Offshore Survey – April 2012

  • Bahamas introduces new Executive Entity structure
    • 1 February 2012, the Executive Entity Act, which creates a new type of structure – Bahamas Executive Entity (BEE) – for use in offshore wealth preservation structures, was brought into force. It introduces a perpetual entity designed specifically and solely to carry out executive functions, such as acting as shareholder of a private trustee company (PTC) or as a protector, enforcer, advisory board or corporate director.

      The officers of a BEE, like the directors of a PTC, can be the founder’s chosen family members or advisers who benefit from limited liability as if they were directors of an IBC. Officers’ details are not publically available in the Bahamas and there is no requirement for a Bahamian resident officer to sit on the board.

      A BEE does not have any shareholders, beneficiaries or enforcers. It cannot hold any value, other than such sums as are necessary to carry out its executive functions and meet any capital adequacy requirements, nor can it own shares in another entity unless such entity also carries out executive functions. It is required to have a Bahamian licensed financial and corporate services provider to act as its agent.

      The Bahamas government gazetted, on 30 December 2011, amendments to the Trustee Act, Purpose Trust Act and the Rule against Perpetuities Act. The Rule Against Perpetuities (Abolition) Act statutorily abolishes the rule against perpetuities while the Purpose Trust (Amendment) Act expressly mandates that any rule of law prohibiting trusts of excessive duration or restricting the period during which income may be accumulated does not apply to authorised purposed trusts. It also expands the definition of authorised purpose trusts to include trusts that have undefined termination dates.

      The Trustee (Amendment) Act further includes provisions that govern the resolution of trust disputes by arbitration and statutorily approves the inclusion of a “no contest clause” in a trust instrument, which permits a beneficiary’s interest to be terminated upon his or her challenge to the validity of the whole, or part, of the trust. It also provides for the codification of settlor-directed powers over investments.

      In addition, the Companies (Winding Up) Amendment Act, 2011 reforms the existing Companies Act in the matter of liquidations to provide a current and comprehensive regime. The International Business Companies (Winding Up) Amendment Act, 2011 further applies the reform in the Companies Act to international business companies to bring that law into accordance with recent international standards.

      Bills have further been passed amending a wide range of legislation to ensure that they meet the requirement of keeping accounting records for a minimum of five years and to bring them into line with the OECD international standards. The government has indicated that a reasonable period of time will be given before these pieces of legislation are brought into force to enable regulators to advise financial services providers and their clients as to the procedures for compliance.

      Aliya Allen succeeded Wendy Warren as CEO and executive director of the Bahamas Financial Services Board (BFSB) on 1 January 2012. Warren will remain as a consultant to BFSB during Allen’s transition into the role.

  • Belize passes International LLC Bill
    • 19 December 2011, the National Assembly of Belize passed the International Limited Liability Companies Bill to provide for the establishment and administration of international limited liability companies. The legislation is due to be brought into force early in 2012.

      Designed to give statutory certainty to some of the key issues of concern to US attorneys using domestic LLCs, the Bill provides a broad foundation to structure an LLC according to its own rules, rather than being mandated by statute. The operating agreement may contain any provision for the conduct of business that is not contrary to law and relates to the business of the company and the conduct of its affairs. An LLC shall be a legal entity with separate rights and liabilities distinct from its members and managers. No manager, officer, member or employee of an LLC shall be liable for the debts, obligations or liabilities of the LLC unless they have assumed such liability by written contract.

  • Cook islands’ on-line registry goes live
    • 12 December 2011, the Cook Islands’ new on-line registry system, which enables all documents, including the incorporation of international and limited liability companies, to be lodged online by qualified staff of licensed trustee companies, went live. The Digital Registers Act 2011, which received Royal Assent on the last working day before the system was rolled out, will ensure the integrity and security of data captured by the offshore register is maintained.

      On the same day the Cook Islands’ Parliament enacted the Banking Act to ensure that the Financial Supervisory Commission can effectively apply enforcement action where banks fail to meet acceptable standards. The impetus for the new legislation was provided by long-running Wall Street Banking Corporation case, which formally had its licence revoked in July 2011.

