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Thursday, 16 April 2009

Swiss Tax Treaties

"Geneva Wonders Who Moved Cheese Amid Looming Secrecy Referendum"

By Warren Giles and Dylan Griffiths

April 14 (Bloomberg) -- Geneva’s butchers and bakers don’t like being lectured about the evils of bank secrecy any more than being asked to give up their traditional cervelat pork-and- beef sausages or Matterhorn-shaped chocolate bars.

“We have our cervelat, our Toblerone and our bank secrecy, and I’m for keeping it,” said Jacky Bula, 60, who has a butcher’s stall at the roofed Halle de Rive market. “Just because we’re a small country, there’s no reason for others to tell us what to do.”

That stubborn streak may threaten Switzerland’s efforts to negotiate new tax treaties, triggering sanctions that may cut exports of Cartier watches, Lindt chocolate and Emmentaler cheese. A 700-year tradition of direct democracy means voters will have the right to demand a referendum on any agreement, and the Swiss don’t like to be intimidated, said Stephane Garelli, a professor at the IMD business school in Lausanne.

“This is a country of mountains and valleys in which farmers depend on a small community to protect themselves,” said Garelli, who is also director of the World Competitiveness Center. “They don’t like to be bullied.”

Geneva’s citizens find themselves in a predicament not unlike the characters in the bestselling “Who Moved My Cheese?” (Penguin, 1998) by Dr. Spencer Johnson, whose cheese is a metaphor for what people want in life. Unlike Johnson’s characters who must learn to embrace change to keep their cheese, the Swiss aren’t so easily persuaded.

Blacklist Threat

Opponents to changing bank secrecy rules need 50,000 signatures in a country of 7.6 million to call a referendum. There is a “great” risk voters will reject a treaty, even if it means ignoring the government’s advice, Garelli said.

Swiss voters approved a five-year ban on genetically modified crops in November 2005. Almost two years earlier, they thumbed their noses at officialdom by voting to imprison some sex offenders and violent criminals for life.

“Blacklists are a threat for politicians and diplomats, not for people on the street,” said Michel Dérobert, secretary general of the Swiss Private Bankers Association in Geneva. “You can put pressure on a government or a diplomat, but you can’t put pressure on a baker or candlestick maker.”

European leaders threatened in February to impose unspecified penalties against uncooperative tax havens. Switzerland is among eight countries that have since agreed to adopt the Organization for Economic Cooperation and Development’s standards for sharing tax information.

‘Protectionist War’

Sanctions may mean foreign governments would pressure their companies not to do business with Swiss trading partners, said Alfred Mettler, an adviser to the Swiss government on bank secrecy and an associate professor at the Robinson College of Business at Georgia State University in Atlanta.

Swiss exports of goods and services are equal to 65 percent of last year’s gross domestic product, said Claude Maurer, an economist at Credit Suisse Group AG in Zurich. By comparison, banking accounts for 8.8 percent of Switzerland’s economy

Germany, France and the U.S, among the fiercest critics of banking secrecy, are, along with Italy, the biggest markets for Swiss exports and the largest consumers of the 61,191 metric tons of Emmentaler, Gruyere, Appenzeller and other cheeses shipped overseas last year.

Food made up 3.6 percent of Swiss exports last year. Chemicals and pharmaceuticals, mechanical engineering and watchmaking, the three biggest categories, together accounted for 58.1 percent.

“We earn every second Swiss franc abroad,” said Maurer, who expects the global financial crisis to squeeze exports by the most since records began in the 1970s. “It would be extremely dangerous to go into another protectionist war.”

Independent Streak

Resistance to foreign powers dates back to the formation of the Swiss confederacy in 1291 and the exploits of William Tell, who according to legend was forced to shoot an apple off his son’s head after showing disrespect to a Habsburg tax collector.

That desire for independence means Switzerland has shunned European Union membership and only joined the United Nations in 2002, even though Geneva is home to UN institutions.

Last month, Defense Minister Ueli Maurer returned his Mercedes S-Class, made by Stuttgart-based Daimler AG, to protest German pressure over the tax regime. Five days earlier, lawmaker Thomas Mueller said German Finance Minister Peer Steinbrueck’s criticism reminded him of the Germans “who walked the streets in leather coats, boots and arm bands 60 years ago.”

The Alpine nation enacted secrecy legislation in the 1934 to protect clients from Adolf Hitler, who threatened to execute Germans holding money abroad. Swiss law was amended in 1998 to stop banks from shielding the identities of those suspected of money laundering or tax fraud.

UBS Case

Switzerland has offered to cooperate with overseas governments in cases where there is evidence of tax evasion. The concession came after UBS AG, the country’s biggest bank, handed over the names of about 300 clients to U.S. authorities, admitting that it helped American clients hide money.

While the government has promised to maintain secrecy for Swiss, it shouldn’t hand over information about foreigners’ accounts, said Heidi, while serving “pain au chocolat” and baguettes at the “Pain Paillasse” bakery in Geneva’s old town.

“I don’t see why they should be treated differently,” said Heidi, who declined to give her second name. “There certainly shouldn’t be anything automatic about exchanging information given that Switzerland’s attraction is as a pretty safe place to be.”

A survey by the Swiss Bankers Association showed last month that banking secrecy was supported by almost 80 percent of the population. Still, “pragmatism and common sense will prevail,” according to Mettler, the Swiss adviser.

‘Level Playing Field’

“If it doesn’t change the situation for the Swiss in Switzerland and is based on a level playing field, then there is a very good chance that it would pass,” Mettler said.

Even the Swiss Private Bankers Association approved “in principle” the government’s decision to implement OECD tax standards, while expressing concern that there must be a level playing field among financial centers.

Politicians have been slow to wake up to the spread of international regulations, said Josef Garcia, 55, a taxi driver who was waiting at a rank in Geneva’s Eaux Vives district.

“Banking secrecy is already not as secret as it used to be,” he said. “It’s not normal that a company boss should be able to hide money. What’s punishable elsewhere should be punishable here.”

After last week’s Group of 20 summit in London, French President Nicolas Sarkozy said Switzerland had been placed on a “gray list” of financial centers, including Luxembourg and Singapore, that have yet to comply with OECD standards.

Swiss Surprise

If France and Germany exert more pressure, voters may spring a surprise.

Eric Richard, Bula’s partner, said banking secrecy, like the Longeoles sausages he sells on his stall, are part of what maintains Switzerland.

“Clients wouldn’t come to us if we didn’t have special products and it’s the same for private banking in Switzerland,” Richard said. And the recipe for his pork and fennel seed sausages? “That’s a secret,” he added with a smile.

To contact the reporter on this story: Warren Giles in Geneva at wgiles@bloomberg.netDylan Griffiths in Geneva at

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