'Loopholes as Big as a Barn Door': German Tax Treaty with Switzerland Could Crumble

By Markus Dettmer and Barbara Schmid

German Finance Minister Wolfgang Schäuble is battling domestic opposition to rescue a planned tax treaty with Switzerland that could mean billions in additional revenues for Germany. Meanwhile, many tax evaders are moving their money from Switzerland to Singapore and Shanghai.

German Finance Minister Wolfgang Schäuble (right) and his Swiss counterpart Eveline Widmer-Schlumpf: Zoom
DPA

German Finance Minister Wolfgang Schäuble (right) and his Swiss counterpart Eveline Widmer-Schlumpf:

Time is running out for both tax evaders and investigators, with just 162 days left before a new tax agreement between Switzerland and Germany is scheduled to come into effect on Jan. 1, 2013. That leaves just a little more time for German tax dodgers to squirrel away their undeclared income somewhere else, and just a little more time in which the country's tax investigators can purchase CDs of bank customer data, and make any tax cheats they find pay up.

Both sides, in fact, would rather the new tax treaty never came into effect at all. Then everyone could simply go on as they did before, both the persistent investigators and their slippery prey.

In fact, precisely that scenario might come to pass. A debate has arisen in Germany over the past two years concerning fairness in taxes in this age of digital data records that can be copied in an instant and turned into commodities. Whether the bilateral agreement will indeed come into effect is more uncertain now than ever.

The most recent purchase of such data records was conducted by tax investigators in Wuppertal, in the western German state of North Rhine-Westphalia. They bought a data CD containing information on German clients at the Zurich-based office of the British private bank Coutts.

Finance Minister Switches into Battle Mode

The first to react to that purchase was Federal Finance Minister Wolfgang Schäuble of Germany's ruling conservative Christian Democratic Union (CDU) party, who announced he would no longer provide funds for acquiring such data. Ultimately, his message was that the state of North Rhine-Westphalia will have to find the means to pay for such expensive purchases on its own from now on. "Since we weren't informed about the CD, we won't share in the costs," is the word from the Finance Ministry in Berlin.

That leaves the minister's state-level colleagues in North Rhine-Westphalia shaking their heads, since they say the purchase of the data CD was approved by the Federal Central Tax Office, in Bonn, which is part of the Federal Finance Ministry.

Schäuble has switched into battle mode in his attempts to save the treaty with Switzerland. It would mean an enormous loss of face for him, and for Germany as a whole, if this became the first bilateral treaty to fail in the Bundesrat, Germany's upper legislative chamber that represents the interests of the country's federal states.

To keep that from happening, Schäuble needs to win state governors from the center-left Social Democratic Party (SPD) and the Green Party over to his side, breaking their majority in the Bundesrat. That body will vote in November, and the finance minister may be able to use the cash-strapped budget situation in many states as leverage for his position. Especially those states that stand to gain little by exposing tax cheats should be willing to hear out Berlin's proposals.

At stake are up to €10 billion ($12 billion), distributed between the federal and state level, that the treaty with Switzerland is expected to bring in. For example, Wolfgang Voss, finance minister for the state of Thuringia and a member of the CDU, stands to gain at least €100 million for his state budget by 2020. Hartmut Möllring, Voss' counterpart in the state of Lower Saxony and likewise of the CDU, can expect even more, €900 million.

"Continuous sources of income are especially important for those states that need to pursue a clear course of consolidation by 2020," Voss argues, referring to the fact that, under Germany's balanced budget act passed in 2009, all German states will be required to balance their budgets by 2020. He adds that these sources shouldn't be ignored just in the hope that there might be even more to be had by pursuing the other path, without the treaty. The challenge for Schäuble in the coming weeks will be to convince state governments that are led by the SPD, Green Party or "grand coalitions" of CDU and SPD to give their blessing to the agreement, which the finance minister and his Swiss counterpart Eveline Widmer-Schlumpf signed last September.

'Loopholes as Big as a Barn Door'

Many in the CDU saw a potential ally within the Bundesrat in the southwestern state of Baden-Württemberg, which for years has been lax in pursuing tax evaders, but so far the state's finance minister, Nils Schmid of the SPD, has stuck to his party line, also represented by SPD head Sigmar Gabriel and by Joachim Poss, the party's expert on financial issues in the federal parliament, the Bundestag. Schmid criticizes the treaty as still containing "loopholes as big as a barn door" despite all the negotiations that have gone into revising it.

