EU Challenges Switzerland Over Bank Secrecy

In its fight against lost revenue due to tax evasion and fraud, the EU is planning a unified system for taxing interest on savings and investments EU citizens make outside EU borders. The law requires that by 2010 banking secrecy laws be lifted in all member countries. Thereafter, banks would be required to automatically inform the country where a customer is normally taxed of any capital yields on an account.

But the new regulations face some stiff opposition outside the EU, and in order for Brussels to implement the regulations effectively, it must also bring on board a handful of countries that are less than eager to participate. The list includes the usual countries known as havens for tax evaders, including Monaco, Andorra and Switzerland, which all fall outside the EU's borders. In order to prevent investors from circumventing paying their interest taxes by investing their money outside the EU, the EU is negotiating with third countries in order to compel them to participate in the new banking information system.

Accommodating Switzerland

In the Alpine republic, banking secrecy laws are holy. To demand that banks give out information about their customers is a step too far for the Swiss. Instead, the country is offering to levy a withholding tax on accounts in question and then transfer the money to the holder's own country. That way, the EU would be able to collect the tax revenue it is seeking without compromising Switzerland's secrecy laws. But the Swiss also say they would only do so in cases in which criminal proceedings against a client are in place.

But so far, EU officials aren't biting. Fritz Bolkestein, the EU's commissioner for internal markets, says the offer doesn't go far enough. In addition to aiding in cases of active tax evasion and fraud, he says, the Swiss should also aid EU finance authorities in the tracking of people who have "forgotten" to declare funds on their tax declarations. But there's also a key difference in the way Switzerland and the EU handle tax evasion cases, and that makes it more difficult to reach an agreement. Technically, tax evasion is not considered a crime in Switzerland -- most proceedings against tax dodgers are done in civil court. Against that backdrop, the Swiss have thus far strictly refused to disseminate bank account holders' data.

EU Ratchets Up Pressure Against Swiss

Since the end of September 2002, an open fight has broken out between the EU and Switzerland over the new regulations. The finance ministers of the United Kingdom and Luxembourg, among, others, are demanding that third countries also participate in the new EU interest tax system. Bolkestein has applied additional pressure on Swiss officials, even threatening the country with sanctions in other bilateral areas starting in 2010 if Switzerland does not cooperate with the planned regulations.

At a recent closed-door meeting of EU ministers, Bolkestein presented a list of possible measures that could be taken against the Swiss, including a suspension of negotiations for future Swiss participation in the Schengen Agreement, which eliminates border controls within the EU and some non-EU "associate" countries, like Norway and Iceland.

In its Oct. 9, 2002, issue, the Swiss newspaper "Neue Zürcher Zeitung," challenged the EU's view in an editorial. The paper concluded that proposal was less about creating effective Europe-wide regulations for interest taxes than to "take the ground out from underneath the feet of Switzerland, a successful finance center." In the cut-throat competition between financial capitals, some EU countries are attempting to burden investors with higher taxes and eliminate Switzerland's legal advantage as a banking center. The paper said that Bolkestein's threat to restrict the free flow of capital between Switzerland and the EU if an agreement wasn't met was proof of its thesis.

Kaspar Villiger, Switzerland's finance minister, has said he was "astonished" that friends would threaten friends with sanctions. And even within the EU member states, there are differing views on the best way to deal with Switzerland. Both Austria and Luxembourg are pleading for fair dealings with the country, and have so far refused to support Bolkestein's sanctions threats.