What Is a Swiss Bank without Bank Secrecy? And Does Anyone Tell New Citizens About US Worldwide Taxation Rules?

by Kenneth Anderson

Lite-blogging Ken notes the front page WSJ story today, “Swiss Banks Freeze Out US Clients,” July 21, 2009.  The freeze-out is a response to UBS and its fight with the IRS, which wants information on US taxpayers (not necessarily just citizens).  I have two questions, neither of which I will try to answer:

First, what is the competitive advantage of a Swiss bank these days, if bank secrecy is gone?  If it is no longer possible for people around the world privately to stash cash in Switzerland, sure, there is still an advantage in having a safe haven bank.  Coup de main, coup d’etat, revolution, hyperinflation … But there are lots of safe haven banks around, and mostly they are located in places like the US and the UK and France and other large, stable states.  Bank secrecy has always been what has set Swiss banks apart, yes?  What is the competitive advantage in relation to other safe havens if that is gone? I don’t doubt the probity and skill of Swiss private bankers; I just doubt it is any greater than other private banks.

Second – perhaps tax blogger extraordinaire Paul Caron can address this? Paul,might I solicit a comment or cross-guest-post? – what about the tax obligations that fall upon people who avail themselves of the opportunity to become US persons for tax purposes – US citizens but also, I take it, not just citizens but permanent residents in the US.  What are the US rules regarding world wide income taxation?  The IRS investigation has focused on US citizens apparently holding secret Swiss accounts that should be subject to US tax rules, regardless of it being offshore.  What this made me wonder is whether anyone advises new, or would be, US citizens in advance of what their full tax-paying obligations might be.  As US rates look to rise, and rise, compared even to Europe and other jurisdictions, does US citizenship or US person for tax purposes look so attractive?


5 Responses

  1. Although I have the luxury of being both an Australian and an EU citizen, so I would not derive any substantial advantage that I am aware of from US citizenship besides the right to purchase firearms in most States and the slightly greater protection of the US consular network, I would never take up US citizenship for the very tax reasons you refer to.

    Broadly speaking, as I understand it you are right and the US taxes the worldwide income of its individual citizens wheresoever domiciled and US-resident corporations and resident alien individuals,  and their wholly-owned subsidiaries. The one real exception is that in the case of trading subsidiaries tax can generally be deferred until repatriation (which may never happen). Also, often, foreign income will come with a foreign tax credit which will offset some or all of the US tax.

    To rub salt into the wound of the anywhere in the world bit, they even seek to tax you for 10 years after renouncing citizenship!! But to answer your final question, I am pretty sure that US person for tax purposes has never looked particularly attractive 🙂

  2. The level of education, information, orientation provided to people who become permanent residents and citizens of the United States regarding their obligations as such is deplorable. It is essentially absent. I say this as an attorney practicing U.S. immigration law who has encounted too many people unaware of the law’s implications for them.

  3. It would indeed hurt the swiss financial centre if the bank client’s secrecy would be abandoned… it would affect the private banks in particular, a study shows that they owe 10 to 20 percent of their market value to the bank secrecy. what does it mean though, to abandon the bank secrecy? that would be an automated exchange of  information about any client. this would actually violate the swiss citizen’s private sphere and not serve any purpose.

    It is important to note however, that the swiss bank secrecy does not provide any protection for criminals. switzerland has very effective provisions against money laundering, corruption and tax fraud.

    As to whether there would be other advantages for swiss banks, consider the following rankings from Scorpio Partnership (2009) study:

    Stability (Economy, Politics):
    1. Switzerland
    2. Cayman
    3. Singapore
    4. Guernsey
    5. Jersey
    6. Isle of Man
    7. London
    8. Hongkong
    9. Monaco
    10. New York
    11. Dubai

    Opportunities in labour market, business opportunities:
    1. Singapore
    2. Switzerland
    3. Hongkong
    4. London
    5. New York
    6. Isle of Man
    7. Dubai
    8. Jersey
    9. Guernsey
    10. Cayman
    11. Monaco

    Taxes and difficulty of immigration procedure:
    1. Monaco
    2. Singapore
    3. Cayman
    4. Hongkong
    5. Switzerland
    6. Isle of Man
    7. Dubai
    8. Guernsey
    9. Jersey
    10. London
    11. New York

    Legal framework:
    1. Switzerland
    2. Singapore
    3. London
    4. Guernsey
    5. Jersey
    6. Isle of Man
    7. Hongkong
    8. New York
    9. Cayman
    10. Monaco
    11. Dubai

    1. Singapore
    2. Monaco
    3. Dubai
    4. Cayman
    5. Hongkong
    6. Guernsey
    7. Isle of Man
    8. Jersey
    9. Switzerland
    10. New York
    11. London

    Additionally, it is to say that large international firms are moving their headquarters to switzerland right now.

    Why Switzerland will always be a centre for offshore money, it is out of pure romance, I suppose. But as seen, there are a couple of other reasons as well.

  4. The comparative disadvantage to being either a US citizen or a US company is growing alarmingly large.  How the US plans on competing in a world where they tax overseas income and their competitors don’t is beyond me.

    I suspect the main thing keeping people from switching their citizenship is the US’s long reach and exceptional vindictiveness against anyone who drops US citizenship.

  5. There are literally millions of people waiting in line hoping for US citizenship, many of them skilled professionals (plenty of H1Bs would take citizenship if they could), so it seems exceedingly unlikely that the US will have any particular trouble attracting clients in the citizenship market.

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