Trouble in Paradise: Berlin Takes on the Tax Havens

By Beat Balzli, and Nana Gerritzen

Part 2: On the Black List

But the pressure on the domestic financial industry alone is not enough to win the fight against tax havens. Last October, Steinbrück met with French Budget Minister Eric Woerth and 15 other government representatives from OECD countries in Paris. The OECD attendees proposed compiling a blacklist of uncooperative tax havens by the summer.

The threat to ostracize suspect territories like the Caribbean Turks and Caicos Islands by placing them on a tax haven blacklist triggered an unforeseen effect. To prevent such a blacklist and sanctions from being approved at the G-20 summit, even previously intractable financial centers have suddenly discovered an urge to promote openness in tax affairs. In addition to Liechtenstein and Switzerland, Hong Kong and Singapore announced in recent weeks that they intended to adopt OECD standards on the exchange of information. Luxembourg and Austria also plan to cooperate in the future.

Last Wednesday, a Swiss delegation paid an initial visit to the German Finance Ministry to discuss the issue, just as a group of officials from Liechtenstein had done a few days earlier. The Swiss told the German officials that if they wanted more information on tax matters in the future, they would have to approve an amnesty for existing customers. Steinbrück's staff has remained tight-lipped on the meetings, noting only that no plans have been made yet.

The Swiss demand is controversial in the German parliament. Gerhard Schick, the Green Party's spokesman on financial issues, considers such a condition unacceptable. "We cannot allow criminal acts to be rewarded after the fact with acquittals and interest earnings," he says. Edelgard Bulmahn, a member of parliament with the center-left Social Democratic Party (SPD), also objects to such concessions. "We must consistently fight tax evasion," says Bulmahn, the chairwoman of the Bundestag's Committee on Economics and Technology. "This is not a trivial offense but a criminal act."

SPD floor leader Peter Struck, on the other hand, does not categorically rule out an amnesty. "It important to us that we arrive at an adequate and sustainable solution with Switzerland," he says. "But if the Swiss government were to absolutely insist on a far-reaching amnesty for tax evaders, we would not be able to accept that."

The freshly erupted conflict over the amnesty demands shows how difficult the battle against tax havens is. The finance ministers are claiming spectacular successes, and yet they must ask themselves how sustainable their victories will be. Opponents are gearing up to offer resistance to, for example, planned legislation on fighting tax evasion. The philosophy of the draft bill, which Germany's grand coalition government of Merkel's Christian Democrats and the SPD intends to introduce this summer, is simple: If a government refuses to provide information, it will be up to the taxpayers to do so.

The authors of the legislation want to give the government the power to require citizens and companies doing business with uncooperative tax havens to provide detailed information to the tax authorities. In the future, the tax authorities would be able to demand sworn affidavits and powers of attorney from taxpayers, which would allow them to obtain information from foreign banks. Anyone who refused to cooperate could expect to face financial penalties.

Even though the draft legislation was already softened, it has had to be removed from the cabinet's agenda twice. The Economics Ministry has so far rejected the plan due to "fundamental concerns." It is also controversial among some members of the business wing of the Christian Democrat Union's parliamentary group.

If the legislation fails, pressure on the tax havens to change their practices will decline. This has happened many times in the past, when countries have repeatedly tried to take on the tax havens. These experiences have been more sobering than anything else.

The OECD has been taking action against unfair tax competition since 1998. It originally branded 41 countries as tax havens. Thirty-five soon disappeared from the list after agreeing to the OECD standards on the exchange of information, although few have actually implanted the standards to date.

In 2005, the political world celebrated the EU guideline on the taxation of interest income as a milestone. Since then, all interest payments by banks to foreigners are supposed to be reported directly to the tax authorities in their country of origin -- except it doesn't always happen that way in practice.

To protect their banking secrecy and their foreign clients, EU members Luxembourg, Austria and Belgium, as well as Switzerland and Guernsey, are entitled to impose an anonymous source tax on foreigners' accounts. But because it only covers a portion of the balances and assets, "the interest guideline is as full of holes as Swiss cheese," say officials at the Finance Ministry, "except in this case there are more holes than cheese."

The problem with tax evasion is that havens everywhere are booming and taxes can also be avoided on a grand scale legally. "Tax evasion has become old-fashioned," says Jürgen Schneider, a Hamburg expert on criminal tax law.

Legal tax tricks, such as Maltese holding companies, are becoming more common. A tax avoidance industry has blossomed in the small country for years, and even the German tax authorities have let it stand. Undisturbed by Steinbrück and other finance ministers, EU member Malta offers multimillionaires a tried-and-tested tax savings model.

"The assets are paid in to the subsidiary of a Maltese holding company," explains Munich tax expert Stefan Süss. The subsidiary's earnings are taxed, but then the taxes are reimbursed at the holding company level. "As a result, the earnings ultimately remain untaxed," says Süss.

Even if Switzerland, Singapore and the like were to permit the exchange of information, there will be a sufficient number of new avoidance models. And there is no urgency to the matter. "Most tax evaders still have enough time to clean up their unreported income situation," says tax law expert Schneider, noting that banking secrecy in tax havens "will only weaken gradually."

Translated from the German by Christopher Sultan

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