The end of bank secrecy seems to be closer
Switzerland and the USA have different attitudes towards the new Standard for Automatic
Exchange of Tax Information between countries. Let us look at an overview of the situation
in each country1. In the last section we will analyze the use of Trusts as a Strategy for Asset
Protection.
Switzerland
In the last few years, in line with a decrease in international tolerance towards bank
secrecy, Switzerland has made some not insignificant concessions regarding secrecy,
agreeing to exchange information on a limited basis with selected jurisdictions, while
largely rebuffing efforts for greater transparency towards other countries, particularly
weaker and more vulnerable developing countries.
In 2009 (IRS vs UBS), there was a break in Swiss confidentiality and since then
transparency in Switzerland only seems to move forward. The OCDE, led by the G20 and
especially the USA, is putting a lot of pressure so that Switzerland moves towards the
OCDE standards.
In February 2013, Switzerland signed a FATCA agreement with the USA in which
financial institutions were required to disclose information about American clients
automatically since July 2014. Las 19th March 2015 in Brussels, Switzerland and the EU
initialed an agreement regarding the introduction of the global standard for the automatic
exchange of information in tax matters. Switzerland and the 28 EU member states intend to
collect account data from 2017 and exchange it from 2018 once the necessary legal basis
has been created.
It is important to mention that, once again, this penetration in the Swiss bank secrecy only
benefits the USA and the UE directly, leaving many other countries vulnerable to the Swiss
bank secrecy, for the time being.
After being regarded as the international guardian of bank secrecy for over a century, the
authorities and the Swiss Banks Association decided to succumb to pressure and to adapt
their policies according to international tendencies. At their own pace, without putting
aside the rights and promises made to non-residents with investments in their country, but
in a very different tack by accepting that transparency and information exchange seems to
be the only way in which Switzerland will maintain its financial business in the long term.
In the last few years, a series of legal and market pressure measures have redirected the
market of Swiss banking services so that banks attend less and less to traditional, private
small and medium accounts, and, more to large professional clients to whom they offer
sophisticated services at competitive rates. One of the driving forces behind these changes
has been Switzerland’s desire to be considered at an international level as a country that is
playing a fundamental role in the fight against organized crime and money laundering.
Developing countries, apparently, are being left behind when it comes to receiving these
changes which, for the time being, are only offered to developed and strong countries with
important commercial relations.
In 2014, the OCDE requested Switzerland to commit to the automatic exchange of financial
accounts information2. In the negotiations with the OCDE, Switzerland demanded some
non-negotiable requirements3 before the agreement:
1. That the USA and Singapore also made the commitment.
2. That the exchanged information be treated as confidential and be used for tax
purposes only.
3. Reciprocity.
4. That the final beneficiaries4 of legal entities be identified.
5. Non-retroactivity.
On May 6, 2014, the first condition was fulfilled during an OCDE Council meeting in
Paris, in which the USA and Singapore accepted to sign the agreement5. However, the USA
changed their mind in November 2014 arguing that reciprocity shall be executed through
the FATCA Agreement. The second condition was approved by the OCDE and it is known
as the “specialty” principle. The third condition is mandatory for those countries which
commit to the automatic exchange, although the Swiss are already talking about the
exceptions that the USA applies to reciprocal exchange. In order to analyze the fourth
condition, it is necessary to further understand the term “Beneficial owner” in Switzerland;
this will be discussed more in depth in the following section (Use of Trusts). With regard to
the fifth and last condition, nothing has been expressed in terms of exchange retroactivity;
however, the OCDE standard refers to exchanging existing information as of the end of
2016. This situation does not clarify the problem of depositors who have not agreed with
their tax authorities upon cases in which there are assets for which taxes have not been
paid. In this regard, Swiss authorities have stated that: “It is in the interest of both
associated countries to come to an agreement regarding all those assets for which taxes
have not been paid previously before introducing the automatic exchange of information.
Otherwise, there will be a risk of funds escaping to dubious States, which is undesirable for
both countries involved.”
