Europe | European tax diplomacy

A punch for honest taxpayers?

A tax agreement between Switzerland and Germany is in trouble

|BERLIN

THERE are two strategies for tackling the old Swiss tradition of letting foreigners hide money from tax authorities in secret Helvetian bank accounts. One is America’s, tough as a Wild West sheriff. In 2007 America began cracking down on UBS, Switzerland’s biggest bank. With enough prosecutions and battering, it eventually forced the bank to pay a stiff fine and hand over thousands of names of alleged American tax evaders. When it appeared that some of that money was fleeing to other Swiss banks, such as Julius Bär (see article), America pursued those. One by one, the banks are now releasing data to America’s tax inquisitors.

The other approach is European, less heavy-handed but more comprehensive. Britain, Austria and Germany have struck separate but almost identical deals with the Swiss government that could, in effect, solve the problem. Germany, with the most money at stake, is due to ratify this agreement in the Bundesrat, or upper house, in November, so that it can take effect on January 1st. The trouble is that a majority of the Länder (states) in the Bundesrat now seem intent on killing the deal.

Under the agreement, Switzerland would hand over to Germany between 21% and 41% of the value of every undeclared account with a German owner. This would compensate the government for lost taxes in the past (Germany’s statute of limitations is ten years). Switzerland would then tax future investment income on those accounts at the going German rate of about 26%. Crucially, however, Switzerland would not reveal the identities of these German account holders unless they do so themselves (which many will because it usually works out cheaper).

This option of continued anonymity for past evaders is what offends many Social Democrats and Greens, who are in opposition in the federal parliament but part of the government in several Länder (12 and five of the 16, respectively). Jürgen Trittin, leader of the Greens in parliament, calls it “a punch in the face for honest taxpayers”. The leader of the SPD, Sigmar Gabriel, talks of “organised crime”.

One of the Länder governed by the SPD and Greens, North Rhine-Westphalia, which is also the most populous, continues to hunt down German tax sinners in Switzerland as though there were no bilateral agreement at all. Its finance minister has spent the summer merrily buying CDs of stolen Swiss bank data. The trade in such contraband goes back to 2006, when the first CD with data about German accounts showed up. But this year alone, the catch is already three CDs.

Germany’s highest court has said that the data on stolen CDs may be used to prosecute tax sinners. Yet it sets a disturbing precedent of ends justifying means when those involve criminal theft. Undeniably, though, the approach is effective. Every time a stolen CD hits the headlines, more Germans with undeclared Swiss accounts panic and turn themselves in. The agreement with Switzerland would close this channel, another reason why Social Democrats dislike it.

Critics of the agreement also claim that much of the dodgy money in Switzerland is already leaving for shadier trusts in other tax havens—such as Singapore—thus undermining the agreement before it even becomes law. There is no evidence of this, says Michael Ambühl, the Swiss secretary for international financial affairs. Instead, Mr Ambühl argues, the agreement is good for all sides. Switzerland, where critics on left and right are collecting signatures for a referendum on the issue on November 25th, benefits because it genuinely wants to clean up its reputation. Germany benefits as it will get oodles of money—about €10 billion ($12.5 billion), according to German estimates. And because the deal covers all German money in Switzerland, Mr Ambühl adds, it is better than the American approach of tough but random pursuit of account holders, which brings in little and is arbitrary.

Whether this logic will convince enough Länder governments to seal the deal in November remains to be seen. The FDP, the liberal party that is part of the ruling coalition in Berlin, has proposed renegotiating with the Swiss to toughen the agreement. Switzerland, which has already ratified it, says this can’t be done. Failure, says one German in the negotiations, means a return to an “ice age”.

This article appeared in the Europe section of the print edition under the headline "A punch for honest taxpayers?"

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