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Swiss Tax Deal Clears Hurdle in Upper House

June 12, 2013 by Leave a Comment

The draft law is set to face far tougher opposition in Switzerland’s lower house next week than in the upper chamber, which passed it by a decisive 24 votes to 15 on Wednesday.

The protection of client information has helped to make Switzerland the world’s biggest offshore financial center, with $2 trillion in assets. But that haven has come under fire as other countries have sought to plug budget deficits by clamping down on tax evasion, with authorities probing Swiss banks in Germany and France as well as the United States.

With some of its biggest institutions facing formal investigations and Switzerland’s oldest private bank already a prominent victim in the probe, the Swiss government is seeking a swift compromise with the United States to limit the damage to its vital finance industry.

Even backers of the bill said they did so grudgingly, while others chafed at what they described as U.S. blackmail.

“Even if this bill violates our understanding of constitutional law, it is vital for our country. Switzerland’s reputation as a financial center is at stake,” said Ivo Bischofberger of the Christian People’s Party, who voted in favor.

U.S. investigators have lost patience with Swiss officials, who have struggled for months to find a way to bend secrecy rules to satisfy U.S. demands and clean up past transgressions.

The bill would allow banks to hand over information and strike settlement deals with U.S. prosecutors, which one lawmaker called a “choice between the plague and cholera.” Such deals would avert the threat of criminal prosecution, but are still expected to include heavy fines that could cost the industry as much as $10 billion.

The vote follows last-minute lobbying in Bern from high-profile bankers including Credit Suisse chairman Urs Rohner, and lawmakers also heard from Swiss National Bank chairman Thomas Jordan, who insisted the central bank would not step in should Swiss banks be cut off from vital dollar-clearing lines by U.S. officials.

INVESTIGATIONS

U.S. authorities have more than a dozen banks under formal investigation, including Credit Suisse, Julius Baer, the Swiss arm of Britain’s HSBC, privately held Pictet in Geneva and local government-backed Zuercher Kantonalbank and Basler Kantonalbank.

Switzerland’s biggest bank, UBS, was forced in 2009 to pay a fine of $780 million and deliver the names of more than 4,000 clients to avoid indictment, giving the U.S. authorities information that allowed them to pursue other Swiss banks.

The legislation approved by the upper house would pave the way for Swiss banks to disclose their U.S. dealings, including names of bank staff and third parties such as accountants and tax lawyers who helped Americans to evade taxes.

Banks will still not be allowed to hand over client names – protected by the Swiss secrecy law of 1934 – but the proposal, valid for a year only, would allow banks to hand over so much information on customers’ behavior that U.S. officials should be able to identify American tax dodgers.

The Swiss government has warned that the United States could indict another bank, a move seen as the death knell for virtually any business. Lawmakers were swayed by concern U.S. prosecutors could indict one of the state-backed cantonal banks in their constituency.

Wegelin Co, Switzerland’s oldest private bank, shut its doors this year and paid $58 million to U.S. authorities after pleading guilty to helping wealthy Americans evade taxes through secret accounts.

If the lower house were to reject the bill, the Swiss government could still take matters into its own hands and approve the data transfer with an executive order, though circumventing a hostile parliament is seen as a gamble.

Any deal not backed by parliament could still be held up or even knocked down by Swiss courts if bank clients, staff or third parties such as tax lawyers and custodians follow through with threatened legal action.

Several lawmakers called for Swiss regulators to sanction the Swiss bank executives who continued to pursue undeclared U.S. client money after UBS’s troubles, though a parliamentary motion to do so failed.

(Editing by Emma Thommasson, David Goodman and Mark Potter)

Article source: http://www.nytimes.com/reuters/2013/06/12/business/12reuters-swiss-usa-tax.html?partner=rss&emc=rss

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Political Economy: The City of London as Savior of E.U. Finance

May 19, 2013 by Leave a Comment

It is perhaps too much to expect the Conservative-led government in Britain to lead any initiatives on Europe, given the orgy of self-destruction in the party over whether Britain should stay in the European Union. But insofar as David Cameron manages to get some respite from the madness, he should introduce a strategy to enhance the City of London as Europe’s financial center.

Britain has in recent years been playing a defensive game in response to the barrage of misguided financial rules from Brussels. It now needs to get on its front foot and sell the City as part of the solution to Europe’s problems. The opportunity is huge both for Britain and the rest of Europe.

The chance of getting the Union to swing behind a pro-London strategy may, on the face of it, seem like pie in the sky. Many people blame the finance industry for the financial crisis. So how could they be part of the solution? What is more, Continental Europeans have long tended to be suspicious of financial markets.

Hence, the plan by 11 E.U. countries (not including Britain) to apply a tax on all financial transactions. Hence, too, the recent decision to cap bankers’ bonuses throughout the Union (over London’s objections) and a plan, so far not agreed upon, to do the same for fund managers.

The oddity about those rules is that they do nothing to address the causes of the financial crisis. Trading in financial instruments was not responsible for the crisis. Nor were fund managers. And although banker compensation does bear some of the blame, the so-called solution is cockeyed. Banks will react to bonus limits by pushing up fixed salaries — which will make their finances more vulnerable when the next crisis hits.

Meanwhile, the financial transaction tax could gum up markets so badly, pushing up the cost of capital and constricting growth, that even its supporters are having doubts. Britain is rightly trying to challenge the plan through the courts because of its extraterritorial implications. Any trading involving financial instruments issued by entities in the 11 countries would be caught by the tax, even if the transactions took place entirely in London.

Despite those obstacles, Britain has a genuine opportunity to turn things around. To do so, it must challenge the conventional script, under which old-fashioned banking is seen as good and capital markets bad. The truth is Europe has a banking crisis, not a capital markets one.