Recent statements by the Swiss Parliament confirm the commitment of Switzerland to
international transparency policies, automatic exchange of information between countries
and the fight against tax evasion. All the statements mention that they trust that the
provisions that currently allow the USA to maintain the information of some accounts
under secrecy are temporary. Indirectly, this implies that their active participation on
information exchange is conditioned to the USA amending their internal regulations and
allowing the exchange of information regarding accounts under the name of legal entities
and trusts.
The Swiss banking secrecy remains intact for most countries, although it is not as strict as it
used to be. There is still a lack of proactive measures to provide transparency in tax matters,
notwithstanding that an increasing number of Swiss citizens and members of Parliament are
demanding these measures. It is clear that there is no turning back.
United States of America
The USA provides a treatment free of taxes and different forms of secrecy for nonresidents, companies and other entities. With regard to tax matters, it charges a zero rate for
some income categories, including the interest paid by banks and financial institutions to
non-resident individuals or foreign corporations; interest on public debt and interest of
some kinds of corporate debt. Regarding secrecy, the USA also has relatively few and weak
agreements for the exchange of relevant information with other jurisdictions which need
such information so they can appropriately charge taxes to their own citizens. Historically,
the U.S. Government has never required non-residents to declare their income in the USA
by signing the W8 form, which means that, even when it is required to exchange this
information by virtue of international agreements, the USA does not have the information
available to do this. Nevertheless, since 2013, the submission of reports has been extended
to at least the interest of bank deposits perceived by residents of some countries7, although
this does not apply to offshore companies and trusts.
A bill was presented by the IRS in 2001, 2003, 2009 and 2011 (REG-146097-09), in order
to force banks to report the interest paid to non-residents. This caused negative reactions
among U.S. senators and members of Congress. The 25 members of Congress of the State
of Florida wrote a letter to President Obama expressing their opposition, from which we
quote the following:
“The regulation will do considerable and irreparable damage to the U.S. economy. Given
U.S. privacy laws, it is estimated that non-resident foreigners have deposits of more than
USD 10 trillion in North American financial institutions.” (…) “For more than 90 years, the
USA has recognized the importance of foreign deposits and has refrained from taxing
interest accrued therefrom or requiring that they be reported…”
To sum up, the tax authority in the USA demands that local financial institutions:
1. Report balances and income obtained by U.S. and Canadian residents.
2. Report bank interest obtained by residents of countries which have signed
Information Exchange Agreements with the USA (this does not apply to offshore
companies and trusts).
3. Do not report any information about non-residents.
In addition, it requires that foreign financial institutions:
1.
2.
Report balances and income obtained by U.S. residents.
Do not report any information about non-residents.
USA’s “Peer Review Report”
The OCDE, through the Global Forum, monitors the approach of countries towards the
standards it supports. This process is called Peer Review (PR), and it evaluates and
provides Reports with recommendations for each jurisdiction. The USA receives more
passive investments than the total amount of investments received by the rest of the
countries. As we have explained, these investments have two conditions: they are not taxed
and they are confidential for the tax authorities from where the investors are taxpayers.
However, in the USA’s extensive and complex PRR8 there is no reference to the existence
of neither the W8 nor the FATCA, nor to the fact that the interest and capital profits of
bank deposits of foreigners are not taxed, nor to the fact that no information thereof is given
to other countries (except Canada).
What is more interesting is the fact that the USA does not have the mechanisms necessary
to obtain relevant information, which means that the affected countries are not capable of
obtaining this information either, and this is exactly what the OCDE remarks with its
“Global Forum on Transparency and Exchange of Information for Tax Purposes” thesis and
tries to impose on the rest of the countries.
The Use of Trusts as Asset Protection
A Trust is a legal resource, the benefits of which largely exceed asset protection. Generally,
it is used as a very effective method for property conveyance among generations and estate
planning, as well as tax planning. However, in this case, we will focus on its advantages
when it comes to asset protection, and particularly the protection of bank accounts.
