Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Swiss make cheese of Aussie tax system.



Download PDFDownload PDF

David Cox MP Shadow Minister for Revenue and Assistant Treasurer Member for Kingston

SWISS MAKE CHEESE OF AUSSIE TAX SYSTEM

AUSTRAC data reveals that $9.1 billion flowed from Australia to Switzerland in 2002-03, while only $6.6 billion returned to Australia.

The net flows from Australia to Switzerland have grown by more than 300 per cent since 2001-02, to $2.5 billion. In 1999-00 and 2000-01 the net flows from Australia to Switzerland were negative.

This dramatic increase in net outflows from Australia to Switzerland may indicate increased use of Swiss bank accounts to cover up illegal activities, including tax evasion.

This is in addition to the $5 billion that flowed from Australia to all the OECD identified ‘tax havens’ in 2001-02 (the OECD does not identify Switzerland has a tax haven).

In a response to a Senate Estimates Question on Notice (see attached) the ATO has admitted that they have no means to establish the extent of the use of Swiss bank accounts by Australians - but the size of flows between the two countries must set off alarm bells.

The ATO also admits that it has no idea who is operating Swiss Bank Accounts, making the enforcement of Australian law almost impossible when these accounts are used.

In the answer the ATO admits:

• “The ATO has no means of establishing the extent of the use of Swiss bank accounts by Australians” ; and

• “It would be advantageous for the ATO to know which taxpayers are operating Swiss bank accounts for compliance monitoring”

Australia last signed a tax treaty with Switzerland in 1981, a treaty which only allows for exchange of information in the case of criminal investigations - not for the purpose of upholding Australia’s taxation or corporations law.

For example, the Offset Alpine affair hit a brick wall 6 years ago because of the inability of Australian authorities to access information about the Swiss bank account trading in Offset Alpine shares. The Swiss had this information, but there was no agreement in place for them to hand it over.

“These accounts are the Swiss cheese of the Australian tax system - enjoyed by the rich, full of holes and the closer you get to them the more they smell” said David Cox. According to the ATO an effort was made in the mid-nineties to sign a new more comprehensive tax treaty with Switzerland - but these efforts stalled as the Australian government focused on negotiating tax treaties with major trading partners, rather than tax havens.

“This lack of focus on tax havens demonstrates how weak the Howard government is on tax havens” David Cox said.

In the mean time Germany, the United States and Finland have all entered into agreements giving them greater access to Swiss banking information. These agreements redefine the concept of fraud, to allow greater access to banking information.

On 24 January 2003 the acting US Treasury Secretary Kenneth W. Dam said of the Mutual Agreement with Switzerland Regarding Tax Information Exchange:

“This Mutual Agreement (on tax information) is a significant step in our efforts to ensure that no safe haven exists anywhere in the world for the funds associated with illicit activities”

“This is the type of exchange of information agreement that the Howard government should be negotiating with Switzerland. Such an agreement would reduce the scope for wealthy Australians to voluntarily opt out of paying their fair share of tax.” David Cox said.

In the answer to the Estimates Committee, the ATO admits that the only plan the government has for a tax treaty with Switzerland is to cover withholding tax rules - not the exchange of information agreement desperately required.

In the eight years since coming to office the Howard Government has focused solely on the now failed OECD processes to combat the use of tax havens to avoid tax. These failed processes never even covered Switzerland, which according the OECD is not a tax haven.

In an answer to a question without notice on 3 November 2003, Peter Costello said:

“In April 2000, in my capacity as the Chairman of the OECD that year, I brought to the council a report called Improving access to bank information for tax purposes. This was an attempt to get agreement between OECD countries to allow cooperation where there was reasonable cause and identification of sums concerned.

I have unfortunately to report to the House that on 16 September this year four countries, led by Switzerland, vetoed those recommendations.”

“The Howard government now stands exposed as having no strategy to deal with tax havens or jurisdictions like Switzerland that provide secrecy for illegal tax and corporate activity,” David Cox said.

A Latham Labor government will ensure that PAYE taxpayers pay no more tax than is necessary, through making high wealth individuals pay their fair share. A Latham Labor government will pursue as a matter of urgency exchange of information agreements with all jurisdictions used to avoid tax.

