Cracking Down on Tax Evaders

Numbers are hard to come by when it comes to tax evasion. Its very nature precludes much reporting and the best the authorities can do is provide rough estimates. The German government says the sums are in the billions every year. The Federal Audit Court has cited a 2003 report that estimated the state loses some 12 billion euros ($15.4 billion) a year just in sales tax manipulation within European Union member countries.

Reports about prominent tax evaders hit the headlines in Germany regularly. One of the highest-profile cases was that of former tennis pro Boris Becker, who was fined 500,000 euros in 2002 for being stingy with the taxman.

He admitted to having a German residence in the 1990s while claiming to live in Monaco, which is a tax haven.

Since high unemployment, a stagnant economy and high payouts from government welfare programs have combined to drain Germany’s coffers to dangerously low levels, the government has a strong motivation to find those who hide substantial amounts of their income or capital gains from the taxman.

The great tax hunt began back in January 2004, when the government introduced a tax amnesty that ran for 15 months. In 2004, tax evaders could come clean and pay a flat 25 percent tax on their unreported income. In the first three months of 2005, that rate went up to 35 percent.

The amnesty program, which ended on March 31, brought in 1.2 billion euros according to the government; a substantial amount, but far below the five million euros that Finance Minister Hans Eichel had predicted.

Step two

As that program ended, what might be called the second phase of the hunt for missing taxes went into effect, the “Law for Tax Honesty.” It allows investigators, such as those working for tax offices, social service departments and labor agencies to access some information regarding Germans’ bank accounts if they suspect income is not being reported.

A customer’s name, birth date and the date the account was opened will be available to investigators, although account activity will not be disclosed. Before April 1, such information could only be obtained by Germany’s financial regulator BaFin under a law that was designed to detect money laundering in the wake of the Sept. 11, 2001 terrorist attacks.

There has been both praise and criticism of the new law, with those not in favor claiming it is an infringement on privacy, weakens Germany’s status as a financial center and hurts Germany’s banking secrecy laws.

"But the question is, do I need bank secrecy regarding the tax authorities? What is being done now, in my opinion, is relatively mild," said Wolfram Scheffler, a professor specializing in tax theory at Friedrich-Alexander University at Erlangen-Nuremberg.

"As long as the constitutional court says that earned interest is to be taxed, then the law must go along," he said.

Others say the strategy itself is off the mark and that allowing officials access to banking details is not going to refill tax coffers.

“It’s simply not necessary,” said Hans-Ulrich Liebern, head of the taxation department at the Federation of Tax Payers in North Rhine-Westphalia. “If we would change the tax structure when it comes to capital gains and introduce a 15 percent compensation tax like is done in other countries, the tax offices wouldn’t need to go sniffing around in people’s business.”

EU tightens noose, but not completely

The European Union, with pressure from Germany, is also turning up the pressure on tax cheats. Starting on July 1, banks in 22 member countries, including Germany, will have to share information on bank accounts opened and used by non-residents. A withholding tax on interest income will automatically be forwarded to the account holder’s home country.

But not all countries are participating, including Luxembourg, Belgium and -- the country some fear will become the new Switzerland when it comes to banking -- Austria.

Experts say Austrian banks are profiting from the change in German banking laws, and Austrian banks, particularly those along the German border, are expecting a rush from Germans unhappy that their accounts at home have become more transparent.

Hans Schinwald of the Raiffeisen banking group in Salzburg, told the Financial Times Deutschland that he expects some 500 million euros to go to Austria in the next few months. Bank secrecy is safe there, having been written into the country’s constitution.

Although the EU is well aware of Austria’s banking secrecy laws and the temptation they present to potential tax evaders, Brussels was not able to convince Vienna to part ways with its cherished financial tradition. A compromise was found in which Austrian banks, as of July 1, will withhold taxes from capital gains (15 percent until 2008) and automatically forward them to the bank account holder’s country of origin. The account holder, however, will remain anonymous.

But will it work?

Despite the new laws, regulations and compromises, there are those who doubt that much can be done about tax evaders, especially the hard-core ones. The new laws might hinder the small fish who “forget” to report that stock dividend or other extra income. But for the persistent enemies of the taxman -- who usually know the ins and outs of international financial law -- there is little that these new regulations will achieve, according to Nuremberg university’s Scheffler.

"Money is bashful and many don’t want to report their earned interest,” he said. “They will naturally look for a country where this money doesn’t have to be reported to the tax authorities."

That country will almost certainly be outside of Europe. The emirate of Dubai, which is eager to remake itself into a global banking center, is likely to soon look more attractive to many in Europe.