countries, aimed at avoiding double taxation, it will agree to the exchange of information in cases of tax evasion as well as tax fraud.

For nationals of these countries, Switzerland shall no longer differentiate between these two notions, which it had done until now, and will continue to do so, on the domestic level. In the future, when a concrete request with supporting evidence is submitted to the Swiss authorities , they will have the authority to obtain banking information and to forward this to the requesting country.

Switzerland announced this decision at almost the same time as other European countries like Austria, Belgium and Luxembourg, Far East financial centres like Hong Kong and Singapore, various British Crown dependencies and offshore territories and three small European states .

All these countries and territories were threatened with being on a G20 "blacklist", a draft of which had been drawn up by the OECD Secretariat. The consequences of this kind of blacklisting were not to be underestimated. They appeared in black and white in bills ready to be voted on in some large countries . Not one of the jurisdictions under threat dared defy the economic risks involved.

The G20 summit
At the G20 meeting in London, the main goal of this meeting was to find solutions to the world financial crisis and an additional target was the so-called "uncooperative" financial centres and other tax havens accused – rather too easily - of being responsible for all our woes. It should be mentioned in passing that not one of the centres in question was invited to the summit.

Under pressure from Germany and France, the G20 decided to establish three lists – a white, a grey and a black – to evaluate the extent of cooperation in fiscal matters. Switzerland is one of the eight "other financial centres" to appear on the "grey list", along with Austria, Belgium, Luxembourg and Singapore. More than thirty "tax havens", such as the Cayman Islands, Liechtenstein and Monaco, also appear on this list.

The big surprise concerned three British Crown dependencies which appeared on the G20 "white list". Here too, figured a series of jurisdictions which certainly did not win this certificate of good conduct for the excellence of their banks' client identification standards. 

Without dwelling on countries of lesser importance and their sometimes doubtful reputations, it should be noted that the US also appears on this list. The opaque practices of a number of federal states did obviously not pose a problem to the censors. The question raised here is the following: when you cannot identify the beneficial owner of an account, how can you exchange tax information?

Four countries, judged to be uncooperative, had initially been put on the "black list". But they quickly committed themselves to what was expected and consequently this third list is now empty.

If the way in which these three lists were drawn up remains a mystery to many observers, there is also the question of the 'missing' countries. For many countries appear on none of the lists.

Consequently, Argentina had the honour of being on the "white list" while Brazil appeared nowhere: a "no man's land" where we presume one would find, for example, India, Indonesia, Saudi Arabia and South Africa i.e. countries which were represented at the G20.  This "non-category" also includes industrialized countries like Israel, as well as the Chinese dependencies of Hong Kong and Macao, which have been split from China in favour of a footnote. 

Many Swiss citizens – just like their Austrian, Belgian and Luxembourg counterparts – have been shocked by their country appearing in this kind of purgatory constituted by the "grey list", even though their government had taken formal commitments.

Their irritation is understandable but it has to be recognized that, from a material point of view, whether this list exists or not makes no difference. Already before it was published, these countries had decided it was too dangerous to run the risk of sanctions from some of the largest economic powers and had decided to modify their contractual policy with regard to the exchange of tax information. But it was impossible for them to negotiate the revision of the required number of double taxation agreements from one day to the next.

From a political point of view, it was only to be expected that the countries represented at the G20 would arrange things among themselves. This explains the swiftness with which the British Crown dependencies signed the required number of agreements  as well as the extreme discretion regarding the American and Chinese territories mentioned above. And finally, there are the "forgotten" countries, which we do not know whether they should be considered cooperative or not.

Negotiating new agreements
In accordance with its commitments of 13 March, the Federal Council will be starting a series of negotiations. In principle, it will be done with all its foreign partners. In practice, negotiations will be faster with some countries than others.

The US heads the list, because Switzerland wants to put an end to the problems its largest bank, UBS, is having in America. Japan is also a priority country as negotiations are already underway with it. The same applies to Poland.

