After a decade of negotiating, the European Union’s proposal to tax non-residents’ savings appears likely to become reality since a deal was struck between the European Commission and Switzerland.
Representatives of the EU's 25 member states last week cleared the way for the deal to be signed on Wednesday, the Financial Times of London reported. Switzerland, a haven for offshore assets, made sure the agreement would not threaten banking secrecy — a hallowed principle among the Swiss.
Other states — especially Luxembourg with its own lucrative banking industry — expressed concern that Switzerland not be given a competitive advantage, so the agreement was not reached until the last minute.
The EU wants to get a handle on savings held by its residents in countries and territories beyond the reach of its tax authorities. The agreement calls for Switzerland to tax "appropriate financial instruments" held locally by EU citizens, with 75 percent of the proceeds going to the account holders' domestic tax authorities, and the remainder to the Swiss.
Switzerland tied its agreement on the tax issue to entry into the EU’s passport-free zone, called Schengen, which allows free movement of people among the 15 member states. Switzerland wanted an exemption from judicial cooperation in financial crimes that may apply to the Schengen group in the future, EUBusiness.com reported. In Switzerland, tax evasion is not a crime.
Under the accord, EU finance ministers have been hoping for a windfall from previously undeclared savings, the Times reported, but the revenues may be far less than expected.
Robert Waldburger, Switzerland's chief international tax negotiator, said the measure is full of loopholes, and observers say account holders will find a variety of ways to avoid the tax.
The deal only covers certain categories of account holders. Only interest payments will be taxed. Income from share dividends, unit trusts or insurance policies will be excluded. Interest payments from the bonds of Swiss-based issuers will be left out too.
The deal is set to go into effect on Jan. 1, 2005, but Waldburger doubts it will be implemented by then. He said it would take a year or more for the legislation to go through the Swiss parliament, and it’s possible the measure could go to a referendum, which would create more delays.