Financial
Stability
Non-Cooperative
Countries or Territories
Low
or No Taxation Regimes
Tax
Information Sharing
In light of the recent trend towards globalization, the United
States and the European Union, as well as many multi-national bodies(1), have become more aware of the need to improve
regulation of the international financial markets. To this effect, various
initiatives have been introduced regarding, for example, international
capital flow, risks of bank default and banking stability, anti-money
laundering and corruption measures, and increased exchange of personal and
tax-related information between fiscal and supervisory authorities. Many
international organizations and countries have recently initiated or
backed surveys, reports and inquiries intended to classify the different
international financial centres and so-called 'tax havens' in an attempt
to achieve these objectives. This update reviews the reports issued since
last year, in order to illustrate perceptions of Switzerland as an
international financial centre from an international regulatory point of
view.
Three international organizations recently published reports
on different financial marketplaces, including Switzerland. The reports
emphasize different criteria, such as financial stability, existing
anti-fraud and anti-money laundering measures, and fiscal evasion
measures.
Switzerland has made considerable efforts during the last
10 years to maintain and improve its reputation as one of the premier
international financial centres, introducing and enforcing modern
legislation and regulation in many of the areas that are dealt with by the
surveys, reports and initiatives.
Financial Stability
The first such report was issued by the Financial Stability Forum (FSF)
in April 2000. The FSF was created by the G-7 (Group of Seven) to inform
itself on the issue of global financial stability in the various
international financial centres, with emphasis on adherence to
international standards of soundness and transparency in respect of
international capital flows, bank stability and risks of default. In this
classification, the FSF compared and ranked 42 offshore financial centres
(OFCs) with perceived significant offshore activities, focusing on their
financial instability risks, and taking into consideration their
supervisory authorities, laws and regulatory framework in banking,
securities and insurance matters. OFCs were ranked according to their
supervisory excellence and the degree to which they cooperated in
international financial capital flows, thereby indicating the extent of
their adherence to international 'standards' of financial fitness and
transparency. While the report was not intended to condemn offshore
activities as a whole, it does point out the dangers and risks that
inadequate financial supervision or laws and regulations and their
enforcement in OFCs may create for global financial stability.
The report establishes three categories of countries and jurisdictions,
which are as follows:
- Group I. These OFCs have efficient and satisfactory financial
laws, regulatory frameworks and supervisory systems. Switzerland is
designated as one of the OFCs in this group. The other OFCs are
Luxembourg, Ireland (Dublin International Financial Services Centre),
Jersey, Guernsey, Isle of Man, Hong Kong and Singapore.
- Group II. These OFCs also have financial laws, regulatory
frameworks and supervisory systems relative to their international
financial activities, but the FSF is of the opinion that they would most
likely improve the most as a result of the FSF survey. The OFCs in this
group are Andorra, Gibraltar, Malta, Monaco, Bermuda, Barbados, Bahrain,
Macao and Malaysia (Labuan).
- Group III. These OFCs have in many cases financial laws,
regulatory frameworks and supervisory systems relative to their
international financial stature. However, the FSF is of the opinion that
they present the greatest risks to global financial stability based on
the size of their banking, securities and/or insurance activities in the
international sphere. These OFCs could benefit from the FSF assessment
by showing their commitment to improve their standards of financial
supervision and cooperation with supervisory authorities in other
jurisdictions. The FSF felt that by publication of the report these OFCs
could undertake to improve the quality of their financial regulatory
institutions and legal frameworks, whether in cooperation with, for
example, the IMF (International Monetary Fund) or otherwise. The Group
III OFCs are Cyprus, Liechtenstein, Anguilla, Antigua, Aruba, Bahamas,
Barbuda, Belize, British Virgin Islands, Cayman Islands, Netherlands
Antilles, St Christopher and Nevis, St Lucia, St Vincent & the
Grenadines, Turks & Caicos, Costa Rica, Panama, Lebanon, Mauritius,
Cook Islands, Marshall Islands, Nauru, Niue, Samoa and Vanuatu.
The FSF report thus falls into line as part of the strategy of the G-7
and OECD (Organization for Economic Cooperation and Development) to create
multilaterally or bilaterally, or in default of same to impose by threat
of sanction, common international standards in all OFC financial affairs
in respect of financial supervision, legal framework, international
cooperation between supervisory authorities and information sharing with
respect to international capital flows. Therefore, the FSF report is to be
viewed in the context of the OECD and Financial Action Task Force (FATF)
reports, which likewise have focused on tax havens.
Non-Cooperative Countries or
Territories
A second report was published on June 22 2000 by
the Financial Action Task Force (FATF). This identifies 15 different
so-called 'Non-Cooperative Countries or Territories', which lack effective
anti-money laundering legislation and regulatory frameworks according to
FATF guidelines. The purpose of the report was to identify these
jurisdictional insufficiencies, which undermine effective international
anti-money laundering efforts. Switzerland is not mentioned, due to its
10-year effort to combat money laundering through relevant criminal
legislation and, since 1997, through its new anti-money laundering law.
