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.