UBS AG, Credit Suisse Group AG and other Swiss banks may lose most of the 500 million-franc ($522 million) guarantee payment they made to the U.K. government as part of a tax deal, the Swiss Bankers Association said.
That payment, under an accord signed by Switzerland and the U.K. in October 2011, covered the failure by bank clients to disclose undeclared money in the past. With fewer untaxed U.K. assets in Switzerland than previously expected, the banks may not be reimbursed by their British customers, the Basel-based association said in an e-mailed statement today.
“The possibility can therefore not be ruled out that either none or only a small part of the bank’s guarantee payment of 500 million francs will be recovered,” the association said.
Switzerland and the U.K. signed the agreement to settle a dispute over tax evasion by wealthy Britons holding offshore accounts with Swiss private banks. With many British clients opting for voluntary disclosure and others holding resident non-domiciled status, which means they don’t fall under the withholding tax deal, repayments by bank customers will be smaller than expected, the association said.
The shortfall may cost Credit Suisse as much as 90 million francs, which will be booked in the second quarter, the bank said in an e-mailed statement.
UBS’s share of the upfront payment is approximately 100 million francs, Dominique Gerster, a spokesman for the Zurich-based bank, said in an e-mailed statement.
“We will take into account all information available to us in our assessment of the impact of the arrangement on our second-quarter results,” he said.
Switzerland is trying to shake off its reputation as a tax haven after amassing $2.2 trillion of assets from affluent cross-border clients. Under the accord with the U.K., Swiss banks will levy a withholding tax of 27 percent on capital gains earned by Britons with offshore accounts. Revenue generated will go to the British Treasury, while client identities remain secret.
Britons may have opted to use the Liechtenstein Disclosure Facility to declare untaxed assets instead, according to Mark Summers, a lawyer with Speechly Bircham AG in Zurich.
“The reality was that in many cases and particularly with larger accounts disclosure and regularization through programs such as the Liechtenstein Disclosure was far cheaper than paying withholding tax,” Summers said in an e-mailed response to questions.
The estimate of revenue generated from the Swiss agreement takes into account the balance between tax withheld by the banks and tax collected directly from individual taxpayers following disclosure, an official at the British Treasury said by e-mail.
“More people have chosen to disclose their tax affairs to HMRC than expected so the yield from this route is likely to be higher than anticipated,” the official said. “There is no reason to revise the overall yield estimate at this point.”
The U.K.-Swiss deal probably didn’t force many voluntary disclosures as it contains a series of loopholes, which means the British government will only recoup a fraction of the 4 billion pounds ($6 billion) to 7 billion pounds envisaged by the bilateral treaty, said Nicholas Shaxson, a spokesman for the Tax Justice Network.
“This is an indication that the U.S.-Swiss tax deal has failed and demonstrates the Swiss withholding tax model is bankrupt,” Shaxson, author of “Treasure Islands: Tax Havens and the Men Who Stole the World,” said by phone “It’s been child’s play to escape the deal through the use of structures, such as discretionary trusts and insurance wrappers.”
Switzerland has also agreed a withholding tax deal with Austria, while Germany’s Parliament rejected a similar accord in November.