Schmid sees the greatest flaw in the fact that under the treaty, undeclared income transferred from a Swiss bank account to an account in another country by Jan. 1, 2013, would not be subject to back taxes. "That loophole remains the most serious point of criticism," he says, explaining that this allows tax evaders time to shift their money to other tax havens. He also considers the initial tax rate of 21 percent on unreported income in Switzerland too low. "It shouldn't be any less than 25 percent," Schmid believes.

Norbert Walter-Borjans, North Rhine-Westphalia's finance minister and a member of the SPD, has been one of the main buyers of tax data CDs. He's also at the forefront of the opposition to the treaty, which he believes rewards the worst tax evaders at the expense of honest taxpayers. Like many in the SPD, he also finds Switzerland's obligations to disclose information to German authorities insufficient.

A Treaty Backed By Swiss Banks

The general consensus is that there's no chance of the Swiss government making further concessions. Swiss Finance Minister Widmer-Schlumpf already faced harsh criticism from those within her country who say she negotiated poorly with Germany, and the whole process hasn't gone smoothly in Switzerland either.

Yet Switzerland's banks need this treaty urgently. The vast majority of the country's financial institutions want to operate aboveboard, and would rather not be viewed as a haven for undeclared income and illegal wealth anymore. These banks support the decision of their government in Bern, which wants to put an end to the practice of harboring such money.

Still, the restructuring has already claimed its first victims, with dozens of small private banks going up for sale. The Swiss newspaper Aargauer Zeitung even ran an article titled, "Swiss private banks heading toward clearance sale." The country's oldest financial institute, high-end private bank Wegelin, took the hit already, closing down in the wake of tax offense charges filed against it in the United States. Consulting firm Booz & Company calculates that revenue earned by Switzerland's private banks may drop by 46 percent by 2014.

Will Singapore and Shanghai Become New Tax Havens?

It comes as no great surprise that not all banks follow purely legal strategies. Individuals determined not to declare their unreported income, and instead to keep their wealth out of the government's hands, will always find willing helpers. One banker who wished to remain anonymous says that in the past two years, as both Germany and Switzerland have debated the potential tax treaty, he has made millions for German clients who previously kept their money in Switzerland. "We work with a clientele that prefers not to pay taxes," is how the banker puts it. The preferred destination for this wealth is now Singapore, the banker says, with experts advising against investments in the United Arab Emirates: "Too much drug money, too many Russians, and in general the unrest in the Arab region has shown that these are not reliable states."

The banker believes he can also help those who feel their money is not secure enough even in Singapore. "Banks in Shanghai are largely owned by the Chinese government," he explains. "That at the very latest is the end of the line for German tax investigators."

In other words, the risky destination for investors these days is not Shanghai, but Zurich. "Anyone putting money into supposedly secure destinations in Switzerland these days must reckon with the possibility of exposure for the next 10 years," explains Karsten Randt, a tax lawyer at the Bonn-based firm of Flick, Gocke, Schaumburg. That's the length of time for which Swiss banks are required to store their clients' data.

And Randt anticipates a further loosening of Swiss bank secrecy. Sooner or later, he says, Switzerland too will fall in line with the OECD's strict criteria. "The dam has broken and there's no turning back," he concludes.

Translated from the German by Ella Ornstein

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From DER SPIEGEL

Tax CD Purchases
Valuable Data
  • Purchases of secret foreign bank account data by the state of North Rhine-Westphalia
  • July 2000: A whistle-blower provided prosecutors in the city of Bochum with a CD containing the names of 200 Germans who worked with Liechtenstein citizen Herbert Batliner to hide their money in foundations as a tax dodge.
  • February 2008: State paid 4.6 million euros for a CD with data on 1,400 customers of Liechtenstein's LGT Group bank (with help from Germany's foreign intelligence service, the BND).
  • March 2010: State paid 2.5 million euros for Credit Suisse customer data, launching a total of 1,100 investigations.
  • October 2010: State paid 1.4 million euros for 220 sets of customer data from the Swiss private bank Julius Bär.
  • February 2011: Investigators found 6,000 sets of customer data during a search of the premises of the Frankfurt office of Credit Suisse. The data is from 3,000 German customers who had taken out life insurance policies through a Bermuda-based subsidiary of the company that was used to launder unreported earnings.
  • October 2011: The state paid 3 to 4 million euros for a CD with 3,000 sets of data from HSBC Luxembourg.
July 2012: State paid 3.5 million euros for around 1,000 sets of customer data from the British private bank Coutts in Zurich.

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