Barack Obama speaks about tax havens – and Switzerland shivers. The days when presidential homilies about more equitable income distribution could be dismissed as moralising in the world’s favourite centre for offshore assets are long over.
Mr Obama’s remarks this week could affect the Swiss in two ways: cracking down on corporate tax ruses may harm Switzerland’s attractiveness as a regional base for US multinationals, such as Philip Morris, General Motors and Dow Chemical, long present there.
Much more immediate is the president’s concern about tax abuse by rich individuals. Last week, UBS, the world’s biggest wealth manager, formally responded to attempts by the Internal Revenue Service to make it reveal 52,000 client relationships involving US taxpayers with Swiss accounts.
In its 50-page filing, UBS argued the IRS’s case was baseless legally and practically. Legally, the demand was invalid, because tax was up to negotiations between sovereign states, not court actions against companies. And UBS contended, the IRS’s scare tactics had already prompted unprecedented numbers of taxpayers to come forward voluntarily.
But so high are the stakes, for both UBS and Switzerland, that the bank, beneficiary of a government bail-out last October, has been working very closely with the state. No wonder: John Cryan, UBS’s chief financial officer, acknowledged yesterday that client money poured out of UBS’s depleted wealth management coffers every time the bank found itself in the headlines. In the first quarter, that was uncomfortably often, after the group revealed the identities of 255 US clients in an unprecedented blow to bank secrecy. The concession, along with $780m penalties, let UBS settle criminal charges brought by the IRS. But a linked civil case, requiring far greater disclosure, grinds on.
Now Bern is pulling out all the stops to deflect that action too. The government has filed its own brief with the court, portraying the IRS initiative as an infringement of Swiss sovereignty and breach of the spirit of the bilateral double tax treaty between Switzerland and the US. Last month, Hans-Rudolf Merz, Switzerland’s finance minister and this year’s head of state under the country’s revolving presidency, used the semi-annual IMF/World Bank meetings to try to persuade Timothy Geithner, the US Treasury secretary, to call off the IRS.
Mr Merz argued that Switzerland had accepted international standards on tax exchanges and would now renegotiate its double taxation treaties accordingly: talks with the US started last week; legislation may be ready before year end.
Mr Merz added the IRS case should be dropped once parliament approved the revised bilateral tax treaty to prevent a popular backlash in a referendum if Switzerland were perceived as succumbing to US bullying. The Swiss think they have a fair case. Bern is a traditional ally and remains useful to Washington diplomatically. And Swiss companies are big inward investors.
Mr Obama, who lambasted tax havens in his election campaign and has backed a big rise in IRS staff, has not responded. But recent influential editorials have hinted at his likely reaction. Washington remains grateful for all Switzerland’s help, and appreciates its latest offer to increase transparency. But there will be no easing of the pressure, either on UBS, or on Swiss bank secrecy in general.
Down to the waterline
A devastating fire at an exclusive boatyard in Austria last month caused the destruction of yachts owned by Ferdinand Piëch and Hans-Peter Porsche, two of the leading protagonists in the enduring family feud about the future of the indebted German sports car maker and Volkswagen, the mass market group it controls. So intense was the conflagration at the Lake Wörth boatyard that 12 other vessels were destroyed.
No one was hurt, but both yachts were left beyond repair. Such mutually assured destruction could also be the outcome of the Porsche-Piëch battle, entering its latest round in Salzburg today. The precise outcome is impossible to predict after so many twists, let alone last month’s surprise coup that VW could acquire Porsche’s sports car operation, rather than vice versa.
Whatever happens will hardly heap further credit on either the Porsche or the Piëch clans, successors to the founding Ferdinand Porsche and between them controlling shareholders of the group. Mr Piëch has proved both a brilliant engineer and an expert corporate tactician: his cousins Hans-Peter and Wolfgang Porsche – the latter the group’s supervisory board chairman – have themselves been no slouches. Non-family shareholders in both VW and Porsche will be hoping their latest talks end in something better than ashes.