With France, things are a little more complicated. A few weeks before the Federal Council announced its new policy, France initialled an amendment to its DTA with Switzerland. Since then, France has decided not to ratify this text and so negotiations will start again at a later date, which has yet to be set.
In the case of Germany, discussions will probably take some time. What's more, in view of the rather strained political climate which currently prevails, following the German Minister of Finance's hostile comments about Switzerland, it would probably be wise to let the dust settle before sitting down together at the negotiating table. 

To date more than twenty countries have voiced their interest in revising their DTAs with Switzerland. Even if the Federal Council has specifically shown its intention of getting down to work fast, these negotiations will take several months.

Time must be added for the parliamentary ratification procedure of the agreements, and even the possibility of a popular vote as the Federal Council has expressed its intention of submitting the first revised agreement to an optional referendum,  which parliament will hardly deny.

From a Swiss point of view, the main principles to respect in these negotiations should be the following:

Precise conditions should be imposed regarding the request for administrative cooperation in order to exclude "fishing expeditions", i.e. investigations with unspecified evidence. This means the asking country would have to submit a written request, providing the justification for suspicions of tax evasion or tax fraud, accompanied by a clear description of the charges. This inevitably means the taxpayer's identity is divulged as well as the name of their bank and the account number.
Retroactive application of the new DTAs should not be allowed.
Reasonable transitional periods will need to be planned and Swiss legal certainty will have to be guaranteed. 
There should be an allowance for the taxpayer concerned to have the right to appeal.
The new DTAs should include the principle of exclusivity to ensure that the contracting state does not have recourse to measures other than the contractual ones to achieve its aim.

Other issues to consider, include:

Some DTAs recently signed by Switzerland contain a so-called "most-favoured-nation" clause. This is because the countries in question anticipated a relaxing of Swiss policy regarding the exchange of information and wished to benefit from the new policy as soon as possible. Since 13 March this type of clause – quite exceptional in tax law – has become groundless.

The issue of equal treatment, or “level playing field” regarding the transparency of trusts and domiciliary company structures must be ensured.
The presence of foreign agents on Swiss territory should not be tolerated. This is one the founding principles of our Confederation and there should be no question of allowing agents from foreign tax authorities investigating in our country.

EU authority
Questions related to the double taxation of income and capital are, in principle, discussed bilaterally, between two nations. But the European Commission has expressed its wish to be attributed the mandate to negotiate centrally, on behalf of its 27 member states, Switzerland's application of the exchange of information standard according to the OECD model.

In concrete terms, it is proposing to broaden the scope of the current agreement on fraud prevention - which Switzerland signed with the EU in 2004 as part of the Bilateral II negotiations – to include direct taxation. This agreement, which, oddly enough, a number of EU countries have still not ratified, is currently limited to indirect taxation.

Entrusting this kind of mandate to the Commission is a controversial question within the EU itself. Indeed, direct taxes – unlike VAT and excise duties – do not fall within the competence of the EU. Moreover, any decision related to taxation must have the unanimous vote of the European Council.  The Commission has set a precedent with an agreement on fraud which it was authorized to negotiate with the Principality of Liechtenstein and which also concerns direct taxation. It is also relying on two draft European Directives which were recently presented and concern administrative cooperation in fiscal matters, but which have not yet been approved.

It may not be in Switzerland's best interest to be drawn into this. The main reason being that the DTAs it has entered into with the individual EU states are all different, as they take into account the bilateral situations which vary from country to country.

Having so far conducted a restrictive policy with regard to the exchange of information, Switzerland has had to make concessions in other areas. From the moment it provides its partners with more information, Switzerland would be justified in making other demands in return.

Should this not be done, the balance of these agreements would be tipped to its disadvantage. Centralized negotiations with the European Commission would not allow this fact to be taken into consideration. Consequently, for it to be of interest to Switzerland, the Commission's proposition would have to hint at the EU making equivalently important concessions; in theory, this is certainly conceivable but nothing suggests that it is Brussels' way of thinking.