Banks have lent too much money to clients who cannot pay it back. Their balance sheets were too weak to start off. Now they are unable to lend to the real economy, throttling growth.

Banks are dangerous beasts. They are not well suited to provide long-term finance, as the Group of Thirty, an influential financial policy group, pointed out in a report this year. Banks fund themselves with deposits and other short-term money. As a result, they do not lend long term, or if they do, they expose themselves and taxpayers to huge risks if liquidity dries up.

The contrast between the United States and Europe is stark. In the United States, banks provide only 19 percent of long-term financing, according to the McKinsey Global Institute. In big European countries, they provide between 59 percent and 71 percent.

America is a much heavier user of securitization, where corporate loans and mortgages are bundled up and sold to investors in the capital markets. Nearly half of long-term financing there is via securitization. In France and Germany, it is only 2 percent and 3 percent, respectively.

The corporate bond market is also in its infancy in Western Europe. Only 21 percent of the debt financing for nonfinancial companies comes from bonds. In the United States, it is 45 percent.

With the European Union’s banking system haunted by zombies, its excessive reliance on banks to provide financing is dragging down the whole economy. It is telling that the European Central Bank thinks that the way to get loans flowing to small businesses in peripheral countries is to revive the securitization market.

Overdependence on banks is not just a short-term problem. Even when the euro crisis is finally over, banks will be unable to do a good job of funding industry. They are rightly being required to hold bigger capital and liquidity buffers, which will push up their costs.

The euro zone’s half-hearted move toward a banking union will lead to even tighter regulation. The E.C.B., which will take over bank supervision next year, will first subject lenders to scrutiny to see whether they are hiding bad debts. It understandably does not want banks blowing up on its watch.

What is more, if Germany eventually agrees to backstop banks in the rest of the zone, the quid pro quo could well be that those lenders will be required to have fortress balance sheets. Berlin will want the chance of that backstop’s ever being used to be virtually zero.

All of this means that the only way of getting a healthy European financial system is to build up its capital markets. This is a huge opportunity for the City, as the bulk of the business would be routed through London. Mr. Cameron should start campaigning for that now. If he can push through such an agenda, it will not just be good for Britain; it will be a powerful argument in any future referendum for staying in the European Union.

Hugo Dixon is editor at large of Reuters News.

Article source: http://www.nytimes.com/2013/05/20/business/global/the-city-of-london-as-savior-of-eu-finance.html?partner=rss&emc=rss

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Europe Rejects Critics of ‘Robin Hood’ Tax

February 14, 2013 by Leave a Comment

BRUSSELS — E.U. regulators on Thursday defended plans to create the first international tax on financial transactions after business groups in the United States warned that the levy could break international agreements.

The plan, also known as a Robin Hood tax, aims to redistribute money generated by the finance industry, and could raise up to €35 billion, or $47 billion, a year for 11 participating countries, which include Germany and France.

The European authorities have promoted the rules as a way of penalizing the financial sector and returning some of the money that was spent on bank bailouts to citizens squeezed by austerity and the economic slowdown.

But the law is raising concerns in the United States, and in European countries like Britain and Luxembourg that are not participating, because the rules could increase the cost of transactions that involve institutions inside the taxed zone.

This week, the U.S. Chamber of Commerce and four powerful financial services associations warned Algirdas Semeta, the European commissioner drafting the rules, that he was proposing “novel and unilateral theories of tax jurisdiction” that were “both unprecedented and inconsistent with existing norms of international tax law and long-standing treaty commitments.”

In a letter to Mr. Semeta, the groups said “many transactions occurring within the United States that have no direct connection to Europe” would be subject to the tax.

A spokeswoman for the U.S. Treasury said in an e-mail that officials had raised concerns about the rules with their European counterparts. She said the Treasury did “not support the proposed European financial transaction tax, because it would harm U.S. investors in the United States and elsewhere who have purchased affected securities.”

Mr. Semeta said at a news conference on Thursday that the criticism was unfounded and that the rules were “fully compliant with international tax law” and based on principles “widely used in international taxation practice.”

The tax would create a significant new source of income amounting to about 1 percent of the participating countries’ tax revenues without placing a further burden on ordinary citizens, according to E.U. officials.

The levy would be based on a tax of 0.1 percent of the value of stocks and bonds traded, and 0.01 percent of the value of derivatives trades. That could mean revenues of about €100 million each year for small countries like Estonia and up to €10 billion each year for the largest participant, Germany, the officials said.

The officials said the law had been formulated so it did not prompt traders to drastically reduce their activities within the taxed countries or move away entirely. In addition, they said any negative effect on growth and jobs in participating countries would probably be canceled out by the recycling of the revenue back into the economy through projects like building new infrastructure.

But Alexandria Carr, a lawyer in London at Mayer Brown, said it was still possible that “we’ll see banks and businesses trying to challenge the rules, or even see them and governments in countries like Britain and Luxembourg outside the taxed zone take legal action at the European Court of Justice to narrow the scope of the law.”

Ms. Carr also warned that costs could be “passed to pensioners and savers, thereby failing to satisfy one of the main objectives of the proposal, which is to ensure financial institutions contribute to covering the costs of the current crisis.”

The 11 participating European states — two more than the minimum required for legislation to be drafted — still need to give their unanimous approval before the law goes into force, possibly at the beginning of next year, making it likely that lobbying against the tax could continue for months.

Article source: http://www.nytimes.com/2013/02/15/business/global/europe-rejects-critics-of-robin-hood-tax.html?partner=rss&emc=rss

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