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DIPLOMATICA|DEBATEFinal withholding tax in SwitzerlandSettling tax claims while preserving the privacy of bank clientsBy Ulrich LehnerAmbassador of SwitzerlandSwitzerland has recently signed taxtreaties — introducing somethingcalled “the final withholding tax”— with the United Kingdom and Germany.These treaties have aroused theinterest of other governments in Europe(and overseas as well) and have given riseto significant public discussion. What isthe final withholding tax and how doesit work?For tax authorities in industrializedcountries, one of today’s great challengesis how to deal with the undisclosed assetsof their citizens. Voluntary disclosure initiativesare often costly and burdensomefor governments. In the UK, for example,two recent voluntary tax disclosure initiativesneeded the involvement of some7,000 taxpayers to raise US$351 million intaxes.In the light of these efforts, the taxtreaty which the UK recently signed withSwitzerland appears to provide substantialbudgetary income with significantlyless administrative effort. Switzerland— or, rather, Swiss banks — will pay theUK a lump-sum, up-front payment of500 million Swiss francs (US$542 million)which will be refunded to them as sufficienttax revenues are raised from UKresident clients. This sum will be toppedup with further payments based on a oneoff,flat-rate tax on existing undisclosed assetsand, also, a withholding tax on futurecapital income.A similar agreement has been signedwith Germany. The initial lump sumpayment to Germany is even higher,amounting initially to 2 billion Swissfrancs (US$2.17 billion), again followed byfurther payments.14The Swiss National Bank (SNB) serves as the country’s central back. Founded by law on Jan. 16,1906, it began conducting business on June 20, 1907A new financial market strategyTwo years ago, following the upheavalsand changed market structures on globalfinancial markets, the Swiss governmentdecided to follow a new strategy withregard to the Swiss financial centre. Themain elements of this new policy arethe strengthening of international competitivenessand resilience to crises. Atthe same time, the new strategy sought toimprove access to financial markets andto guarantee the integrity of Switzerlandas a financial centre. The new strategy affirmedSwitzerland’s longstanding policyof fighting financial crimes, includingmoney laundering, and of returning illicitassets of politically-exposed personsto their countries of origin, and complementedthis objective by ensuring fullinternational cooperation against tax evasion.The decision by Switzerland to concentrateon the management of taxed moniesin its banks is thus embedded in its financialmarket strategy. It might be usefulto recall at this stage that the financialsector is a supporting pillar of the Swisseconomy. Its contribution to the country’s2010 gross domestic product (GDP), atcurrent prices, of US$598.9 billion, is approximately12 percent.How does the final withholding tax work?Switzerland is not interested in untaxedmoney. In order to provide a satisfactorysolution to partner states to tax theundisclosed assets of their citizens, Switzerlandhas developed the model of thefinal withholding tax. This tax guaranteesthe full remittance of taxes claimedby partner states on the existing untaxedassets and future income of their citizensin Switzerland. The tax is deducted fromthe credit balance of the relevant personon an anony mous basis. More specifically,the Swiss bank deducts a flat-ratetax sum on existing assets from UK andGerman resident clients (past) and oninvestment income and capital gains(future) respectively, and forwards thesesums to the Swiss Federal Tax Administration.The latter then transfers thesemonies to the respective British and Germantax authorities.Once the tax has been levied, the taxliability is deemed to have been settled —hence the term final withholding tax. Thetax rates that will be applied have beennegotiated with both the UK and Germanyand are aligned with the tax ratesapplicable in these countries, in order toavoid any distortion of competition withregard to taxes.Privacy is guaranteedThe question may then be asked whetherthis is the end of bank secrecy — one ofthe pillars of the Swiss banking sector.WINTER 2012 | JAN-FEB-MARDodo von den Bergen