      The Cook Islands has further issued draft foundations legislation for consultation. Largely based on the recent Isle of Man Foundations Act, the draft also contains comprehensive provisions dealing with the termination, dissolution and migration of foundations. It is due to be put before cabinet in the first half of 2012.

  • Cyprus amends International Trusts Law
    • 9 March 2012, the Cyprus House of Representatives passed a law to amend the Cyprus International Trusts Law 1992 (CIT) address a number of perceived deficiencies. The new law has now been put before the European Commission to ascertain alignment with the acquis communautaire.

      The new provisions clarify the rules on settlor residence, remove the prohibition on resident beneficiaries and ownership of immovable property in Cyprus – including shares in companies formed in Cyprus and in real estate located in Cyprus or abroad – and exclude the laws of any other jurisdiction. Settlors will also be able to create reserved-powers and settlor-interested trusts and trustees will be allowed to invest as freely as if they were beneficial owners.

      Other provisions in the new bill abolish the ban on perpetuities, redefine charitable purposes to match the public benefit test now used in England and Wales and set out rules for determining choice of jurisdiction.

  • EC requests UK to remove corporate exit tax
    • 22 March 2012, the European Commission formally requested the UK to amend its legislation providing for exit taxes on companies because it may breach the European Union’s freedom of establishment by making it more expensive to transfer a company seat or place of effective management to another member state than to another location in the UK.

      Existing UK legislation results in immediate taxation of unrealised capital gains in respect of certain assets when the seat or place of effective management of a company is transferred to another EU or EEA state. However, a similar transfer within the UK would not generate any such immediate taxation and the relevant capital gains would only be taxed once they have been realised.

      The Commission’s request takes the form of a reasoned opinion – the second step of EU infringement proceedings. In the absence of a satisfactory response within two months, the Commission may refer the UK to the Court of Justice of the European Union.

  • EC urges strengthening of the Savings Tax Directive
    • 2 March 2012, the European Commission adopted a report on the performance of the European Savings Taxation Directive (STD), a triennial requirement, which reaffirmed that the STD must be amended to prevent the use of intermediary jurisdictions and “loophole” financial products to avoid tax liabilities.

      The report, which covered the period 2005-2010, showed that the quality and usability of data that member states transmitted to each other had improved, thanks to common EU rules on automatic exchange of information. It also provided practical suggestions to member states’ tax administrations on how to make the current system even more transparent in the future, including how paying agents could complete data in a better way for the purpose of international reporting.

      The relevance of offshore centres as a location for deposits and as place of establishment or management of non-bank deposit holder structures indicated that the implementation of look- through and paying agent upon receipt provisions for certain legal structures located in offshore jurisdictions was justified and necessary for both the Directive and the Savings Agreements.

      The report also noted that loopholes in the current STD continue to be exploited, for example, by increased use of new structures and financial products. In particular, it noted, the increased use of financial derivatives, structured products, non-UCITS funds and unit-linked life insurance products would support an extension of the scope of the Directive to include these products.

      “The economic analysis has shown that the updating of the Directive and the relevant Savings Agreements, in terms of product scope as well as transactions and economic operators covered, is urgently needed in order to address the existing possibilities for circumvention, including those arising from triangular situations which involve jurisdictions both within and outside the scope of the Savings Agreements,’ said the report. “A consensus on the proposal and the adoption of a negotiating mandate for equivalent improvements in these agreements are necessary in order to promote transparency and good governance in tax matters both within and outside the EU.”

  • EU obliges UK and Germany to modify Swiss tax deals
    • 5 March 2012, the European Commission announced that it had persuaded Germany and the UK to renegotiate key parts of the bilateral tax deals they have signed – but not yet ratified – with Switzerland.

      Under the arrangements, the Swiss authorities were due to levy withholding taxes on German and UK clients with Swiss bank accounts and transfer the proceeds to their home tax authorities. But EU Tax Commissioner Algirdas Semeta said matters already covered by the EU savings tax directive should not be negotiated individually by any of the bloc’s member states.

      When countries make bilateral tax agreements with other nations, EU policy calls for them to leave out any areas covered by a common European framework, Semeta said. In the case of savings income, the bloc has existing information-exchange rules and is working on additional measures related to interest payments, ownership stakes and the 27-nation EU’s relationship with Switzerland.

