For as long as assets have been at risk there have been strategies to safeguard them. For many investors the first option that springs to mind is the traditional Swiss Bank account. The carefully cultivated Swiss image of security and secrecy dates back to the Middle Ages and until fairly recently has stood resolutely steadfast. However, in the same way that the mighty Alps are breached by mountain passes, so the Swiss banking behemoth is busy facilitating carefully controlled access for the world beyond its borders. Change that once happened at glacial pace is accelerating as Switzerland displays remarkable nimbleness in order to keep its place at the top table of world financial centres.
Swiss Stability - A Product of the Ages and its People
Switzerland has always maintained its political distance from the rest of Europe. It stayed neutral during both World Wars, despite being geographically located in the centre of the conflict. A fairly recent member of the United Nations (which it joined in 2002) it has shied away from full EU membership, preferring the free trade agreement with the EU that has been in place for 40 years. Switzerland has much to recommend it as an asset haven. It is a stable western country with a highly educated workforce – six per cent of whom are employed in its finance industry. Its laws are well established, reducing the risk of unscheduled regime changes – a condition conducive to investor confidence. This mix of stability, protection and privacy is estimated to have attracted one third of offshore funds – half of which are lodged with just two institutions. The inherent risk of institutions ‘too big to fail’ has not eluded the Swiss government.
Focus on Funding Gaps
Since the financial crisis in 2007, cash strapped foreign governments have chipped away at the veil of secrecy that enveloped the banking industry. Following the money is the backbone of forensic accounting and foreign governments wasted little time before knocking on the discrete doors of Swiss private banks. The pressure applied to Switzerland is not unusual amongst offshore financial centres; what makes Switzerland unique is that no other jurisdiction has secrecy so deeply hardwired into its DNA. The concept of banking data security is enshrined in Swiss law – but in practice the guarantees of privacy are limited. Swiss numbered bank accounts are legendary to the public as bastions of secrecy, assuming almost mythical status. In reality, however, there is little difference. All account applications insist on completed forms that clearly trace back to an identified individual, or in the case of a corporate account, the beneficial owner.
Switzerland has over 80 double tax agreements with various countries and in the last few years it has been actively renegotiating them. A key component of the changes is the adoption of Article 26 in the OECD Tax Treaty. This governs the manner in which sensitive data is requested and supplied. In the event of a criminal investigation, personal data must be supplied as requested by a court order. Explicitly forbidden are ‘fishing expeditions’ by foreign governments hoping to stumble into a windfall.
Re-inventing an Industry
These efforts brought Swiss banking practices more in line with global trends of transparency and prudence in the world banking community, but they did not go far enough for the Revenue Services of the world’s wealthy but deficit-laden nations. The USA, together with many European Union members complained that their nationals actively and deliberately used Swiss services to avoid taxation at home.
Demands were made and over time concessions were granted. A spate of amnesties resulted in billions of Euros being repatriated to Germany and Italy. Since July 2005 a withholding tax on interest earned on personal accounts of EU nationals has been levied. The value proposition amongst Swiss banks changed focus to deliver a broader range of services – all served up with a healthy dash of compliance.
In 2012 the tipping point in relations between the United States Revenue Services and Swiss banks was reached – and fell heavily in favour of the Americans. In a case that demonstrated the intent on both sides, the Swiss Government allowed the countries oldest bank, Wegelin & Co to close after it pleaded guilty to helping American citizens avoid tax. The substantially deeper pockets of more mainstream banks saved them from a similar fate, but not before reluctantly handing over relevant account holder details and millions of dollars in fines. A FATCA Model II intergovernmental agreement (IGA) was signed on the 14th of February 2013 between Switzerland and the United States. This contract requires Switzerland to instruct domestic financial entities to register and enter into an agreement with the IRS (the FFI agreement), report directly to the IRS and comply with the final FATCA regulations.
