Perpetuating or "Reforming" Swiss Banking Secrecy

An Increase in Interest Income Taxation Favored at the Moment by Switzerland’s Political Parties

Since the concession involving the surrender of the banking records of American clients of Swiss banking giant UBS to the United States government, politicians are poring over ideas of how Switzerland’s financial center might be protected and how banking secrecy might be defended or just amended. However, abandoning the distinction between tax fraud and tax evasion, a Swiss idiosyncrasy, still does not have a majority appeal with the middle-class political parties.

The good news on the issue of the Swiss financial center came on Tuesday from Switzerland’s Federal Department of Justice and Police. The Swiss Justice Minister, Eveline Widmer-Schlumpf, is traveling to Washington next Monday to meet her American counterpart, Eric Holder. Topics of conversation may include the cooperation of legal authorities from both countries, the fight against terrorism and organized crime, questions related to the Guantánamo prison camp, and the complex issues surrounding Swiss banking giant UBS. The governments of the two countries will finally be speaking face to face. The lack of such contacts and a transparent negotiation strategy had been criticized recently by all political parties.

Expanding Taxation at the Source

The central question highlighted in Switzerland’s ongoing domestic discussion is how the financial center can be strengthened or refined over the long term after the special emergency interventions brought about by international pressure. As a long time critic of the banking industry and tax evasion, the Swiss center-left Social Democratic Party (SP) took an aggressive stance on Tuesday and presented its demands at a news conference. Intense discussions are also underway with the other political parties. They want to define their positions in caucuses next week with respect to the anticipated urgent debates in the March session.

The discussions are generally taking two tracks. One track calls for reform, meaning a restriction of banking secrecy, and another track calls for a defense of banking secrecy and accompanying measures where applicable. The middle-class parties want to defend unrestricted banking secrecy as much as possible. As a substitute for the surrender of client information, as UBS did last week under pressure from the United States, Switzerland’s two centrist political parties, the Free Democratic Party (FDP) and the Christian Democratic People’s Party (CVP), are looking at an increase in the collection of taxes at the source of the income. Switzerland already does this within the context of the interest income taxation agreement with countries in the Euro Zone. An increase would be possible substantively and geographically. Taxation of interest income has thus far included only individual people, or “natural persons” in a legal context, for whom the possibility of tax evasion would be eliminated upon discovery by legal authorities. This could also be broadened by taxes on other sources of income, namely dividends. And globally, it would be worth considering the conclusion of analogous agreements with non-Euro Zone countries, in particular, the United States. The Swiss Federal Council has brought up this possibility before but not done much about it. Gabi Huber, the FDP party whip, suggests that this offer be brought up in return for a free trade agreement, something that the Swiss Federal Council has wanted to negotiate with the United States for quite some time.

Tax Fraud or Tax Evasion?

In contrast, the distinction between tax fraud and tax evasion is a central issue in banking secrecy, as it has been traditionally understood in Switzerland. On Tuesday, the leader of the Social Democratic Party (SP), Christian Levrat, called for only taxing just the one-time and negligent type of tax evasion, such as simple omissions in a tax return, as a harmless violation. On the other hand, deliberate and repeated tax evasion should be punished as tax fraud. As a consequence, the administrative and legal cooperation, which Switzerland has granted to authorities from other countries thus far only with tax fraud, would be correspondingly broadened.

In recent days, other individual politicians, such as CVP party whip Urs Schwaller, and FDP members Didier Burkhalter, Johann Schneider-Ammann, and Christian Wanner, have said that Switzerland must certainly reconsider the distinction between tax fraud and tax evasion because it would not otherwise be understood abroad. Schwaller, however, responded to a question by saying that, for him, this “could be a possibility only in the medium term and only internationally with respect to other countries.” For the time being, the expansion of interest income taxation is now at center stage, and domestically there would really be no need for action. A more strict approach to foreign banking customers would mean that, in the double taxation agreement, the criterion for doubling the punishment would have to be abandoned since the same offenses can be prosecuted in both Switzerland and abroad.

Unnecessary Constitutional Standard

The conservative Swiss People’s Party (SVP) does not want any involvement with either an expansion of the interest income tax or a restriction of banking secrecy. In contrast, it wants to anchor banking secrecy in the Federal Constitution. Because the party failed to do this in Parliament once before, it now wants to take a new approach. Furthermore, National Councilman Hans Kaufmann (SVP, Zürich) wants to diminish the blackmailing of Switzerland with further measures such as the withdrawal of gold reserves from the United States and the prohibition of trustee deposits by Swiss banks with foreign institutions. The FDP and CVP are certainly not taking stock in anchoring banking secrecy in the Constitution any longer. Since this was not useful in dealing with the United States just now, embedding banking secrecy in the Constitution would only have a purely symbolic meaning.