Tax Law

How Tax Collectors Learned to Love Bank Secrecy

Germany and Switzerland recently signed a landmark tax agreement that resolves years of squabbling over secret bank accounts. Fascinatingly, the agreement ends one form of blatant offshore tax evasion while preserving Swiss bank secrecy. How can that be? The answer is simple: tax collectors have been promised a piece of the action.

The accord serves as a blueprint for how Switzerland plans to deal with other countries that share concerns about offshore tax evasion. This could be the next big trend in global tax administration: withholding in lieu of information exchange.

Here are the details in brief.

For generations, wealthy Germans have been stashing money in Swiss bank accounts and not reporting the income for tax purposes. The existence of the foreign bank accounts is not illegal, but the tax evasion certainly is. This scenario should sound familiar. Substitute U.S. taxpayers for German taxpayers and you have the recent UBS scandal.

Under the new agreement, however, the Swiss will enforce a 26% withholding tax on the bank deposit income earned by German account holders. Once the Swiss collect the tax, the proceeds will be remitted directly to the authorities in Berlin. Germany will receive tax revenue, but they won't know from whom? And they'll never know -- that's an essential part of the deal. The identities of the offshore investors remain intentionally obscured.


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