Buoyed by its success the US Government has introduced the wide reaching and not particularly inclusive directive named FATCA or Foreign Account Tax Compliance Act. This initiative requires foreign financial institutions with US clients to register with the IRS and file an annual report giving details of all US account holders. Once account holders are identified the institution must impose a 30 per cent tax on any payments or transfers where such information is not personally declared. Clearly this imposes an onerous obligation on the financial institution but the risks of non-compliance have been well documented and ruthlessly demonstrated. The trend amongst banks is that US nationals are not a cost effective target market resulting in many legitimate account applicants complaining of victimisation on the basis of their nationality.
Closer to home the UK and Germany have put their hands up for a similar deal. Not quite as ‘take it or leave it’ as FATCA, the so-called ‘RUBIK Agreements’ give the account holder a modicum of choice depending on their desire for maintaining secrecy. They may elect to allow their bank to supply details of transactions and go with full disclosure. Alternatively they may agree to a withholding tax levied at source – with tax deducted forwarded on the relevant authorities. In this case the account holder remains secret, but HMRC gets some revenue as calculated by the bank managing the account. Clients not wishing to comply with either of these options will have their accounts closed.
Governments the world over would prefer an individual to put up their hand and negotiate over a coffee rather than in a courtroom. For many investors a safe route to compliance can be found in Liechtenstein in the shape of a Liechtenstein Disclosure Facility (LDF). This agreement can be used by tax and legal firms to help clients declare previously undisclosed assets. After payment of a more favourable penalty on tax due, account holders are free to continue with business as usual while sleeping peacefully at night. In a calculating move, HMRC has made this facility available to funds originating elsewhere.
Broadening its Reach
Changes of this magnitude would shake any industry but Switzerland is rolling with the punches. Co-operating more closely with the international community is a two way street. In return for giving up elements of privacy they are demanding access to markets abroad. The Swiss offering is still very attractive. As regulation becomes more formalised (and expensive), it is expected that the trust industry will face predictable consolidation, resulting in fewer, but higher calibre players emphasising compliance and service. The industry represented by the SATC (Swiss Association of Trust Companies) is very active in this regard and has recently drafted a white paper as to how this should look and is in talks with the financial authorities re the implementation.
Negotiate Locally – Trade Globally
Switzerland is a country of stunning scenic beauty but limited natural resources. No surprise then that an estimated 70 per cent of its economic output is based on services. This focus on services extends across many areas of the economy, making Switzerland a highly sought after place to live and work. Consistently well ranked in Global Competition and Standard of Living Indexes the country presents an attractive option to international firms looking to establish corporate headquarters – and accommodate the high powered executives who run them.
The ‘Swiss Mixed Company’ is a very popular vehicle incorporating the characteristics of a locally domiciled company and also a holding company. The term is more of a tax classification than a legal definition. Rules governing the classification include ensuring that 80 per cent of trading activities take place outside of Switzerland making it particularly advantageous for companies engaged in global trading, financial services, intellectual property management or holding company administration.
The independently minded Swiss allow each Canton (a territorial subdivision of Switzerland) a surprising amount of autonomy in setting tax boundaries beyond the Federal rate currently set at 8.5 per cent. Most Cantons are willing to grant Mixed Companies extensive tax privileges on income and capital, resulting in a blended rate of around 11 per cent.
This allows the Cantons to effectively compete with each other at a personal and corporate level. As you would expect certain cost of living aspects reflect a more benign tax regime, for instance real estate prices are higher in lower tax cantons. In certain Cantons they offer a forfeit or lump sum tax basis for private individuals moving to the area, which is based on a multiple of living costs (typically five times) circa CHF400,000.
Switzerland has created a high-end brand of safety, security and efficiency wrapped up in a national psyche that respects privacy and rewards professionalism. The move towards a ‘white money’ economy is financially and morally sound. Like the Edelweiss, its national emblem with a reputation for resilience and flourishing in harsh terrains, Switzerland will continue to play a leading role in the financial community – and remain the destination of choice for many of the world’s most discerning investors.