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Secret movement

Sunday, 23 November 2014 15:17
Secret movement

In 2014 it’s 80 years since banks of Switzerland began to be guided in the activity by the principle of a bank secrecy.

Now more than 80 countries adhere to the principle of bank secrecy in this or that look. But, as Thomas Martin believes, the partner of the EY Company, it can end in the near future. The budget deficit of the majority of the countries of OECD and huge debts led to that the governments aren't able to allow any dollar or euro to remain unaccounted or to go to an offshore.

Doubtful trillions

The quantity of the foreign capital in Switzerland is estimated at the sum equivalent to about $1 trillion. However the absolute leader remains the USA with more than $2,5 trillion of the foreign capital, some European countries have a little more than $1 trillion (France, Germany, Great Britain, Belgium), and about $0,7 trillion is in Singapore. For comparison: the foreign capital placed in Russia is estimated at $0,5 trillion, thus it is considered that a considerable share of these means — the reinvested Russian money. On a ratio of the foreign capital per capita the three of leaders includes Luxembourg, Switzerland and Singapore.

The bank secrecy — the special legislative norms demanding from banks and financial institutions to store confidential information of clients and not to disclose it to the third parties, including the government and tax authorities. The bank secrecy extends on all types of personal and financial data, including data on deposits, number of accounts and operations. Emergence of concept of bank secrecy is connected usually with the Swiss law on bank activity of 1934. However actually at the beginning of the XVIII century Big council of Geneva approved provisions which demanded from bankers of conducting records about the client, but thus forbade to provide such information to someone, except the client.

In the liberal and globalized economy money has to move freely between the countries. So what is a problem?

In April, 2009 leaders of the countries of "the big twenty" decided to intensify fight against evasion of taxes and declared that "the era of bank secrecies came to an end". In 2013 leaders of the countries of "the big twenty" officially approved system of automatic exchange of information, the highest embodiment of the principle of transparency, as the standard for which it is necessary to strive.

Besides, the extended coverage in mass media was received by some tax trials. The USA accused several Swiss bankers of assistance to evasion of taxes and fined some Swiss banks with the considerable sums. U.S. authorities, France, Germany and Great Britain "caught" lists of the citizens which didn't declare the personal funds placed in Switzerland and Luxembourg. In 2013 the French finance minister resigned after it became clear that he illegally transferred funds to accounts in Switzerland.

The most part of the countries of OECD desperately tries to cope with debts which already reached about 100% of annual GDP, and here and there even exceeded this indicator. As a result the government raise taxes, and citizens even more often reflect on "fair system of the taxation". Evasion of taxes became a topic of the day in the majority of the countries therefore politicians need to show gravity of the intentions to solve this problem.

Besides, considerable volumes reached cash flow, received from illegal activity (drug traffic and other criminal acts). It is impossible to obtain reliable statistical data, however only the turn of means from drug traffic is estimated, at least, at $0,3-1 trillion. Anyway it is about quite large sums which considerable part passes through a world financial system. The governments intend to kill two hares at once: on the one hand, to limit illegal activity, on the other — to try to catch at least part of these financial streams.

To achieve these objectives, the state needs to know in all details, "where the money are" and whom they belong to.

It is possible to note also that the sector of financial services generates the considerable income therefore many governments look for a way to eliminate competitive advantage which the bank secrecy gives. Thus, bigger transparency is demanded by those countries which count that their financial system will benefit from cancellation of bank secrecy.

Pervasive FATCA

Now the USA are the only large economy which holds a tax on the income of the citizens (and foreign residents who have a residence permit) regardless of a place of their accommodation and the country of origin of the income. About 6 million citizens of the USA live abroad, and about 13 million foreign citizens (with the potential income in other countries) have residence permit and pay taxes of the USA on difficult system which considers the taxes paid in other countries and the sum which would be paid to the USA.

Thus tax authorities of the USA aren't sure at all that each taxpayer gives all information necessary for them. In addition the citizens and residents living in the USA not always declare property and the income abroad. Therefore in 2010 the law "About the Taxation of Foreign Accounts" (FATCA) which will come into power this year was also adopted. The essence of FATCA is that banks and the financial organizations of those countries which concluded the intergovernmental agreement with the USA, have to provide information on the American clients in appropriate authorities of the USA, otherwise sanctions will be applied to them. The largest economies of the Eurozone have already signed agreements, and, strangely enough, Switzerland followed their example. Russia conducts negotiations so far, but it is expected that the agreement will be signed soon.

Thus, all financial organizations need to make changes to the procedures providing identification of tax residents of the USA (including persons with a dual citizenship), and to provide information on them in tax authorities of the USA. Some banks which disagreed to foot the bill and risks connected with such procedures decided not to serve clients from the USA and asked the available clients to close the accounts from the USA.

Nevertheless, if FATCA is effective, there are no doubts that other countries will follow the example of the USA. Large economies of the EU watch succession of events with interest, and some has already begun work on similar bills.

However, not everything is so obvious. FATCA and other laws mean additional expenses and risks for banks which, in turn, shift them to shoulders of the clients. Clients also should provide additional information and documentation at interaction with bank.

It isn't clear yet, how many tax revenues can receive the USA and other large economies if and when they receive detailed information on assets and the income of the taxpayers abroad. The most optimistical assessment in case of FATCA is $1 billion a year. For comparison: $100 billion go to an offshore and more than $300 billion taxes the treasury of the USA receives less in a year (in Germany, Italy, France and Russia evasion of taxes is estimated at the sum about $200 billion a year, however it is necessary to operate with these indicators with care). However Great Britain, whose tax authorities expected to receive $5 billion after conclusion of agreement with Switzerland at the end of 2011 until received less than $1 billion. Therefore you shouldn't take unconditionally on trust optimistic forecasts in this regard.

At the same time the total cost of expenses of all foreign banks due to the need to conform to requirements of FATCA, most likely, will exceed $1 billion a year. Besides, the number of the people who refused citizenship of the USA increased in three years six times. However, it is only 3 thousand cases so for the USA it isn't a serious problem.

And not all countries agree to refuse to follow the principle of bank secrecy generally and to accept FATCA in particular. So there’s high probability of that, for example, Switzerland or Luxembourg will face outflow of means from the banks when clients for whom confidentiality is for any of several reasons necessary, move the assets to quieter places, many of which settle down on exotic islands. Besides, large economies like Brazil, India or China still carefully consider all options, and they aren't lonely in the doubts. All this gives the grounds to believe that hearings about death of bank secrecy are exaggerated.

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