This law is considered to be one of the world's most efficient anti-money
laundering legal and regulatory regimes, and is often cited as a model.
The 15 jurisdictions named in the report were Liechtenstein, Bahamas,
Cayman Islands, Dominica, St Christopher and Nevis, St Vincent & the
Grenadines, Panama, Russian Federation, Israel, Lebanon, Cook Islands,
Marshall Islands, Nauru, Niue and Philippines.
The FATF report has
been made available to other multi-national bodies, such as the G-7, OECD,
IMF and World Bank, so that they can study its recommendations in order to
determine what actions should be taken to ensure that the jurisdictions
listed implement effective anti-money laundering measures. In addition,
the FATF members themselves are invited to take appropriate
counter-measures to ensure that their own anti-money laundering legal and
regulatory frameworks are not further undermined. These counter-measures
may include the following:
- requiring FATF-member financial institutions to adopt appropriate
client identification procedures in respect of financial transactions
with a non-cooperative country or territory;
- increasing reporting requirements on FATF-member financial
institutions in respect of financial transactions with a non-cooperative
country or territory;
- restricting or prohibiting financial transactions made by
FATF-member financial institutions with a non-cooperative country or
territory; and
- restricting or preventing correspondent facilities provided by
FATF-member financial institutions to their correspondents located in a
non-cooperative country or territory.
Low or No Taxation Regimes
A third report was issued on June 26 2000 by the OECD. It establishes a
blacklist of 35 tax-haven jurisdictions which, according to the OECD,
facilitate fiscal fraud and evasion because of their lack of cooperation
and information sharing. The OECD report followed the 1998 OECD Report on
Harmful Tax Competition, which listed 47 tax havens that had either low or
no taxation. The other condition for listing was the existence of at least
one of the following criteria:
- legal or regulatory framework prohibits tax information exchanges
with the tax authorities of other tax jurisdictions with respect to a
taxpayer of that low or no taxation tax haven;
- lack of transparency in respect of the low or no taxation tax
haven's laws and regulations;
- lack of 'substantial' economic activity by a taxpayer benefiting
from the tax haven's low or no taxation regime.
Prior to publication of the blacklist, six jurisdictions - Cyprus,
Malta, San Marino, Bermuda, Cayman Islands and Mauritius - agreed to bring
their respective legal and regulatory frameworks into line with OECD
standards with respect to information exchange. The respective
jurisdictions must adopt these legislative revisions by December 2005 at
the latest. Six other jurisdictions were not named on the blacklist, since
the OECD believed that they do not meet OECD tax-haven criteria. These are
Costa Rica, Jamaica, Dubai, Brunei, Macao and Tuvalu.
The OECD
report points out that the 35 blacklist jurisdictions are potentially
dangerous for international fiscal exchanges and stability in respect of
the tax bases of OECD members. The real objective of the OECD is thus to
equalize fiscal regulation in the different jurisdictions to create a
'level tax playing field' according to OECD norms. This will permit real
cooperation between the tax authorities of the various jurisdictions,
rather than harmful tax competition, which, again according to the OECD
report, only favours tax havens to the detriment of OECD members. The real
intent behind the OECD initiative is therefore simply to eliminate what
the OECD calls 'preferential' taxes in different jurisdictions. The 35
jurisdictions are: Andorra, Gibraltar, Guernsey (with Alderney and Sark),
Isle of Man, Jersey, Liechtenstein, Monaco, Anguilla, Antigua, Aruba,
Bahamas, Barbados, Belize, British Virgin Islands, Dominica, Grenada,
Montserrat, Netherlands Antilles, Panama, St Christopher and Nevis, St
Lucia, St Vincent & the Grenadines, Turks & Caicos, US Virgin
Islands, Bahrain, Liberia, Seychelles, Cook Islands, Marshall Islands,
Nauru, Niue, Tonga, Vanuatu and Western Samoa.
Switzerland is not
mentioned in the OECD report because it is not considered a tax haven
under the OECD criteria. It is nonetheless interesting to point out that
Switzerland, a member of the OECD, abstained from the vote that approved
the report, on the ground that the criteria for defining tax havens are
wrong.
In addition to the OECD blacklist report on tax havens, the
OECD Committee on Fiscal Affairs approved a Report Improving Access to
Bank Information for Tax Purposes earlier this year. The report was
unanimously endorsed by all OECD members, including Switzerland.
Recommendations of the report include:
- elimination of anonymous bank accounts accompanied by bank client
identification procedures;
- voluntary - even unilateral - tax treaty information exchange
between treaty partners; and
- review of banking and/or administrative legislation and regulatory
regimes which restrict or prohibit tax information exchanges, whether in
criminal or civil contexts.
Switzerland was represented by the Swiss federal Finance Department on
this OECD report. Swiss authorities were pleased with the language of the
final report as issued and emphasized that present Swiss law in the
respective areas dealt with by the report complies with the OECD
recommendations. Further, Swiss law already provides for identification of
bank customers and Swiss banking secrecy is not affected by the OECD
report: indeed, Swiss bank secrecy for banking clients is not negotiable.
