Governments' aggressive approach to taxation is alternately punishing and rewarding financial services firms.
The Swiss government is planning to abolish tax secrecy laws – what does that mean for Swiss banking?
On Wednesday 29 May 2013 the Swiss government proposed to allow Swiss banks to disclose information to the US government. The proposal, if passed when the government next sits in June, could open the way to settlements between Swiss banks and the American
government for the assistance of US tax evaders.
The need for settlements – which in this case means the payment of up to SFr10 billion in fines – has been a forgone conclusion since 2009, when UBS entered an agreement to turn over client names and admitted supplying tax evasion services to US clients.
More recently Switzerland's oldest bank Wegelin & Co was shut down/sold off after admitting to similar charges.
There appears to be a global government clampdown on tax; is there any upside for banks?
The Swiss private banking industry is undoubtedly suffering since it lost the battle to conceal clients' income from interested governments, but this resolution at least allows it to move forward.
Some banks are seeing the tougher tax regimes as a new source of income. In the US the Foreign Account Tax Compliance Act (FATCA) has placed the responsibility for withholding tax penalties for certain types of payments, including the gross proceeds from
the sale of securities, on financial institutions.
Having been given the task of collecting tax on behalf of the US government, global custodian banks have spotted the opportunity to provide services to fund manager clients by helping them track end investors' activity using their transfer agency services.
The clients get much better support in keeping themselves FATCA compliant as a result, while the custodians get new revenue streams.
Aren't banks also getting taxed directly?
The French financial transaction tax (FTT) introduced in 2012 was intended to 'punish' banks and recover money spent supporting them through the crisis. It actually affects end investors not brokers, charging 0.2% on equity purchases of large Paris-listed
companies but exempts market makers, derivative trades and repo transactions. As a consequence it barely touches banks and really hits the buy-side.
Would European or US FTTs change that?
They could; initial EC proposals were tougher than the French FTT, with equities and bonds taxed at 0.1% and derivative contracts at a rate of 0.01%. However cracks have appeared during the negotiations over what should be taxed - such as FX transactions
– and so the bill may watered down. The US proposal to tax 0.03% on financial transactions for secondary market cash products and a further tax on derivatives has been put forward to Congress but is widely opposed by both republican and the current administration.
As one wag put it; if taxes on cigarettes are supposed to reduce smoking, what do taxes on business do?