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Type Bachelor's Thesis
Scope Discipline-based scholarship
Title The Tax Dispute between Switzerland and the United States: Consequences for Swiss Wealth Management Banks
Organization Unit
Authors
  • Stefanie Frei
Supervisors
  • Christoph Basten
Language
  • English
Institution University of Zurich
Faculty Faculty of Business, Economics and Informatics
Number of Pages 132
Date 2018
Zusammenfassung The tax dispute between Switzerland and the United States [US] is popularly described as a ‘drama with no end in sight’ (Diem Meier (2017, title)) or ‘power game of the US’ (Hauri (2018, L. 72)). What is intended by these statements? What is regarded as the tax dispute and what consequences does it have on the financial market? This paper focuses on these and related questions and provides answers either from the compiled literature research or the personally conducted interviews. Switzerland has long distinguished itself in wealth management, particularly with a focus on offshore banking (Expatica (2018)). Although the country is unable to compete with many other major powers in terms of size and resources, the Swiss Confederation has established itself as a popular financial centre thanks to its political and economic stability, excellent service quality and discretion ((Gabriel and Fischer (2003) and Swiss Bankers Association (2017a)). For a long time Switzerland was known for its cantonal spirit, but due to intensified globalisation, the country has opened up and the financial centre has become increasingly international (Errico and Borrero (1999)). The appealing investment conditions outlined in this paper attracted a growing number of foreign customers. Many clients saw the Swiss discretion and banking secrecy as an opportunity to hide money from their tax authorities and transferred their assets to the safe haven of Switzerland in order to evade taxes (Johannesen (2014)). According to Mr Kiepert (2018), this process was unproblematic, and for many years Switzerland achieved high profits from foreign client deposits. One day, however, Bradley Birkenfeld, a former UBS employee, announced to the US tax authorities that the UBS was helping US clients to commit tax evasion. The State Secretariat for Finance [SIF] (2016) states that this event set the tax dispute in motion: Subsequently, the US requested information from Swiss banks, which the latter were unable to disclose for various legal reasons. There was a conflict of laws and a compromise solution had to be found. More and more financial institutions were targeted by the US tax authorities, and there was the danger of an escalation. The Internal Revenue Service [IRS] and the Department of Justice [DoJ] took structured action against Swiss banks and tried to profit as much as possible from the situation. Swiss politicians made great efforts to find a blanket solution for all corporations. An agreement was finally reached and the US Tax Program, which is elaborately described in this paper, was drawn up. The Tax Program (2014a) divided the financial institutions into four categories: Banks that were already under examination from the IRS were excluded from it and were assigned to Category 1 on a flat-rate basis. All other institutions were able to report and classify themselves in the corresponding category. Category 2 banks had carried out transactions that were against US law and could apply for a Non-Prosecution Letter. Others that had not been involved or were innocent of such transgressions could class themselves in Category 3, but had to prove their innocence. Category 4 was primarily intended for nationally oriented banks that were not in contact with US customers. In order to participate in the program of the DoJ (2017), the institutions had to meet various criteria. For example, they had to work through all their customers in a structured manner to determine which of them have a link to the US. The banks had to prove that these accounts are tax compliant and provide all data in detail to the US authorities. In addition, a leavers list had to be submitted showing to which competitors US clients transferred their money after closing their account. Furthermore, a penalty had to be paid by most institutions. The participation in this program and the tax dispute in general brought about major changes and consequences for the Swiss financial centre, which is the focus of this paper. It was anticipated that the tax dispute severely impaired Swiss banks’ profitability and had a negative impact on their reputation. Moreover, the author assumed that the banks had to adapt their business models considerably in order to comply with all new obligations. After discussing some key facts about wealth management and the Swiss financial market, this paper concentrates in particular on the consequences of the tax dispute on wealth management banks. It is found that the financial institutions are still very cautious when it comes to disclosing information about the tax dispute. A study of Schilling, Meier, Ecabert, Pauli and Schneeberger (2016) detected that, contrary to expectations, there was no decrease in the total assets under management [AuM]. Since 2007 the average gross profitability has decreased and the average cost-income ratio, which measures the efficiency of a bank, has increased. Still, Mr Preiswerk (2018) confirms that the tax dispute has led to a great distrust of foreign business. Many Swiss banks have dismissed most of their US customers and no longer wish to look after them. According to Ms Brunner (2018), a registration with the United States Securities and Exchange Commission is required to continue to manage assets for US clients. Such a registration is time-consuming and costly, which is why only a few institutions have decided to do so. Moreover, the tax dispute has led to the issue of tax transparency becoming increasingly popular. The US introduced the Foreign Account Tax Compliance Act [FATCA] which ensures that information about US accounts is delivered directly to the US, making tax evasion impossible. This FATCA was also the model for the Automatic Exchange of Information [AEOI] which is currently being implemented. As a result of the tax dispute, banks are having to comply with an increasing number of regulations, including those from the clients’ country of residence. Mr Kapalle (2018) noticed that the tax dispute was treated more negatively within Switzerland than abroad. In the opinion of Mr Hauri (2018), media coverage certainly had a small negative impact on banks that were involved in the tax dispute, as it unsettled clients. In the end, a great number of firms participated in the program in such a way that participation was almost considered normal. Experts, such as Mr Risi (2018), fear that the tax dispute with the US also led to foreign states being made aware that there is something to be gained in Switzerland. Other countries started requests for administrative assistance and tried to proceed in a similar way to the US. As part of this paper, seven different experts were asked about their involvement in the tax dispute. The employees were questioned about their personal experiences and the direct consequences and severity for the bank. In addition, the most important key figure indicators for wealth management were analysed. The author discovered that the high penalties and the data preparation were the most severe consequences for the participating institutions. All experts were very affected by the unfortunate affair and are relieved that this chapter is over. In the main, the tax dispute did not drastically endanger the surveyed banks’ profitability as the penalties were considered as one-off payments for which provisions were made in time. Most of the institutions analysed in this paper did not suffer any decline in assets under management and there was also no extreme deterioration in the costincome ratio. However, what was established is that Swiss banks have become very cautious with regard to foreign customers. Many firms focus only on certain customer segments and no longer serve US customers at all, or only as a marginal segment. During the writing of this paper headlines about the tax dispute frequently appeared in the newspapers. Most financial institutions have been able to find a solution with the US tax authorities, but there are still some isolated Category 1 banks waiting to complete their proceedings (Alich (2018)). Even if the tax dispute caused extreme turmoil, frayed nerves, as well as destroyed the banking secrecy to a certain extent, the Swiss financial market still has a good base for a bright future as the Swiss bank industry learnt another lesson (Kapalle (2018).
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