      “We very clearly explained to our German and British colleagues what has to be changed in order to make them comply with EU legislation,” Semeta said. “Both those countries agreed to renegotiate these provisions.”

      In a separate letter, sent to the Danish EU presidency and to all EU finance ministries, he advised that the 27 EU member states “should refrain from negotiating, initialling or ratifying agreements with Switzerland” if any of the provisions interfered with EU legislation.

      In his press briefing, the Commissioner insisted that it would be far better to negotiate a collective EU agreement with Switzerland and reiterated calls for EU governments to mandate the commission to do so. He also urged member states to approve a proposed tightening of rules aimed at curbing intra-EU tax evasion, which takes advantage of stricter bank secrecy rules in countries such as Luxembourg and Austria.

      On 20 March, Switzerland and the UK signed a Protocol of Amendment that supplements the withholding tax agreement of 6 October 2011 by excluding Interest payments from the agreement’s scope. Inheritance is also now covered by the agreement in order to eliminate a loophole. In the case of inheritance, the heirs must consent to either collection of a tax or disclosure. The agreement is ready for deliberation by the UK parliament.

  • Five EU states agree to help US enforce FATCA
    • 8 February 2012, the five largest European countries signed an agreement to assist the US government to implement the Foreign Account Tax Compliance Act (FATCA) when it comes into effect in January 2013.

      FATCA requires foreign financial institutions (FFIs) to report all their US clients’ dealings to the US Internal Revenue Service. They must also block payments to US clients and to other FFIs if ordered to do so by the IRS, and must close accounts belonging to individuals regarded by the US as delinquent. For banks that refuse to comply, the US will levy a 30% withholding tax on their earnings from US investments.

      The legislation has been much criticised, partly due to the compliance costs and partly because it would require banks in some jurisdictions to break domestic laws. In particular, banks in EU member countries are bound by the 1998 EU Data Protection Directive, which includes a general ban on the transmission of sensitive personal information to the US.

      But in a joint statement “regarding an intergovernmental approach to improving international tax compliance and implementing FATCA”, the governments of Germany, France, Spain, Italy and the UK have undertaken to collect this client account information from banks within their borders and pass it on to the US tax authorities on the banks’ behalf.

      Financial institutions from the five EU member states will be exempted from withholding at the source 30% of certain payments to “recalcitrant” account holders or other financial institutions. It is not clear whether banks will be permitted to opt out of this scheme if they elect not to comply with FATCA.

      In return the US has committed itself to collect information on US bank accounts operated by European residents and automatically pass it to the relevant national tax authority. This so-called “reciprocity” arrangement would be based on the countries’ existing bilateral tax treaties.

      The European Commission issued a statement approving the agreement. It noted that FATCA compliance could have cost European multinational banks as much as US$100 million if they had had to achieve it individually. “Any member state that wants to should now be able to adopt this government-to-government approach to information exchange through coordinated bilateral agreements with the USA,” it said. Such coordination, noted the Commission, “could, at a later stage, form the foundation for wider cooperation on information exchange between the EU and the US.”

  • Hong Kong and Jersey sign tax treaty
    • 24 February 2012, Hong Kong and Jersey signed a double tax treaty setting out the allocation of taxing rights between the two jurisdictions. The treaty, which incorporates the latest OECD standard on exchange of information relating to tax matters, will come into force after the completion of ratification procedures on both sides.

      The treaty is the twenty-third comprehensive Double Tax Agreement concluded by Hong Kong. It is also the third full DTA that Jersey has signed that complies with the OECD Model Agreement following treaties with Malta and Estonia. Jersey Finance, the promotional agency for Jersey’s financial services industry, said the treaty reinforces Jersey’s focus on building business in Asia. Jersey Finance has had a permanent office in Hong Kong since 2009.

  • India ratifies multilateral tax assistance convention
    • 27 February 2012, India ratified the Convention on Mutual Administrative Assistance in Tax Matters, a multilateral agreement developed jointly by the Council of Europe and the OECD that was opened for signature to all countries in June last year. India is the first country outside the membership of the OECD and the Council of Europe to become a party to the Convention.