CANBERRA 12 February 2003

Senate Economics Legislation Committee

ANSWERS TO QUESTIONS ON NOTICE

Treasury

Australian Taxation Office

Supplementary Budget Estimates 2003 (6 November)

- 1 -

Question: Supp 4

Outcome 2

Topic: Switzerland—Swiss Bank Accounts

Senator Sherry asked:

1. What evidence does the ATO have on the extent of the use of Swiss bank accounts by Australians?

Answer: The ATO has no means of establishing the extent of the use of Swiss bank accounts by Australians. The Swiss tax authorities will only provide information where it can be demonstrated that the Swiss definition of tax fraud, which is criminal in its nature, has been met.

The distinction between tax evasion and tax fraud has direct consequences for mutual legal assistance as Switzerland only grants mutual legal assistance in criminal matters when the foreign procedure involves elements of a crime which are regarded as tax fraud in Switzerland.

2. How much money flowed from Australia to Switzerland in 2002-03 and earlier income years?

Answer: The value of the money transfers from Australia to Switzerland from AUSTRAC data in the financial year ending 30 June 2003 and earlier years is as follows:

1999/00 2000/01 2001/02 2002/03

$6,370,152,268 $5,850,698,791 $11,225,961,039 $9,138,214,551

3. How many transactions occurred between Australia and Switzerland in 2002-03 and earlier income years?

Answer: The number of outward transactions from Australia to Switzerland from AUSTRAC data in 2002/03 and earlier years is as follows:

1999/00 2000/01 2001/02 2002/03

23,827 24,554 25,849 26,869

The number of inward transactions from Switzerland to Australia from AUSTRAC data in 2002/03 and earlier years is as follows:

1999/00 2000/01 2001/02 2002/03

47,018 55,050 56,645 60,139

Senate Economics Legislation Committee

ANSWERS TO QUESTIONS ON NOTICE

Treasury

Australian Taxation Office

Supplementary Budget Estimates 2003 (6 November)

- 2 -

4. How much money flowed from Switzerland to Australia in 2002-03 and earlier income years?

Answer: The value of the transactions from Switzerland to Australia from AUSTRAC data in the financial year ending 30 June 2003 and earlier years is as follows:

1999/00 2000/01 2001/02 2002/03

$7,049,346,550 $8,573,236,877 $10,447,004,587 $6,666,329,366

5. How many people were involved in these transactions?

Answer: The number of individuals who were involved in these transactions inbound to Australia and outbound to Switzerland from AUSTRAC data is as follows;

No. of ordering No. of beneficiary

Inbound Customers Customers

1999/2000 15284 24885

2000/2001 18224 30591

2001/2002 17726 30868

2002/2003 18356 31792

Outbound 1999/2000 9643 9956

2000/2001 9575 11098

2001/2002 10381 11499

2002/2003 10427 11704

6. Is Switzerland considered a tax haven by the ATO?

Answer: Many fiscally sovereign territories and countries use tax and non-tax incentives to attract activities in the financial and other services sectors. However, not all of them are classified as tax havens.

The 1998 OECD report; “Harmful Tax Competition, An Emerging Global Issue”, has identified four key factors in considering whether a country is a tax haven:

a) No or only nominal taxes Tax havens impose no or only nominal taxes (generally or in special circumstances) and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape tax in their country of residence.

b) Lack of effective exchange of information

Senate Economics Legislation Committee

ANSWERS TO QUESTIONS ON NOTICE

Treasury

Australian Taxation Office

Supplementary Budget Estimates 2003 (6 November)

- 3 -

Tax havens typically have in place laws or administrative practices under which businesses and individuals can benefit from strict secrecy rules and other protections against scrutiny by tax authorities thereby preventing the

effective exchange of information on taxpayers benefiting from the low tax jurisdiction.

c). Lack of transparency A lack of transparency in the operation of the legislative, legal or administrative provisions is another factor in identifying tax havens. The transparency criterion is concerned with ensuring that laws are applied on an open and consistent basis among similarly situated taxpayers, and that information needed by tax authorities to determine a taxpayer’s situation is in place. Lack of transparency can make it difficult, if not impossible, for tax authorities to apply their laws effectively and fairly. “Secret” rulings, negotiated tax rates, or other practices that fail to apply the law in an open and uniform way are examples of lack of transparency. Lack of transparency is also present if there is inadequate regulatory supervision or if the government does not have legal access to financial records.

