Who says that a little pressure doesn’t work these day? Singapore and Liechtenstein have both apparently decided that they wanted to be one of the cool kids after all. This week, both countries received word that they are slated to be removed from the dreaded gray list of the Organisation of Economic Cooperation and Development (OECD).
The gray list is a list of countries – more than 30 currently – who have made noise about increasing financial transparency but have not taken the necessary steps.
In the case of Singapore, it had publicly endorsed the transparency standard for tax purposes earlier in the year but had not signed the requisite number of financial agreements with other countries. It will hit the magic number *12* when it signs an Avoidance of Double Taxation Agreement or DTA with France this week. Singapore has also renegotiated agreements or signed new agreements with Mexico, Qatar, Norway, Austria, Australia, the Netherlands, UK, Denmark, New Zealand, Belgium and Bahrain.
Similarly, Liechtenstein has agreed two new treaties with Belgium and the Netherlands, respectively. Liechtenstein has also signed agreements with Germany, France, UK and the US. It is negotiating with Italy, Sweden and Norway.
The countries follow on the heels of Switzerland and Austria, which were removed from the grey list in September. This brings to 15 the number of countries which have been moved to the “substantially implemented” category since April 2009. The fallout from UBS is widely viewed to have contributed to the rush to be considered “mainstream.” The OECD is laughing all the way to the, er, transparent banks…
Germany, like the US, has been highly critical of countries considered to be tax havens. Mostly, those are countries outside of Europe with financial and banking secrecy laws meant to woo (mostly) westerners with the lure of escaping taxation. There are a few notable exceptions within Europe: Luxembourg, Liechtenstein and Switzerland.
All three are small, wealthy countries which lean heavily upon their allies. Luxembourg, in particular, has no navy, no air force and approximately 800 citizens in its army. It looks to its neighboring allies for military protection, as well as for sources of income. Heavily dependent on finance, it follows the US as the second largest investment fund center in the world and is the most important private banking center among countries that have converted to the Euro.
So while the three claim to not care what other countries think about their banking secrecy laws – and the source of their wealth – they clearly do, with both Switzerland and Liechtenstein taking steps to appease their friends and neighbors with promises of a more transparent banking process.
But Luxembourg won’t go quietly. The tiny country is now fighting a very public war of words with Germany. On Sunday, Luxembourg’s prime minister complained about recent comments made by Germany’s Finance Minister Peer Steinbrueck. Steinbrueck has been extremely critical of Switzerland, Luxembourg and Liechtenstein, down to outright accusing them of aiding tax evasion. Steinbrueck has actually encouraged others to crack down on those countries engaging in such behavior, with his party chair going so far as to say that “in the old times one would have sent in troops” to combat tax havens.
Luxembourg Prime Minister Jean-Claude Juncker was not laughing. “We don’t find that funny,” he was quoted by Der Spiegel. “We suffered under German occupation. Thank God we no longer resolve our problems with soldiers.” He continued, “We don’t talk that way about the Germans. And the Germans have no right to talk that way about Luxembourgers.”
German Chancellor Angela Merkel made what almost sounds like an apology (almost) when she said, “If there has been irritation, I as head of government will do everything I can so that it is dispelled quickly.”
Merkel, however, also made it clear that she welcomed changes in banking secrecy laws as promised by her neighboring countries. It is not certain when those changes will occur as Luxembourg, Liechtenstein and Switzerland have made no secret of the fact that they feel bullied into accommodating the wishes of their allies. Not surprising, since the three countries are somewhat stalwarts of tradition. Luxembourg’s motto perhaps sums this up best: “Mir wëlle bleiwe wat mir sinn” or “We want to remain what we are.”
Who said those tax havens don’t care what the rest of the world thinks about them? Apparently, some do.
Four countries were removed from the “black list” and placed on the “grey list” – the creativity of those financial minds is breathtaking, is it not? – after committing to international standards on bank information disclosure. The four countries were Uruguay, Costa Rica, Malaysia and the Philippines. Switzerland and Luxembourg have indicated that they would also move towards international data transparency standards.
The lists were published just days after the G20 summit in London wrapped up. International standards of bank information exchange were a top priority at the summit.
Raising eyebrows on the list was a shift to the “white list” for China.
Chinese President Hu Jintao had been active in discussions regarding the OECD, despite concerns that some countries had about what appeared to be a lack of commitment from Hong Kong.
With such powerhouse banking centers making concessions, it seems that the crackdowns are working. But is it all just temporary?
When the Asian markets fell into trouble years ago, the OECD focused on these tax havens, attracting support from nations like the US and the UK. However, the issue lost momentum once the financial markets picked back up. It seems that where the rich stash their cash seems to matter most when other dollars (and Euro) are tight. Once, however, economies rebound, it doesn’t seem to be an issue. Will this time be different? It actually might. In the past, banking secrecy stalwarts have steadfastly refused to cooperate. But with indications that nations like Switzerland and Costa Rica are willing to make changes, maybe this time, it will stick.
Switzerland likes to think of itself as a neutral tax haven. Germany, however, thinks that its much more menacing than that, with Peer Steinbrück, the German finance minister, out and out accusing the Swiss of trolling for tax evaders, saying:
Switzerland offers conditions that invite the German taxpayer to evade taxes.
Steinbrück went so far as saying that Switzerland should be added to an international international blacklist of tax havens as reported by the the Organisation for Economic Co-operation and Development (OECD). The list includes Andorra, Monaco and yes, Liechtenstein, which has been under investigation for its own questionable practices.
Germany is not alone in a growing frustration with Switzerland. Eric Woerth, the French budget minister, has suggested that there may be economic retaliation for those countries which refuse to exchange tax information, including Switzerland. But maybe they don’t care: Switzerland, Austria, and Luxembourg refused to attend a recent conference to discuss tax transparency, as did the United States. Those countries that were in attendance, however, have demanded a revised list of “noncooperative” countries by summer 2009. That list could grow to include Panama, Gibraltar, Bahrain and perhaps even Singapore and Hong Kong.
Notwithstanding calls for a united front against these countries, Germany is refusing to wait for consensus and is taking measures into its own hands. The German government is moving to immediately boost supervision of German banks and insurance groups with offshore subsidiaries. Additionally, the German tax code is being amended to disallow exemptions on dividends for those countries who refuse to observe a sufficient amount of tax transparency as demanded by the OECD.
It will be interesting to see the fall out from this public break, especially as the global markets as taking a hit. While clearly Switzerland is not dependent upon money from one country, if similar measures are adopted in the 17 countries that attended the conference, the economic pressure could be enough for Switzerland to yodel a little differently. It did, after all, work for Liechtenstein.
