Our Favourite Tax Expert

Gets a little confused I fear. Take it away Mr. Murphy!

Switzerland has announced that:

there has been a substantial increase in the amount of tax retained on behalf of the European Union for 2007. The withholding tax on savings accounts of EU citizens added up to SFr653 million ($618 million) last year, SFr116 million more than in 2006.

A little analysis shows this to be bluster, and that the real story is something quite different.

Let’s look at some facts. First, interest rates increased by at least 29.4% in the year i.e. from average daily 12-month Euro LIBOR of 3.44% in 2006 to 4.45% in 2007. Secondly, the € / CHF exchange rate improved by 3.1% from end 2006 to end 2007. All things being equal therefore, the Swiss withholding tax should have increased by at least 33% (1.294 x 1.031). However, the withholding tax increased by only 21.6%. That’s in real economic terms a fall, therefore. But this is illogical. We know, for example, that UBS had net private wealth inflows into Switzerland from 2000 until the last quarter – CHF31.5 billion in fact in the last quarter of 2007.

This also makes no sense. The implication of the sums withheld is that deposits subject to the EU STD have gone down, from €64.7 billion in 2007 to €58.9 billion in 2007.

The implication is obvious: EU STD avoidance is rising. It’s another very good reason for reform. TJN will keep campaigning for it.

There\’s a few things here (and I myself will probably not get all of them correct).

Firstly, why are we looking at Euro LIBOR? Is this an assumption that all those deposits in Switzerland are in fact in Euros?

Seems like a very odd assumption to me, to be sure. I mean you can have foreign currency accounts there, for sure, but would everyone? Wouldn\’t some, most, nearly all accounts be in CHF? Canny investors might well have avoided the dollar, but just beause these deposits belonged to EU investors there\’s absolutely no reason to assume that they were all denominated in €. CHF LIBOR might be more appropriate then (if such a thing exists, which I imagine it does) and from very limited googling this seems not to be 4.45% in Dec 2007 but whatever the normal premium over the unchanged base rate of 2.75% was.

So, if we assume that the deposits are in CHF, not Euro (and I\’ve no information either way, but the assumption that 100% of them are in € looks most odd) then that 1.294 increase we should have seen goes away.

The second is that the €/CHF exchange rate did indeed change in that year by about the percentage that Murphy says. From €1 at CHF 1.55 to CHF 1.60 or so.F weakened agains the € (which can indeed mean "improved" depending how you look at it). But again, this argument that there should have been an increase in the nominal CHF sum only makes sense if you assume that all the accounts were in €, the interest was calculated and paid in € and then converted into CHF.

Here\’s the original announcement again. There\’s nothing about these all being € denominated accounts at all,. It\’s simply accounts held by people who are EU citizens.

About those net private inflows to Switzerland:

May 6 (Bloomberg) — UBS AG, the world\’s biggest money manager for the wealthy, said client inflows at its private bank slowed in the first quarter as the parent company\’s reputation took a beating from investment-banking writedowns.

Clients of UBS\’s international, U.S. and Swiss wealth- management divisions added 5.6 billion Swiss francs ($5.3 billion) in net new money over the three-month period, compared with 31.5 billion francs in the previous quarter, the Zurich-based bank said today.

Yes, that is the same link Richard was using. That is not inflows of money into Switzerland, that\’s net inflows into their entire global private banking system. And it\’s most certainly not inflows only from EU citizens, but from those all around the globe. Youo might actually note that people in quite a lot of non-EU countries were getting pretty rich in that year….oil states, Russia etc\’

Ad finally, we have this:

deposits subject to the EU STD have gone down, from €64.7 billion in 2007 to €58.9 billion in 2007.

Well, if the accounts were indeed held in CHF, then with the decline in the currency we would have expected it to decline (assuming no nett additions or subtractions) to € 62.7 billion anyway (and no, I\’m not going to note the typo there).

Now I\’m certain that I am not correct in every detail above: partly because I never am but also because I have no doubt that *some* of the relevant accounts were indeed being held in €.

But wouldn\’t you agree that Richard has used an extremely odd assumption (that they are all and are only € accounts) to enable him to leap to the conclusion that tax avoidance must be rising?

From the information he\’s got there that simply isn\’t supportable.

5 thoughts on “Our Favourite Tax Expert”

  1. He is also using the word “avoidance” (legal) rather than “evasion” (illegal). Or would Richard Murphy like “avoidance” to be illegal too?

  2. We’ve had this debate with Richard before and the answer, Kit, is ‘Yes’.

    His position put simply is that its everyone’s (individual and corporate entity) duty to maximise their tax payment.

  3. I’ve said it before and I’ll say it again… he’s not the sort of person you’d want as your accountant, is he? So why on earth did he train as one in the first place? It’s like an atheist applying to be a priest. The man’s crackers! A real John the Baptist. I bet he wears a hair shirt and eats locusts.

  4. The one who knows

    Tim,

    Your entire argument is flawed. Not a single EU resident would keep a CHF deposit account due to low interest rates and currency risk. Deposits are in Euros. You didn’t know Swiss banks can offer multi-currency deposits?. Also interest for Eu Savings tax, is mainly from Eurobonds.

    So you may as well delete this entire article, as it is 100% debunked. Amazing….

    Tim adds: Not a single one? I am an EU resident in the euro zone and I have $, £ and € accounts. True, I don’t have a CHF one, but your assertion that not one EU resident would have one seems a rather flawed assumption. I do indeed note, something which if you’d bothered to parse the post, that accounts can be in Switzerland and be in other currencies than CHF. “Seems like a very odd assumption to me, to be sure. I mean you can have foreign currency accounts there, for sure, but would everyone?” That’s something of a clue you might think.

    We have an empirical question here. Murphy’s calculations rest on the case that all and every one of those accounts held by EU residents is in €. There are, you might note, a number of EU residents whose domestic currency is not the €. Thus the assumption that all of them would squirrel their money away in € is highly suspect, to say the very least. But it is an empirical question: if 100% of those accounts are in € then Murphy is correct. If less than 100% he isn’t. And until we find out what the percentage of accounts in € is, a factual matter, we won’t know.

    Finally, I do hope you know that “eurobonds” does not refer to bonds denominated in euros? It’s a description of a legal status, not a currency one. Indeed, at least until recently (I don’t know the modern figures) the largest eurobond markets were in US $. And there are GBP eurobonds, € eurobonds, CHF eurobonds, SEK eurobonds, even Yen eurobonds….

    “100% debunked” would be slightly over-egging your pudding there I think.

    Oh, and as you told me via email, there’s a US $ compenent to those holdings. The $ falling quite heavily against the € in the year in question, something which would of course lower the amount of tax with held.

  5. Pingback: An Empirical Question

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