Finally, the defining principles of Swiss law shall be the guidelines with
respect to any further discussions on the matter. Switzerland already
provides mutual assistance in criminal matters to foreign requesting
states where the crime alleged by the foreign state is also a crime under
Swiss law. As such, Switzerland even now provides de facto
unilateral mutual assistance to requesting states in criminal cases that
involve fiscal matters defined as tax fraud under Swiss law.
Tax Information Sharing
Switzerland cannot afford isolation internationally, and needs to and
does cooperate on the international scene. The main discord between
Switzerland and the OECD is on tax information sharing between Swiss and
foreign tax authorities. While Swiss mutual assistance laws provide
unilateral assistance to foreign states in criminal matters that satisfy
the Swiss legal conditions and Swiss dual criminality, Switzerland must
continually and repeatedly insist that in principle such information
sharing is not part of its culture and is thus not foreseeable. Swiss
isolation internationally can nonetheless be harmful to its financial
sector.
In this respect, during the recent Feira (Portugal)
European Union summit held in June 2000, 15 EU member countries reached a
provisional compromise agreement on tax information sharing under the
Draft Directive on Taxation of Savings Income, effective December 31 2002.
The EU member states estimated that this agreement could only be efficient
if the other important financial centres outside the European Union, such
as Switzerland, adopted similar measures. Since the Swiss economy is
closely linked to that of the European Union, Switzerland will certainly
be called upon to negotiate with the European Union in respect of the key
provisions of the draft directive, that is, the choice given to each EU
member state between implementing a withholding tax framework or tax
information sharing framework in respect of EU resident cross-border
savings held in EU member states. Likewise, the European Union will
probably give Switzerland the choice to either (i) implement a withholding
tax framework in respect of EU-resident Swiss bank clients, or (ii)
implement a tax information exchange framework in respect of EU-resident
Swiss bank clients.
Under the draft directive, EU member states have a choice - some with
grace periods in which to adapt their respective bank secrecy legislation
- following which all EU member states would be required to adopt tax
information exchange frameworks. Certain EU member states such as
Luxembourg have specifically called for negotiations to be held with
Switzerland, which Luxembourg fears would, by virtue of Swiss bank
secrecy, obtain an unfair competitive advantage over Luxembourg as a
banking/financial centre. The two-year suspension period is for the
express purpose of permitting the EU to negotiate with Switzerland and
other bank secrecy jurisdictions in order to obtain undertakings from
these non-EU banking centres to introduce similar legislation that
provides for the exchange of tax information.
If the EU received these undertakings within the two-year period, then
satisfactory agreements in respect of same must be signed on a bilateral
basis. These bilaterals will be subject to unanimous approval by the EU
member states, in addition to referenda in Switzerland requiring double
majorities of both the Swiss people and Swiss cantons. Only then would the
June Feira compromise agreement enter into effect. If no bilaterals are
agreed, then the compromise agreement issued by the Feira summit will
cease to have effect. In the wake of Feira the European Union has already
decided, notwithstanding the results of negotiations with Switzerland and
other banking jurisdictions, to draft a directive in respect of tax
information exchange among EU member states. If Switzerland hopes to avoid
taking account of EU measures providing for tax information exchange, then
it will have to negotiate well and be prepared to offer a viable
negotiation alternative to its traditional refusal to enter into these
fiscal information exchange agreements. A viable alternative might be the
proposal of a Swiss withholding tax system operated on a withholding pool
basis similar to the qualified intermediary system which most Swiss banks
will be implementing from January 1 2001 as regards transactions in US
securities (see Impact
of New US Withholding Tax Rules for Customers of Swiss Financial
Institutions).
Therefore, one of the main challenges to the
Swiss international financial sector for the next few years is
Switzerland's development of equivalent but alternative measures to
administrative information sharing with foreign authorities (eg,
innovative withholding tax measures), at present forbidden by Swiss law,
which simultaneously respect the existing principles of Swiss law
regarding the protection of personal information and the Swiss banking
secrecy owed by law to Swiss bank clients irrespective of nationality or
residence. Perhaps innovative withholding tax measures would provide, for
example, for payment by withholding pool rates without disclosing
beneficial ownership to foreign authorities. This would thus allow for
effective indirect taxation on certain foreign resident Swiss bank
customer savings in Switzerland, while respecting Swiss legal norms
regarding protection of bank client confidentiality under Swiss banking
secrecy.
For further information on this topic please contact David G
Forbes-Jaeger at Secretan Troyanov by telephone (+41 22 789 70 00) or by
fax (+41 22 789 70 70) or by e-mail (gva.mail@secretantroyanov.com).
The Secretan Troyanov web site can be accessed at http://www.secretantroyanov.com/.
Endnotes
(1) These include G-7 (the Group of
Seven), the Organization for Economic Cooperation and Development, the
International Monetary Fund, the World Bank, the United Nations, the
Financial Action Task Force, the Financial Stability Forum and the Basle
Committee of the Bank for International Settlements.
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