Newsletter  -  The Latest Attack on Privacy

"We are not prepared to accept blatant attempts to undermine a decades-old system that protects the financial privacy of our clients, particularly when the competitive motives behind these attempts are so obvious."
- Chairman, Swiss Bankers Association<

Even before September 11, privacy was already under attack. Like it or not, during 1999-2000 the Swiss financial industry became subject to arguably the strictest money laundering laws on the planet. Then last year, the US imposed new withholding taxes and reporting requirements on offshore bank accounts, forcing clients to liquidate or restructure US-based assets held in foreign accounts. The war on terrorism adds a new aspect to the war on drugs in that terrorist finances are not restricted to illegal sources. The latest attack comes in the form of another set of tax rulings which, among other things, gradually repeals US estate taxes.

Estate taxes are currently imposed at up to 55 percent on property transfers of above US$3,000,000, but the US government, in the new tax act, aims to phase it out completely by 2010. In 2010, the estate tax will be repealed but only for that year. It is far from sure that the repeal and other changes will be extended after 2010.

They also call for the reporting of certain transfers of assets at death or by gift starting on January 1, 2010.

Failure to report could subject banks to a fine of as much as 5 percent of the market value of the assets. The reporting requirements place foreign banks located in bank secrecy jurisdictions in a very difficult situation.

The following example illustrates the filing obligations:

Mr. H., a Hong Kong citizen, dies and leaves a fully diversified portfolio in a Swiss bank to his US-resident son. If this portfolio is valued at more than US $60,000 on his death, then an information return is due to the IRS. Since Mr. H. was based in Hong Kong, there was no US executor appointed. In this case the bank is responsible for filing the information return. Since the bank is governed by Swiss bank secrecy rules, it may only file the return with the consent of Mr. H's son. If no consent is given and no information return is filed, the IRS may impose a penalty of 5% of the value of the assets.

 

For example, non-US persons who own US stocks can be advised to hold these investments through non-US offshore corporations to avoid US estate tax exposure. Such tax planning could include the use of offshore trusts and offshore life insurance. It's best to consult your tax advisor.*

The bottom line: As much as there are ways to legally get around tax constraints, one also has to be resigned to the fact that privacy has many enemies. Offshore tax havens will always be viewed with suspicion by them. One has to assume that there will be more and more exchange of information, financial affairs will become more and more transparent in a globalizing world. Switzerland, along with other offshore centers, will continue to be under pressure to do away with bank secrecy. But because financial privacy is so ingrained in the Swiss culture, the likelihood is that Switzerland will be the last bastion of privacy, less private than it would like to be but still a more private place for your money than any where else in the world.