ABBL

“A good puzzle, it’s a fair thing. Nobody is lying. It’s very clear, and the problem depends just on you.” – Erno Rubik

Switzerland recently signed tax agreements with Germany and the United Kingdom. According to these deals, Switzerland would levy taxes in line with German, respectively British tax law. Switzerland has also agreed to a one-off deduction from existing accounts held by residents of both countries who are liable to owe taxes to their respective governments.

Although the European Commission is loath to admit it, these deals represent a game changer in the European discussions on the Savings Directive. With the UK and Germany, two major EU countries have now officially endorsed a withholding tax system. The Swiss model, often nicknamed “Rubik” after the famous mechanical puzzle, indeed represents a real alternative to the European Savings Directive’s parallel systems of automatic exchange of information and withholding tax. Importantly, “Rubik” solves the problem of how to safeguard client privacy while at the same making sure that clients pay the taxes they owe.

Experience has shown that the automatic exchange of information is inefficient and is difficult to apply in practice. To top it all off, it is also discriminatory. While most Member States are only too happy to apply an automatic exchange of information at cross-border level, they don’t force their banks to automatically notify tax authorities at national level. In fact, they prefer a withholding tax system at home. Yet the withholding tax system as it currently exists at EU level is also discriminatory, since, at 35%, the tax rate is higher than those applied at domestic level. It clearly discourages investing outside of one’s home country.

The Swiss tax deals, if implemented, would add a third discrimination: Swiss banks would be able to apply a final withholding tax system for EU clients that would be equivalent to the system these clients benefit from at home. If this model is not adopted within the EU, third countries that have negotiated bilateral agreements with individual EU Member States will be treated more favourably than EU Member States themselves.

For many years now Luxembourg has been making a case that the EU should introduce an efficient cross-border withholding tax system and put an end to the current discriminatory parallel system. For all intents and purposes the UK and Germany have now subscribed to such a system. It would thus be hypocritical to continue to push for an automatic exchange of information within the EU, if a more efficient, elegant and fair solution to the apparent puzzle of taxing the savings income of non-residents has been found with a third country.

Jean-Jacques Rommes, CEO (ABBL) – Editorial published in Luxembourg Banking Quarterly 03/2011