      The Convention provides a multilateral basis for a wide variety of administrative assistance, including information exchange on request, automatic exchange of information, simultaneous tax examinations and assistance in tax collection. The current signatories are: Argentina, Australia, Belgium, Brazil, Canada, Denmark, Finland, France, Georgia, Germany, Greece, Iceland, India, Indonesia, Ireland, Italy, Japan, Korea, Mexico, Moldova, Netherlands, Norway, Poland, Portugal, the Russian Federation, Slovenia, South Africa, Spain, Sweden, Turkey, Ukraine, the UK and the US.

  • Indian Supreme Court overturns Vodafone tax case
    • 20 January 2012, India’s Supreme Court ruled that UK telecoms group Vodafone was not liable to pay a US$2.2 billion tax charge on its US$11.2 billion acquisition of a controlling stake in an Indian cellphone company from Hong Kong’s Hutchison Whampoa in 2007.

      The acquisition deal was structured as a transaction between Vodafone’s Dutch subsidiary and a Cayman Islands-based company that held Hutchison Whampoa’s India assets. India’s tax office claimed Vodafone was liable to withhold capital gains tax because most of the assets from the deal were based in India.

      Vodafone contested the tax charge on the grounds that the deal was between two overseas companies, the tax was applied retrospectively and capital gains tax is usually applied to the vendor rather than the purchaser. It appealed to the Supreme Court after losing the case in the Bombay High Court in 2010.

      The three-judge Supreme Court panel held that the Indian revenue authorities did not have jurisdiction to tax the deal because it was structured as a transaction between two foreign entities. It agreed with Vodafone that the deal was not subject to capital gains tax – and Vodafone therefore had no obligation to withhold tax – even though the main asset changing hands was a controlling interest in an Indian cellphone company.

      The offshore transaction was a “bona fide” structure, said Chief Justice S.H. Kapadia. The fact that Hutchison’s Cayman Islands unit was in place for several years before the deal suggested that the deal structure was not created with the purpose of avoiding taxes. The court said taxing Vodafone “would amount to imposing capital punishment for capital investment”. It directed the tax office to refund the 25 billion rupees (US$500 million) that Vodafone had deposited, along with 4% interest.

  • India’s 2012 budget targets non-residents
    • 16 March 2012, India’s Budget for 2012 contained a number of proposals that will have negative implications for non-residents – making indirect share transfers outside India subject to tax in India, introducing a general anti-avoidance rule (GAAR), tightening requirements to obtain benefits under India’s tax treaties, the application of withholding tax to non-residents regardless of their presence in India, as well as a broadening of the definition of “royalty”.

      Following the Supreme Court’s decision in the US$2.2 billion Vodafone case in January, it had been expected that the Indian government would introduce rules to enable India to tax cross-border transactions in which the underlying assets are located in India. Under existing law, a foreign company is liable to tax in India on income accruing in or deemed to accrue in India or income received in India. In the context of a transfer of shares, income is deemed to accrue in India if it accrues through or from the transfer of a capital asset situated in India.

      Under the Budget proposal, India would be permitted to tax capital gains arising in the hands of a non-resident from the transfer of shares in a company incorporated outside India that, in turn, has “substantial” assets or interests in India. The “situs” of shares in a company incorporated outside India would be deemed to be in India if the shares derive their value, whether directly or indirectly, “substantially” from assets located in India. The budget amendments also clarify that, with effect from 1962, gains from indirect transfers are includable in deemed income.

      Also retroactive to 1962 is a proposal to broaden and clarify the scope of the withholding tax rules. Under the measure, all payers, whether resident or non-resident, that have a business connection in India would be required to withhold tax at source if the payment would be chargeable to tax in India. This obligation would apply regardless of whether they have a residence, place of business, business connection or any other presence in India.

      The proposed GAAR, to be introduced as from 1 April 2013, is intended to tackle aggressive tax planning and the use of low-tax jurisdictions for residence and the sourcing of capital. It would codify the substance-over-form doctrine in which the real intention of the parties, the purpose of the arrangement and the effect of the transactions concerned would be taken into account to determine the tax consequences of those transactions, regardless of the legal structure used by the taxpayer. The GAAR would give the tax authorities broad discretion to characterise a transaction as aimed at avoiding taxation and to ignore an arrangement carried out exclusively for the purpose of avoiding tax.

