EU Tax Dodgers Lose Swiss Haven

From July 1, banks in Switzerland -- which is not a member of the European Union -- will begin taxing the savings accounts of EU residents on behalf of their governments, implementing an accord that Bern and Brussels reached after years of painstaking talks.

"This is the first time in the world that banks have agreed to levy a tax on behalf of a foreign country," said a spokesman of the Swiss Bankers Association.

The accord is meant to crack down on tax-dodgers who take advantage of Swiss banking secrecy laws and is tied to a tightening of rules within the 25-member EU under a new directive on savings taxation.

Rather than automatically revealing the identity of the account-holder, banks in non-EU Switzerland will initially levy a 15 percent withholding tax on the interest EU citizens earn on their savings.

The rate will rise to 20 percent in 2008 and 35 percent in 2011.

Swiss banks will keep a quarter of the levy to cover their costs, and hand over the rest to the saver's home country.

Keeping secrets

In exchange for agreeing to play tax collector for the EU, Switzerland was able to protect its cherished system of banking secrecy, which has helped make the reputation of the country's financial sector for critics and supporters alike and fuel the country's prosperity.

There are no official statistics for the number of Swiss bank accounts belonging to EU residents.

Total funds managed by Swiss banks in 2004 were around 3.55 trillion Swiss francs (2.29 trillion euros, $2.77 trillion) -- an estimated one-third of global private assets.

The country's banks say they have spent 300 million Swiss francs on setting up the computer systems needed to levy the EU tax.

EU clients can alternatively authorize the banks to hand over their details to tax authorities in their home country, which can then calculate the exact sum they should pay.

Skirting the rules

But even though the Swiss-EU accord is meant to cut tax evasion, it has several loopholes.

The withholding tax can be avoided by shaking up one's portfolio. The deal does not cover dividends, insurance products, capital gains or derivatives. It only applies to individuals, not businesses, so wealthy customers can create a company in Switzerland to mask their savings.

Germany's Finance Minister Hans Eichel was one of the biggest supporters of the accord with the Swiss, aiming to boost tax revenues at home by taxing the savings many Germans are said to hide in Switzerland.

But according to Swiss banks, the withholding tax will inject less than expected into EU nations' coffers -- and certainly not the hundred of millions of euros that EU governments have been hoping.

Publicly, Swiss banks say they do not fear that customers will head to other financial centers where authorities have more inroads into bank accounts.

Foreign savers appreciate not only banking secrecy, but also the efficiency of Swiss banks and the country's political stability, bankers say here. However, Swiss banks have also made strategic moves to ensure they do not lose out, spreading operations to financial centers which are not included in the deal with the EU, such as Singapore.

Several large Swiss banks have opened offices in Asia in recent years, to "recapture" money previously held in Switzerland and attract the region's increasingly wealthy savers.

The new tax rules also apply to EU members' dependencies -- such as Britain's Jersey and Guernsey -- plus Monaco, Liechtenstein, San Marino and Andorra, which have also placed a premium on discretion.