Switzerland’s Declining Tax Haven Appeal
Tax havens have historically offered respite for individuals and companies looking to avoid high levels of taxation in their home countries. Some countries have effectively set out to create an environment in which international financial transactions come under little scrutiny so that foreign individuals and companies can safely park their money in the country’s financial institutions and avoid detection by their own governments. Tax haven countries typically use legislation to ensure secrecy so that the foreigners’ funds are not traced back to them and, therefore, they are not subject to their country’s tax laws. A list of places that have been tax havens at some point includes the Cayman Islands, Bermuda, Dubai, Liechtenstein, Singapore, and, of course, Switzerland.
Swiss Secrecy
After the start of the Depression in 1929, the Swiss actively turned their country into a tax haven. In the early 1930s, as Austria and Germany suffered from many bankruptcies, the Swiss took steps to make their banking system safer. To this end, the government passed the Banking Act of 1934, which strengthened the banking industry’s secrecy and protected such secrecy under criminal law. This meant that banks were to protect any accounts they held and accord them professional secrecy. The law called for banks to maintain “absolute silence” with respect to such accounts, meaning the banks could protect them from all governments, including the Swiss government. To ensure that this was accomplished, the Swiss law made it a criminal offense to inquire into the “trade secrets” of banks. Thus, any money that made it into Swiss banks was pretty much guaranteed safe haven protection.
Switzerland’s tax haven status has come under threat in recent years. Following the global financial crisis of 2007 through 2009, Western governments have been cash-strapped and looking to boost their revenues. As a result, they have redoubled their efforts to collect tax. This has led to a series of agreements between the Swiss and the governments of the US, the UK, and France to share information about money kept in the Swiss banking system.
For instance, the UK signed a tax deal with the Swiss in 2011 whereby the UK tax authorities would be able to see which of their citizens had money stashed away in Swiss banks. This enables them to get their share of the tax these individuals owe. The Swiss have also entered into these sorts of deals with France and Singapore.
The United States has also decided to be more active in terms of going after tax evasion. In 2010, the US enacted the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to provide information on accounts held by US citizens. The Swiss government had been stalling on cooperating with the US in this sort of endeavor, in a bid to hold on to its tax haven status, but was ultimately forced to bow to US pressure.
In 2012, the US government indicted Wegelin & Company, a Swiss bank, on charges that it allowed US citizens evade taxes on $1.2 billion from 2002 to 2010. Wegelin pleaded guilty and agreed to pay $57.8 million in fines and restitution, despite their actions being legal under Swiss law. The bank subsequently went out of business after a 272-year history. The Swiss decided to cooperate with the US to ward off other such punitive actions by Washington. In 2013, the US government signed a tax treaty with Switzerland that calls for Swiss banks to provide details on their American account holders and close the accounts of Americans who set up accounts for the purpose of evading US taxes.
The Bottom Line
The Swiss have successfully built up a tax haven status for their country and attracted money from foreigners who hope to evade taxes in their home countries. However, as cash-strapped governments have started to crack down on tax evasion in recent years, they have expressly started tracking their citizens’ offshore holdings. They have even pressured the Swiss government to cooperate with them and make Swiss banks give up their much-vaunted secrecy, which means that the country is starting to lose its tax haven allure.