      The Budget proposes to introduce specific requirements for obtaining benefits under India’s tax treaties. Non-resident beneficiaries of income would be required to submit a tax residence certificate, although this would not be conclusive proof of eligibility.

      The Budget proposes to clarify retroactively that “royalty” includes payments made for the use of, or the right to use, computer software including the granting of a licence, regardless of the medium through which the right is transferred. Royalty would include consideration for any right, property or information regardless of whether the payer retains possession or control and regardless of the location.

      It is proposed to bring forward the Advance Pricing Agreements programme, initially included in the Direct Tax Code Bill 2010, by introducing it in the Finance Bill 2012. Under the proposal, the Central Board of Direct Taxes would be empowered to enter into an APA with any person to determine the arm’s length price or the method to be used to determine the arm’s length price of an international transaction. An APA would apply only to international transactions and would be valid for either a period of five consecutive years or the period specified in the agreement.

  • Jersey introduces Private Placement Funds
    • 26 January 2012, Jersey extended its funds regime through the introduction of Private Placement Funds, which are closed ended funds restricted to less than 50 sophisticated, professional investors and with a minimum investment or commitment level of £250,000 or currency equivalent.

      Similar in scope to the existing COBO (Control of Borrowing Order) private funds, the new fund offering is designed for “fast track” approval, usually within three business days, and will complement the existing Expert Fund regime, which also provides a streamlined approval process. They are targeted for use across the alternative asset classes, including real estate, private equity, mezzanine, cleantech and emerging market funds.

  • Liechtenstein Disclosure Facility extended
    • 7 February 2012, the UK and Liechtenstein governments agreed to extend the Liechtenstein Disclosure Facility (LDF) – which was signed in August 2009 and was to run from 1 September 2009 to 31 March 2015 – for a further year. They also initialled a new double tax treaty.

      Liechtenstein was the only European Economic Area (EEA) member without a tax treaty with the UK. The treaty, which will now go through formal procedures of signing and ratification, is expected to come into force from 1 January 2013.

      The LDF was designed to enable UK residents to legitimise their tax affairs for the past and ensure they are tax-compliant for the future. Dave Hartnett, Permanent Secretary for Tax at HMRC, said: “As the number of disclosures already exceeds the total we originally expected for the whole period of the LDF, we have agreed with the Liechtenstein Government that it makes sense to extend the facility by one year to 5 April 2016.”

  • Oman accedes to the Apostille Convention
    • 30 January 2012, Oman’s instrument of accession to the Hague Convention Abolishing the Requirement for Legalisation for Foreign Public Documents – the Apostille Convention – entered into force. It was deposited last May. It became the first Gulf state to join the Convention.

      The Apostille allows specific types of foreign public documents, including patents, court rulings and notarial attestations of signature, issued in one of the signatory countries to be certified for legal purposes in all the other signatory states. Apostilles can only be issued by the designated authority in the country where the public document originates.

  • Russia ratifies Cyprus tax treaty protocol
    • 15 February 2012, the Russian State Duma ratified the Protocol to the existing double tax treaty between Cyprus and Russia, which was signed on 7 October 2010. Cyprus ratified the protocol in August 2011. The Protocol requires the approval of the Russian President and is expected to come into force as from 1 January 2013, except in respect of the sale of shares in companies deriving their value primarily from the real estate, which is to be applied from 1 January 2017.

      There are no changes to the existing withholding tax rates applying to cross-border payments of dividend, interest and royalties, although the Protocol clarifies that distributions from mutual funds and similar collective investment vehicles – other than those primarily investing in immovable property – will be subject to the normal withholding tax rates applying to dividends.

      The exchange of information article has been revised in line with article 26 of the OECD Model Tax Convention and reflects the changes that have already been introduced in the Cypriot tax legislation since 2008. The limitation of benefits article applies to tax residents of Russia or Cyprus which are not companies registered in either of the two states and only in cases where the tax authorities of the two countries agree that the main purpose or one of the main purposes of the company is to obtain the benefits of the agreement.

