The UK/Swiss deal

I commented on the UK/Swiss tax deal in my blog of 26 August 2011. The agreement provides a cash strapped UK Exchequer with an opportunity to secure unpaid tax from UK citizens who have undisclosed bank accounts in Switzerland.  The price, however, is that Swiss banks and their clients can maintain confidentiality.  For past years, the banks will make a one-off payment to HMRC on behalf of their clients at an effective tax rate of 34%, although the actual tax rate is likely to be somewhat lower.  For future years, the banks will deduct an amount annually from assets held by them, again on a no-names basis. The withholding tax rate will be 48% on interest income, 40% on dividend income and 27% on capital gains.

Enter the European Commission

European Commission lawyers have now concluded that the bilateral agreement, which is critical to the Exchequer’s attempts to maximise the tax take for UK Plc, is in breach of EU laws.  The men in  Brussels have threatened to take action against the UK unless ministers renegotiate the agreement with Switzerland.

In an interview with the Financial Times, the EU’s Tax Commissioner, Algirdas Semeta said he was “ready to defend this key principle” if no progress is made.  Mr Semeta concluded:

If we are unable to sort out these problems then it is clear that as guardians of the treaty we will have to proceed with the instruments that are in our hands.

What’s upsetting the EU?

Upsetting Mr Semeta and his colleagues is the fact that the deal agreed between Britain and Switzerland undermines the EU’s attempts to force Switzerland and other ‘tax havens’ to waive banking secrecy and sign up to the automatic exchange of information.  The Commission is also unhappy that some details of the agreement, including the rates and application of withholding tax, may also clash with the EU savings directive and other legislation.

Where now?

In an interview with the Daily Telegraph in 2009, Dave Hartnett, Permanent Secretary for Tax, gave a stark warning to the middle classes that some of them will “end up in tears” as HMRC  prepared to take a hard line on foreign holdings. He said: “I think our top priority right now is the work we are doing to end tax secrecy, particularly in tax havens“. Notwithstanding these comments, Mr Hartnett is a big supporter of the UK/Swiss agreement and would much prefer it to remain unchallenged.  In a recent interview with the CIOT he said:

I don’t think it does let fraudsters off, because we weren’t going to catch them anyway… we don’t think banking secrecy will disappear in Switzerland over any time in the foreseeable future, certainly not in the next 10 years … so what we are doing is collecting back taxes from people who we couldn’t identify, and at a time when our nation has a deficit it seemed like a very sensible thing to be doing.

Unfortunately, precedent may be against Mr Hartnett.  The EU Commission’s threat to take Britain to the European Court of Justice is strikingly similar to the dispute between the EU and US airlines over air space treaties at the beginning of 2000.  Readers may recall that in 2002 the ECJ ruled that airlines had to negotiate with the EU as a whole, rather than individual member states securing routes through European air space.  The ruling destroyed a number of bilateral air agreements between US airlines and EU member states.  I await the eventual outcome of this latest controversy with considerable interest.