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Better cooperation

Andreas Moll

On March 20 2012, the United Kingdom and Switzerland signed a protocol of amendment that supplements the withholding tax agreement of October 6 2011. The aim of the agreement is the effective taxation of UK taxpayers' assets in Switzerland. The agreement provides for withholding tax on future investment income and gains on assets, as well as taxing UK taxpayers' previously untaxed assets in Switzerland.

The agreement between the UK and Switzerland is the first agreement covering the issue of untaxed assets of foreign residents' Swiss bank accounts. Based on banking secrecy, once implemented to protect bank clients' privacy, Switzerland used to grant judicial assistance to other states only when strict requirements were met. Claiming that Swiss banks would use banking secrecy to instigate foreign residents to commit tax fraud, several countries, including the United States, the UK and Germany, have increased pressure on Switzerland in recent years to ease the requirements for obtaining information on Swiss assets in cases of presumed tax fraud.

While these states, and even more the EU, would prefer to establish a system based on the automatic exchange of information in the area of investment income to ensure accurate taxation, Switzerland is not willing to totally give up its banking secrets. As a result, the agreement between the UK and Switzerland combines these two concerns: the protection of bank clients' privacy and the implementation of legitimate tax claims. In accordance with the agreement, the bank client may instruct the bank not to disclose any information to the UK tax authorities. However, in such case, withholding tax on investments of UK taxpayers, which corresponds in terms of content to the UK's taxation of income and gains, will be imposed in Switzerland and paid to the UK.

It is not yet clear if this agreement is compliant with EU law. José Manuel Barroso, president of the European Commission, has declared in the media that the European Commission would never accept an agreement between a member state and a third state if it was not completely in line with EU law. In particular, the EU, which clearly prefers the system of automatic exchange of information, has always been of the opinion that a clause pursuant to which all tax duties are fulfilled by levying a final withholding tax must not be part of such bilateral agreements. In the agreement between the UK and Switzerland, however, the UK explicitly acknowledges that the proposed system is an equivalent solution.

It is planned that the agreement will come into force on January 1 2013 and it can be expected that it will be only the first of many more to come. On March 30 2012, an amendment to a similar agreement entered into by Germany and Switzerland was signed and there are negotiations between Switzerland and other member states of the EU on the same issue.

Despite the uncertainty with respect to compliance with EU law and thus the risk of the EU initiating infringement procedures, member states seem keener to conclude a bilateral withholding tax solution with Switzerland than to wait for the EU and Switzerland to agree on a system of an automatic exchange of information at some point in the future.

The coming years will show whether Switzerland will have been able to enduringly reduce the pressure by entering into bilateral agreements or whether these agreements were just the first step in loosening Swiss banking secrecy, finally ending in the automatic exchange of information.

Andreas Moll

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