Financial Secrecy: Switzerland on place 3

Commissioned by the Tax Justice Network, a team of academics and financial experts investi-gated which of the 60 best-known tax havens and offshore centres bear the brunt of the respon-sibility for the opacity of global financial markets. The outcome has been an international ranking of the most secretive financial service centres.
Switzerland occupies an unattractive third place on that list. The top slot goes to the US Federal State of Delaware, followed by Luxembourg. In fourth position are the Cayman Islands, followed by the City of London. In their own way they all facilitate the concealment of illicit financial flows or contribute to international tax evasion. Tax avoidance practices of multinational corporations and tax avoidance by wealthy private individuals mean that developing countries forgo billions every year, which they could use to reduce poverty.

What was measured?

The Financial Secrecy Index (FSI) consists of two parts. First, a jurisdiction's significance to the world market for financial services is calculated. The background data used for that purpose is International Monetary Fund statistics. The Index then uses 12 criteria to assess the extent to which the jurisdiction’s rules of secrecy contribute to international tax evasion and the conceal-ment of other socially harmful practices. The FSI 2009 calculations considered statistical data and policy developments up to the end of December 2008.
Switzerland's poor performance results from the fact that it is one of the world's most important financial service centres, but stands out for its extreme opacity, by Tax Justice Network criteria. According to the TJN assessment, it did not achieve a positive result for any of the 12 criteria on which the ranking is based (see the Annex for the criteria).
The Swiss jurisdiction could do better in the next edition of the Financial Secrecy Index, how-ever. In the realm of money laundering, for example, several legislative amendments have taken effect since the survey's cut-off date. Those amendments were Switzerland's reaction to some points of criticism raised in the latest country assessments by the Financial Action Task Force, an international organisation devoted to combating money laundering and terrorist financing. Besides, since last March, new double taxation agreements have been worked out post-haste with over a dozen countries, in compliance with the OECD standard. Even when these agree-ments do take effect, there can still be no talk of sufficient transparency, specifically in dealings with developing countries.

An alternative to the OECD list of tax havens

The Tax Justice Network, of which Alliance Sud and the Bern Declaration are founding mem-bers, is attempting to show with the new Index that it is not just small exotic islands that are fa-cilitating international tax avoidance and illicit financial transactions. World political heavyweights like the USA and the UK are also contributing to the lack of transparency of global financial mar-kets. Trusts and other opaque constructs used for example by the US federal state of Delaware and the City of London are no less instrumental than banking secrecy when it comes to disguis-ing dishonest business practices. This is why Delaware tops the Financial Secrecy Index rank-ing, with London in fifth position.
This outcome differentiates the new Financial Secrecy Index markedly from the OECD's list of tax havens. Because they are not sovereign countries – and for reasons of power politics – juris-dictions like Delaware, Nevada and London are left out of the OECD's black and grey lists. Swit-zerland should therefore take the FSI also as a challenge to go on the foreign policy offensive. It must stand up for multilateral initiatives that ensure greater transparency in tax matters and in the world's financial services market – and it must do so worldwide. That will also be the best means of avoiding «competitive disadvantages» for its own financial centre. It is not enough to react defensively to international pressure from the G20 and OECD.

Tax flight as an impediment to development

At the same time, Switzerland is also being challenged to continue doing its homework. For there is not a single developing country amongst those to whom it has committed, under the new double taxation agreements, to grant administrative assistance in cases of tax evasion. The over 360 billion Swiss francs in private monies from the South sitting untaxed in Swiss bank accounts are still untouched for now. So far Switzerland has done just as little as other countries to counter the aggressive tax avoidance practices of multinational corporations. The OECD's re-moval of Switzerland from its grey list of tax havens in September therefore says more about the quality of the OECD list than about Switzerland's international tax policy.
If the flight capital stashed away in Switzerland were properly taxed, developing countries would have 5.4 billion francs more in annual revenues – at a 5 per cent yield and a tax rate of 30 per cent. They could use those funds to combat poverty and promote sustainable development. Lost tax revenue of 5.4 billion francs is two and a half times the roughly 2 billion being spent annually by the Confederation on development cooperation.

Development policy demands

The continued unequal treatment of the countries in the South under double taxation agree-ments is no longer tolerable. Switzerland must expeditiously (re)open negotiations with develop-ing countries and guarantee them equal rights. Alliance Sud and the Bern Declaration are also demanding in this connection that a most-favoured-nation clause should be added to the agree-ments. Any concessions granted to powerful negotiating partners such as the USA and EU should also be extended to other countries, in particular to the developing ones.
Administrative assistance procedures in cases of tax avoidance are costly and time-consuming. They stretch many developing countries to the limits of their administrative capacities. The OECD standard for administrative assistance is therefore no substitute for the taxation of sav-ings. Instead, Switzerland should implement such taxation for the benefit of developing countries as well. Already last December at the UN Conference on Financing for Development in Doha, Switzerland's Foreign Minister made an offer along those lines on behalf of the Federal Cabinet. In the medium term, however, only automatic information exchange between tax authorities as demanded by the TJN can guarantee the full and proper taxation of assets under cross-border management.
Moreover, the dispute over secrecy jurisdictions is not just about private tax evasion. Industrial-ised and developing countries are forgoing substantial tax revenues also because of tax avoid-ance practices by transnational corporations. For corporate profits to be properly taxed, the TJN has long been striving for the introduction of country-by-country financial reporting by multina-tionals. That would make it difficult for them to resort to abusive internal transfer pricing practices to move the bulk of their profits to letterbox companies in secrecy jurisdictions.

Contact:
Mark Herkenrath, Alliance Sud
Financial Secrecy Index
Taxjustice Network