A Trust is an agreement between a Settlor and a Trustee, in which the Settlor “donates”
certain assets to the Trust so that the Trustee can manage them for the benefit of a third
party (the Beneficiaries). It is possible to appoint a Protector who will supervise and advise
the Trustee regarding his/her tasks as administrator. By using this strategy, the donated
assets are no longer part of the Settlor’s property, preventing the access thereto by creditors,
former spouses, tax authorities, etc. The assets are now part of an independent property
managed by the Trustee, which means that they are not part of the Trustee’s property either
and so the Trustee’s creditors cannot have access to them. The key to understanding this
legal entity lies in two concepts from Common Law: legal ownership (trustee) and
beneficial ownership (beneficiaries).
Confidentiality: considering that global tendency leads to international transparency and
information exchange between countries, Trusts have proved to be very effective in terms
of confidentiality. In Swiss jurisprudence (UBS vs IRS), the justice determined that in the
case of an irrevocable and discretionary Trust, information about the Settlor or the
Beneficiaries should not be disclosed, since they were not “Beneficial owners” but merely
expected to be compensated. In the USA, the IRS defines the beneficial owner of a Trust as
“he/she who has the obligation of including the assets in his/her tax return in that fiscal
period.” In the case of an irrevocable Trust, the Beneficial Owner is the Trust itself.
In terms of tax planning in Argentina, the fiduciary contribution of assets to an irrevocable
Trust is considered by the AFIP as a transfer of the assets, meaning that they do not belong
to the Settlor’s property anymore. This moment marks the beginning of the profit
accumulation period, and until there are no real distributions to resident beneficiaries, there
is no base for profits or personal assets taxation. For a more detailed analysis of this
subject, we recommend the study of two Argentine jurisprudence cases which resulted in
plenty of caselaw in this regard: the decision dated May 15, 2009 by the National Court of
Appeals for Criminal-Economic Affairs from the case “Deutsch vs AFIP”, and the case
“Eurnekian vs AFIP” of the year 2000.
For many years, Invertax has provided fiduciary services to clients in the region.
SERVICES OFFERED
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Counsel and assistance in the formation of international trusts;
Trustee, protector and executor services;
Formation and management of offshore Foundations;
Formation and management of companies and other offshore entities;
Invertax International Trust (NZ) sponsors the Trusts for FATCA purposes, it fills
and signs W8 Forms and any other bank requirement;
International estate planning, protection and transmission of family businesses;
Family structures in general, international legal and fiscal counsel;
Investment funds and special offshore vehicles;
Other fiduciary services.
We share our experience and knowhow with our clients’ local advisors.
For further information and enquiries regarding this matter, do not hesitate to contact one of
our advisors - we will be delighted to help you.
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1
This report was created by selecting content from the work entitled “Intercambio de Información fiscal entre
países en Suiza, EE.UU., Panamá y Uruguay” (Tax Information Exchange between countries in Switzerland,
USA, Panama and Uruguay) written by Lic. Marcelo Gutiérrez, 2015.
2
Finally, the commitment consists in exchanging accounts information as of December 2017 since September
2018. The question regarding the countries with which Switzerland should introduce this exchange of data is
not affected by the signing of the multilateral agreement; it will be presented to Parliament separately at a later
stage.
3
http://www.swissinfo.ch/eng/politics/Switzerland_to_back_OECD_tax_treaty_.html?cid=38014420
4
The term employed is “beneficial owners.”
5
http://www.oecd.org/mcm/MCM-2014-Declaration-Tax.pdf
6
http://www.sif.admin.ch/themen/00502/00821/00904/index.html?lang=en
7
Interests of deposits of USD 10 or more paid to any non-resident foreigner who is a resident of a foreign
country with whom USA has agreed to exchange tax information under a double taxation agreement or any
other agreement or bilateral agreement shall be reported in the 1042 S Form. See
http://www.irs.gov/publications/p515 for further information.
8
http://www.eoi-tax.org/jurisdictions/US#latest