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November 8, 2002
EU threatens Swiss again over information exchange
The European Union has again threatened to impose sanctions on Switzerland if it does not agree to the automatic exchange of information about bank accounts and investments held by non-residents.
However, there are doubts over the effectiveness of these threats, given that Luxembourg has said it will veto any proposal to implement sanctions. It is also unlikely the EU will try to impose sanctions against
the US, which it is also asking to comply with the information exchange regime but which has again indicated that it is unwilling to do so.
The threat of sanctions has re-emerged after the latest negotiations
over the EU's proposed Savings Tax Directive stalled on September 6 when Switzerland stood by its proposal for a voluntary exchange or withholding tax instead. The sanctions could include restrictions on the
movement of capital into and out of Switzerland. EU foreign ministers have also warned they will scrap a proposed range of measures to improve links with Switzerland, including passport-free travel and the free
movement of goods, if it does not agree to the Savings Tax Directive.
Under the directive, which is currently only a draft, countries would automatically exchange information about bank accounts and
investments held by non-residents with the tax authorities in account holders' countries of residence within the EU.
Luxembourg, Austria and Belgium, as well as the Channel Islands and Isle of Man, have
agreed to the Savings Tax Directive only as long as "third-party countries", including Switzerland and the US but also Andorra, Liechtenstein, Monaco and San Marino, also sign up to it by the end of this
year.
But Luxembourg, which like Switzerland has banking secrecy, has stated it does not support the use of sanctions, which would require the support of all 15 nations in the EU. "It is not worth
beginning a political war with the Swiss or the other third countries," said Luxembourg's minister of economic affairs, Henri Grethen, in early September.
Luxembourg's prime minister, Jean-Claude
Juncker, repeated the Grand Duchy's opposition to sanctions at a conference last month, saying: "The way in which some of my colleagues are trying to negotiate with the Swiss is not acceptable. They are
treating Switzerland like an Alpine Iraq."
Luxembourg, Belgium and Austria would all prefer to impose a withholding tax on non-residents' interest and investment income. Under the draft directive, the
three countries would be able to impose a tax for a transitional period of eight years before having to implement the exchange of information system in 2011.
The EU's plans took a further blow on October 29
when the Bush administration reiterated its unwillingness to agree to automatic exchange of information with the EU. Larry Lindsey, the president's senior economic advisor and director of the National Economic
Council, was quoted as saying: "The administration does not support the EU Savings Directive - there is zero interest in it." The statement follows an earlier disavowal of the directive by Glenn Hubbard,
chairman of the president's Council of Economic Advisers.
US campaigners against tax co-operation with the EU now believe the measure is dead. Says Andrew F. Quinlan, president of the Center for Freedom and
Prosperity: "Defeating the EU savings tax cartel has been the Center's top priority. I am extremely gratified that President Bush and his team have rejected this scheme to undermine tax competition, financial
privacy and fiscal sovereignty."
Adds Daniel Mitchell, a senior fellow at the Heritage Foundation: "The EU information-sharing proposal would have enabled foreign governments to tax
U.S.-source income. Because the United States has attracted about $5trn of passive investment from overseas, the EU cartel would have harmed America's competitive advantage in the world economy."
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