d) No substantial activities In addition, the absence of a requirement that the activity be substantial is important because it suggests that a jurisdiction may be attempting to attract investment and transactions that are purely tax driven. It may also indicate that a jurisdiction does not (or cannot) provide a legal or commercial environment or offer any economic advantages that would attract substantive business activities in the absence of the tax minimising opportunities it provides. The determination of when and whether an activity is substantial can be difficult. For example, financial and management services may in certain circumstances involve substantial activities.

Over time the OECD’s Harmful Tax Practices Initiative has placed less emphasis on the ‘no substantial activities’ criterion, and consequently this criterion has not been used by the OECD in determining the status of a tax haven. (For a full explanation see “OECD’s Project on Harmful Tax Practices: The 2001 Progress Report”.) Consequently, the first three factors have become the focus for this exercise.

Senate Economics Legislation Committee

ANSWERS TO QUESTIONS ON NOTICE

Treasury

Australian Taxation Office

Supplementary Budget Estimates 2003 (6 November)

- 4 -

The first factor, no or nominal taxes is a gateway criterion to determine those situations in which an analysis of the other criteria is necessary. However, it is not sufficient, by itself, to result in characterisation as a tax haven. The OECD recognises that every jurisdiction has a right to determine whether to impose direct taxes and, if so, to determine the appropriate tax rate. An analysis of the other key factors (lack of effective exchange of information and transparency) is needed for a jurisdiction to be considered a tax haven.

The OECD work has not identified Switzerland as a tax haven on the basis that refusal to exchange information on civil tax matters (Switzerland does exchange information when criminal tax fraud is at issue) is not adequate alone to identify Switzerland as a tax haven. OECD countries continue to press Switzerland to change its policy in this respect, including through the

work on bank secrecy. (For further explanation, refer to the OECD’s report: “Improving Access to Bank Information for Tax Purposes, the 2003 Progress Report.”)

7. Do you know which taxpayers are operating Swiss bank accounts?

Answer: As with the response to Question 1, it is not possible to establish which taxpayers are operating Swiss Bank Accounts unless it can be demonstrated that the Swiss definition of tax fraud has been met.

Switzerland’s bank secrecy rules generally prevent Swiss banks from revealing information about their clients. It follows that the Swiss tax administration cannot obtain information concerning interest paid by Swiss banks, or received in the accounts of clients of such banks, either for Swiss tax purposes or in response to requests from treaty partners.

Swiss banks are obliged to furnish information when criminal proceedings are conducted against a client or a third party, but tax authorities cannot lift bank secrecy for tax assessment or tax evasion matters.

• If not: Would it be advantageous for the ATO to know which taxpayers are operating Swiss bank accounts?

Answer: It would be advantageous for the ATO to know which taxpayers are operating Swiss bank accounts for compliance monitoring.

Senate Economics Legislation Committee

ANSWERS TO QUESTIONS ON NOTICE

Treasury

Australian Taxation Office

Supplementary Budget Estimates 2003 (6 November)

- 5 -

8. Has Australia approached Switzerland about signing a new and more comprehensive double tax agreement then that entered into in 1981?

If no:

i. Who decided that such as an approach should not be made?

ii. On what grounds does the government decided to/or not to enter into such negotiations?

If yes:

i. What is the progress?

ii. When do you expect the agreement to be signed?

Answer: Australia and Switzerland commenced renegotiation of the existing treaty in the mid-1990s. However, negotiations stalled and Australian priorities moved towards focusing on concluding treaties with our major trade and investment partners.

With the entry into force of the amending Protocol to the Australia-US tax treaty, most favoured nation’ clauses in Australia’s existing tax treaties with Switzerland and seven other countries require Australia to enter into negotiations with a view to providing the other treaty partner

similar withholding tax outcomes to those agreed in the US Protocol. Australia has notified Switzerland of its obligation; however, it is too early to indicate whether these renegotiations will result in an amended treaty.