      Ratification should result in Cyprus being removed from the so-called “black list”, which currently lists 42 countries. This would mean that dividends received in Russia from Cypriot sources will qualify for the Russian dividend participation, if conditions are met, and the zero corporate tax rate would apply.

      Russia also signed similar protocols with Switzerland and Luxembourg last year, in September and November respectively. These have not yet been ratified.

  • Seychelles amends IBC Act
    • 27 December 2011, the International Business Companies (Amendment) Act was brought into force to oblige companies to produce and maintain financial information on an annual basis and for companies incorporated in the Seychelles to ensure that all corporate records, including shareholder registers, are kept and maintained in the Seychelles. Further, controls are being brought in to restrict the use and issue of bearer shares.

      The changes do not make ownership and accounting information available to the public but increase the information that is required to be kept in the Seychelles and which will now become more easily accessible to scrutiny by the Seychelles regulatory and fiscal authorities through the courts and other regulatory investigation systems.

      The Seychelles government has committed to introduce a single corporate law regime to be brought about under a new Companies Act. A draft of the proposed new Companies Act has been circulated to stakeholders for consultation and review and a corporate law consultative committee has been established.

      The new Companies Act aims to bring regulation of all companies in the Seychelles, be they domestic or “offshore”, under the sole jurisdiction of a single registrar, thus enabling information – or at least the means to obtain information – to be available from a single source when required for regulatory investigations. The law is also intended to ensure that other legislation already providing certain regulatory investigation tools can be better dovetailed with the law governing all corporate entities in the Seychelles.

  • South Africa budget proposes 15% dividends tax
    • 22 February 2012, the Budget proposals set the new dividends tax – which will replace the 10% Secondary Tax on Companies (STC) on 1 April – at a 15% rate, rather than the 10% rate that had been widely anticipated. It is also proposed that the withholding tax rates on royalty and interest income be increased to 15%. In the absence of tax treaty protection, non-resident investors are currently subject to withholding tax rates of 12% on royalties and 10% on interest.

      The capital gains tax (CGT) inclusion rate on the sale of capital assets by individuals after 1 March 2012 is set to rise to an effective rate of 13.3% from the previous maximum rate of 10%. At the same time it is proposed that the effective CGT rate for companies increases from 14% to 18.6%, although the date of implementation is not yet clear. The intention is to achieve greater parity between the income tax and CGT consequences for transactions.

      Non-resident companies are currently taxed at a rate of 33% on income earned in South Africa, while domestic companies are taxed at a rate of 28%, plus the 10% STC in respect of dividends declared. As a result of the impending repeal of the STC on domestic companies it is proposed that, as from 1 April 2012, the rate applicable to external companies will also reduced to 28%.

      Draft legislation is due to be issued in June 2012 and will be brought into force later in the year or in early 2013.

  • Swiss canton dumps lump-sum taxation
    • 11 March 2012, Appenzell Outer Rhodes became the third canton to abolish lump-sum taxation for wealthy foreign residents after voters approved a proposal by the centre-left Social Democrats. In a similar ballot in canton Lucerne, voters rejected abolition but opted to increase the tax rate from five to seven times the annual rental value of the residence.

      Over the past two years, cantons Zurich and Schaffhausen have voted to do away with the preferential tax system, while St Gallen and Thurgau have raised their tax level. Further cantonal votes are scheduled later this year.

      Lump-sum taxes have been a feature in Switzerland since 1920, allowing cantons to ignore the wealth and income of wealthy foreign residents as long as this has been earned abroad. Communes, cantons and the federal government earn about SFr668 million from these agreements.

      On 6 March, the Swiss Federal Senate confirmed that wealthy foreigners with no Swiss income would be able to continue to benefit from lump-sum tax agreements, although they will pay slightly more. The House of Representatives still has to approve the change in current legislation.

  • Swiss parliament approves US tax treaty revision
    • 29 February 2012, the Swiss House of Representatives approved an amendment to its 2009 tax treaty with the US, making it easier for the US authorities to identify US taxpayers with undeclared Swiss accounts. The Swiss Senate had passed the plan in December.