There is another reason why the European Commission option is not really feasible: before being able to tackle the subject, Switzerland would have to start by waiting for the EU member states to agree among themselves, which could take time. Indeed, it is a controversial subject and each country jealously guards its tax privileges. However, as mentioned above, the Federal Council does not intend to waste time. The bilateral path would therefore appear to be the more realistic one. Moreover, several EU member states have already expressed their preference for this.

Other EU action points
In Bern, all attention is currently focused on the double taxation agreement negotiations. There are, nevertheless, other important issues that still need to be resolved with the EU. On the one hand, there is the taxation of savings and, on the other, a disagreement relating to the taxation of companies and, more specifically, certain cantonal tax systems.  As this second subject does not concern the banking sector directly, we shall concentrate on the first one.

The European Directive on the taxation of savings is currently being revised. The European Commission has reached the conclusion that its scope is too limited and is consequently recommending its extension. The proposed modifications aim at closing some of the loopholes both in relation to those targeted and their related investments . A new and very problematic link has been established between the Directive's notion of  beneficial owner and that of anti- money laundering legislation.

Switzerland cannot remain indifferent to a revision of the taxation of savings in the EU as, since 2005, it has been enforcing a bilateral agreement whose content is materially identical. In principle, the revised agreement should not be introduced until the full implications of its application have been evaluated. As this was to take place in 2011, it has always been thought that there would be no revision before 2013. However, as the EU has expressed its wish to speed things up, the Federal Council has declared it is, nevertheless, open to discussions.

However, any renegotiation of this agreement will have to take into account changes made to Switzerland's policy relating to the exchange of tax information. In particular, the 35% withholding tax individuals are charged on income from interest, which is planned to come into effect in July 2011, should be reconsidered especially as many European countries have in the meantime adopted, on a domestic level, withholding taxes at much lower rates which are deductions at source in discharge of taxes.

What must happen
In view of the challenges Switzerland is facing, it appears that the country will need to adopt a resolutely proactive policy to ensure the future of its financial centre. This policy will need to target two goals:
- maintaining legal certainty,
- reinforcing the financial centre's competitiveness.

On the first point, the stakes are above all international and mainly conditioned by the Federal Council's new policy on the exchange of tax information as mentioned above. It will be a question of setting out clear rules based on the principles listed above  in the renegotiated tax agreements.

As far as the taxation of savings issue is concerned, Switzerland will need to accompany its openness to extend the scope of this agreement it has with the EU, with a firm stand on the question of long-term maintenance of the withholding tax as an equivalent alternative to the automatic exchange of information practised in most of the EU states.

The second area of action is, on the contrary, basically a domestic issue. For decades the traditional concept of Swiss banking secrecy has provided the banks' clients with a guarantee of security to which they are extremely attached. When this concept is considered in the context of the new fiscal assistance policy, Swiss banks risk losing one of their main competitive advantages. This could reduce their ability to create value in their own country. Switzerland must, therefore, be quick to adopt new measures aimed at providing long term compensation for this loss of competitiveness.

The measures to be taken concern tax issues but also regulatory matters. Many of these measures were already presented in 2007 as part of a Masterplan developed by the financial centre's different umbrella organizations. However, this plan was drawn up in a medium-term perspective, with 2015 as the horizon. These reforms were already necessary at the time,  but it is now urgent that they get underway. Others will no doubt need to be developed further.

In any case, the mistake to be avoided at all costs today is to become obsessed with the financial crisis and fall into compulsive re-regulation, on some pretext that only the strictest of rules would enable the banking system to get back on course. It should not be forgotten that the current crisis was born in America, not in Switzerland.

Strengthening the financial centre's competitiveness does not necessarily mean "reduced taxes" and "reduced regulations", but an attractive tax system and a more balanced regulatory framework. The financial crisis and the numerous challenges Switzerland has to face today are a perfect opportunity for us to improve our financial sector's framework conditions and therefore allow it to remain the country's leading creator of wealth.