Tax evaders keep step ahead of EU

 

By Tom Wright International Herald TribuneWEDNESDAY, MAY 25, 2005GENEVA After more than a decade of haggling, the European Union is now just one month away fromstarting its biggest, coordinated assault on tax evasion: a new law aimed at uncovering - andtaxing - interest earned on the hundreds of billions in savings stashed by EU citizens outside theirhome countries.Yet the windfall of new revenue that some cash-strapped countries, led by Germany and France, hadbeen hoping for is unlikely to materialize, according to bankers in Switzerland and other taxhavens.Not only are historic low interest rates keeping the potential pot to be taxed low, but manyinvestors are restructuring their deposits to legally avoid paying anything, bankers say.Others have already moved their money even farther afield - to places like Singapore - where it canremain hidden from tax collectors at home."We should certainly not expect to see any kind of fiscal miracle," said Urs Roth, chief executiveof the Swiss Bankers Association in Basel.Most European nations have been trying for years to recoup some of the lost revenue - estimated atmillions or billions of euros over the years - on interest earned by their citizens in tax havenslike Switzerland and Luxembourg.Tax amnesties offered in recent years have brought some deposits back, with Italy showing betterresults than Germany. Places like Switzerland are now finding it harder to accept money withoutasking questions because of stricter money-laundering rules adopted since Sept. 11, 2001.But huge amounts of potentially taxable funds remain out of reach of EU tax collectors. InSwitzerland, about 1.2 trillion Swiss francs, or $975 billion, was held by foreign private investorsand some three-quarters of that was not declared to tax authorities, Deutsche Bank estimated in areport last year.The new EU law, which takes effect July 1, allows governments to track at least some of that hoard.Negotiations, which started in 1989, bogged down for years over divisions between nations that lostout on taxes, like France and Germany, and financial centers like Luxembourg and Britain thatprofited from the investment business."It's a very political issue," said Roger Kaiser, a tax specialist at the European BankingFederation in Brussels. "From the start it was very difficult to reach agreement."The law was eventually whittled down to aim at only interest income from savings and bonds. Itcovers only individuals, not companies and trusts, and earnings from other assets, like stocks andderivatives, are exempt.Finance ministers gave their final endorsement to the pact a year ago, but implementation wasdelayed to allow time for countries to pass the necessary legislation."At the beginning we wanted much more," said Maria Assimakopoulou, taxation spokeswoman at theEuropean Commission. "That was the best compromise we could get."In 2007, the EU will review the directive with a view to possibly broadening its scope.In the meantime, neither the commission nor national capitals will speculate on how much revenuethey think they will collect.Generally, EU banks must report interest payments they make to residents of other EU nationsdirectly to those customers' home governments.Banks in Luxembourg, Belgium and Austria, which have banking secrecy laws, can levy a withholdingtax on interest income if clients choose not to have that information given to their homegovernments. The rate starts at 15 percent and will rise to 20 percent in 2008 and 35 percent as ofJuly 1, 2011.Three-fourths of the money collected will be forwarded to the country where the account holder is aresident - without identifying the depositor.Countries like Switzerland or Monaco, which are not in the EU, as well as dependent territories ofEU nations, like Jersey and the Cayman Islands, have also agreed to the withholding tax.The German government, which is one of the biggest losers from tax evasion, estimates its citizenshave some €300 billion to €500 billion, or $378 billion to $631 billion, in so-called offshore bankaccounts.But Charles Hermann, a partner at KPMG, an accounting firm, in Zurich, estimates that Switzerlandwill collect only about 30 million francs to 50 million francs annually in withholding tax."The directive is full of loopholes," Hermann said.Rather than spur depositors to bring their money back home, he expects most will rejigger theiraccounts to avoid any tax by such methods as moving them into trusts.Funds that are less than 40 percent invested in interest-paying assets, like bonds, are also exempt,according to Kaiser at the banking federation.The chief executive of a private, Zurich-based bank, who declined to be identified, said largeinvestors have "got their money structured in a way so it doesn't trigger the taxes."Swiss bankers say the new EU law also has sparked an outflow of money to Singapore, a relativelysafe haven that will not come under the withholding tax.Credit Suisse, Switzerland's second-largest bank after UBS, decided recently to move its head ofinternational private banking, Joachim Straehle, to Singapore from Zurich to take advantage offaster growth rates in Asia."We see lots of money flowing in to Singapore from all over the world these days," Straehle saidduring an interview."I feel Switzerland is becoming more part of Europe," he added. "We need to build up an alternativeto Switzerland, to put our eggs in different baskets."While Switzerland is still a huge financial center, little new money is coming into the country amidthe tightening of financial surveillance, bankers say.Kaiser at the European Banking Federation, which represents 4,500 banks, said some parts of thedirective were still not clearly defined, but conceded that there was little chance of postponing itagain.The law was already held up from a planned start date of Jan. 1 as Luxembourg and other countriesasked for more time to get laws through their Parliaments.A banker from Pictet & Compagnie, a private bank based in Geneva, said he is now advising Europeanclients not to bring funds to Switzerland.In the past, a French family that he advises was able to transfer money to Geneva without payingtaxes at home. By linking the account to a credit card, they could spend the money wherever theytraveled.But now, with tighter control by European governments, using a credit card might raise suspicion,the banker said. The family now buys vacation packages from Switzerland as a way of spending themoney."I'm not advising European clients to bring money to Switzerland anymore," the banker said oncondition of anonymity.Swiss banks are instead opening new branches in European capitals to manage their clients' taxablemoney, he said.http://www.iht.com/bin/print_ipub.php?file=/articles/2005/05/24/business/tax.php