Switzerland, No Longer a Tax Haven?

Can you believe it? Switzerland is no longer a tax haven.

How did this happen? On Sept. 30, the Organization of Economic Cooperation and Development (OECD) declared that because Switzerland has lived up to international standards in sharing information about financial accounts, it had shed its tax-haven status. Thus, the OECD achieved in six months something the mighty United States had been unable to do in 70 years: It convinced Switzerland to share information with the U.S. on its secret bank accounts.

Or did it?

Earlier this year, the OECD released a progress report detailing its efforts to encourage tax authorities to share information with one another when one country suspects its residents are evading taxes by hiding income elsewhere. Although the OECD did not exactly call Switzerland a tax haven (it used the term "financial centre"), the organization's roster of such countries became known as the "tax haven" list. Thus, Switzerland, Austria, Belgium and Luxembourg soon carried the taint of being formally considered tax havens, as were the Bahamas, the Cayman Islands, Gibraltar, Monaco and San Marino, along with 33 other countries.

To make matters worse for those nations, the G-20 leaders pledged in April that they stood ready to "deploy sanctions to protect our public finances and financial systems" against non-cooperative jurisdictions that failed to live up to the OECD standards. Their communiqué made the bold statement that "the era of banking secrecy is over."

It is this victory that the OECD trumpeted on Sept. 30.

But don't remove the tax-haven label from Switzerland just yet. There is a very large loophole to consider. The OECD removes countries from the list merely because they have signed -- but not necessarily implemented -- an agreement to share tax information.

The exposed nations quickly seized the opening and signed agreements by the dozen. Within days, several Caribbean countries signed agreements en masse, largely with a group of Nordic countries.

While the ink was still drying on the OECD report, the Cayman Islands signed seven agreements. Bermuda signed eight just days later.

By Sept. 30, the OECD's list was empty.

Could these countries -- 42 in total -- have so quickly given up their long-standing practices? After all, the OECD has been pushing them to eliminate their tax practices for more than a decade.

Well, there's that catch, of course. The OECD does not insist that countries actually abide by their agreements, just that they sign them. Not a single agreement signed since April is in force, as is the case with some that were signed more than a year ago.

Such delays mean it is too soon to say that these countries no longer provide shelter for offshore tax abuse. Moreover, it would be wrong to conclude that just because Switzerland is no longer a "tax haven" that it no longer provides banking secrecy.

Nothing could be further from the truth.

Regardless of his country's decision to adopt OECD standards, Swiss President Hans-Rudolf Merz (pictured above) issued an official statement affirming that "secrecy is firmly entrenched in our banking system and safeguarded in the federal constitution." He insisted that "the cabinet remains fully committed to providing banking secrecy for residents of Switzerland. The law will not be changed."

Switzerland has yet to make a concrete move to change its practices. As with the other self-proclaimed converts to the exchange of information, the Swiss are very effective at dragging their feet. For example, in his February testimony in a civil court case concerning undeclared accounts held at the Swiss bank UBS, IRS Deputy Commissioner Barry Shott described Switzerland's lack of cooperation in turning over the names of 52,000 U.S. account holders. Shott noted that the Swiss government said it would provide information on just 12 of those accounts. Unfortunately, all 12 have filed lawsuits to prevent the Swiss from doing so. Thus, it is with justified frustration that Shott said, "The Swiss Government has not provided any records sought . . . and it is not clear when, if ever, it will."

It's also not clear that Switzerland will change its behavior under the protocols of the U.S.-Swiss tax treaty that Treasury Secretary Timothy Geithner and the Swiss ambassador signed on Sept. 23.

As the Swiss Finance Ministry indicated, before the Swiss government will exchange any information, the U.S. must provide precise details about the suspected account holder and the bank where the account is held. And these account holders still have the right to litigate.

In addition, both countries must now ratify the new treaty before it can take effect. Assuming that the Senate Foreign Relations Committee approves the deal, the treaty will go to the full Senate for its advice and consent. The Senate is likely to approve the agreement -- it almost always does -- so that part of the process will proceed without hitch.

But trouble may arise in Switzerland.

You see, the Swiss public would like to keep bank accounts there hidden from the prying eyes of the tax authorities. After all, the offshore financial sector is big business. The OECD cites estimates that from $1.7 trillion to $11.5 trillion in assets are held offshore. Specific figures for Switzerland are not available, although its government estimates that Switzerland managed nearly 30 percent of all private assets around the world in 2005. While there may be some legitimate reasons to hold assets offshore, the OECD suspects that many use these accounts are "to evade their tax obligations." The Permanent Subcommittee on Investigations of the U.S. Senate estimates that $100 billion in taxes are evaded annually through offshore tax abuses.

The Swiss public may also have something to say about their government's new policy of sharing account information. Swiss law allows local jurisdictions to vote on federal measures that might impose significant additional obligations on them. If the government puts the tax matter to a popular referendum in these jurisdictions, some of which can be very cantankerous, then the policy may very well be rejected.

Regardless of what it says, Switzerland's actions make clear that it has no intention of implementing any time soon its promise to provide the U.S. with the information needed to enforce its tax laws. Switzerland has yet to turn over a single name to U.S. tax authorities.

And until it does, it will be hard to conclude that is no longer a tax haven.