Switzerland has become the latest country to sign a tax information sharing agreement with the United States that will help the US to identify citizens who are engaging in tax avoidance practices.
Switzerland has joined the likes of Denmark, Ireland, Italy, Mexico, Norway, Spain and the United Kingdom, by agreeing to implement the US Foreign Account Tax Compliance Act (FATCA) from January 2014.
In a move that has surprised many, the Swiss government have granted exceptions to their traditionally strict bank secrecy laws in order to allow banks to comply with the United States’ request for information on US citizens who hold accounts in the European tax haven. Switzerland’s State Secretariat for International Financial Matters disclosed in a statement that failing to adhere to FATCA requirements would be potentially problematic for the Swiss finance industry: “The prohibitive withholding tax of 30 per cent on all payments from the United States and the likely consequence that foreign financial institutions would terminate their business relationships with Swiss financial institutions in the medium term would result in exclusion from the world’s largest capital market.”
FATCA and its associated penalties
FATCA was formally passed by US Congress in 2012 and was implemented as a means of identifying US citizens who avoided tax by holding their cash in offshore accounts. Now in the process of being implemented throughout the world, the legislation requires foreign financial institutions (FFIs) to share details of any US citizens who hold accounts in their banks with the US Internal Revenue Service (IRS). Those institutions that fail to comply face a 30% withholding charge on transactions in the US.
Discussing the implementation of tax laws, Senator Max Baucus, who chairs the Senate Finance Committee and sponsored the legislation, told the New York Times last year to explain why FATCA was needed: “Offshore tax evasion costs the US jobs and billions of dollars each year, and it puts an unfair burden on the average American taxpayer to make up the difference.”
However, the FATCA laws have posed problems for many financial institutions, especially those that have strict data protection and privacy laws, such as those found in Switzerland. These have been bypassed by implementing information exchange at a government level, thus avoiding legal complexities.
More than 50 countries are currently negotiating intergovernmental agreements (IGAs) to beat FATCA’s January 2014 deadline.