      Switzerland and the US are holding talks to resolve an investigation involving 11 Swiss banks, including Credit Suisse and Julius Baer. The amendment would “significantly increase” the amount of client data eligible for administrative assistance.

      Specifically, the plan would allow Switzerland to hand over data on suspected tax evaders, even if the US tax authorities are unable to identify alleged offenders by name or bank account. Switzerland will grant administrative assistance, including for group requests, in cases where the US tax authorities produce clear evidence of a suspected offence by a bank and can detail a “pattern of behaviour”.

      The Swiss government and the US Senate must both ratify the amendment. Finance Minister Eveline Widmer-Schlumpf earlier pledged that the treaty would not be ratified before both countries agreed on a solution to the negotiations involving the 11 banks.

      The Swiss finance ministry confirmed, on 31 January 2012, that encrypted data relating to Swiss banks’ clients in the US had been transmitted to the US tax authorities. Full access to the information, with names of client advisors, would only be provided on a case-by-case basis or once a tax agreement was in place between the two countries, the ministry said.

      Last December the US tax authorities issued an ultimatum to 11 Swiss banks to hand over thousands of client names and pay billions in fines to avoid prosecution for tax evasion in the US. The banks were to provide all correspondence with offshore clients over the past 11 years – with deadlines set for the end of December 2011 and the end of January 2012.

      The US Department of Justice has been targeting Swiss banks since it pressured the Swiss authorities to amend banking secrecy laws to allow UBS, the biggest Swiss bank, to hand over the names of nearly 4,500 US clients in 2009. It has been using information gathered from a series of prosecutions and from recent Offshore Voluntary Disclosure Programmes to build cases against other Swiss banks.

      The Swiss government, which is seeking to negotiate a global solution with the US for its entire banking industry – not just the 11 banks under threat – intervened and persuaded the banks to encrypt the data for the time being. The offer of key data was intended as an inducement to increase the pressure on the US side.

      However, on 2 February, the US Justice Department indicted Wegelin, the oldest Swiss private bank, on charges that it enabled US taxpayers to evade taxes on at least US$1.2 billion hidden in offshore bank accounts. It is the first time that an overseas bank has been indicted by the US for enabling tax fraud by US taxpayers.

      On 22 February, the Swiss government also agreed in principle on extending due diligence requirements of banks and improved legal assistance on tax matters with other countries. The finance ministry has been mandated to prepare concrete measures by next September

      Widmer-Schlumpf said the policy was designed to outline the strategy for a “credible, tax compliant and competitive Swiss financial centre.” The aim is to settle past tax problems with individual countries through amended deals and a withholding tax to ensure that investment income and capital gains of Swiss bank clients living abroad are taxed in line with international regulations.

      Widmer-Schlumpf said the Swiss cabinet had agreed on three tenets, including upgrading due diligence rules to prevent banks accepting untaxed assets. Clients would also be required to make a declaration on the fulfillment of their tax obligations in their home countries.

      “We are convinced that this strategy allows us to live up to a legitimate demand of bank clients for privacy and to the equally legitimate demands of foreign countries to tax their citizens,” she said. However the cabinet has continued to refuse the adoption of automatic exchange of information, notably demanded by the European Union.

  • Swiss regulator calls for more transparency
    • 27 March 2012, Swiss Financial Market Supervisory Authority (FINMA) director Patrick Raaflaub warned that Switzerland would lose its competitive edge unless the tax evasion issue was wholly resolved. He said the proper way to solve the problem was with enhanced bank data exchanges. While recognising Swiss efforts to purge tax evasion assets, he nevertheless urged a “radical rethink” to address growing international demands for more data.

      “Restricting administrative assistance as much as possible and only supplying the client details that are absolutely necessary to foreign partner authorities in both the tax and supervisory fields was a conscious and politically accepted decision enshrined in law for many decades,” he said. “As regards the international collaboration between authorities especially, it is clear that Switzerland’s restrictive approach is no longer meeting international expectations.”

      The Swiss Bankers Association (SBA) rejected Raaflaub’s concerns, arguing that the regulator had no authority to intervene in such matters. The regulator said it was duty bound to report to politicians its concerns that a lack of tax transparency could continue to undermine the financial sector.

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