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0 - Introduction
A preacher went into his church and he was praying to God. While he was praying, he asked God, "How long is 10 million years to you?" God replied, "1 second." The next day the preacher asked, "God, how much is 10 million dollars to you?" And God replied, "One penny." Then finally the next day the preacher asked, "Can I have one of your pennies?" And God replied, "Yes my son, just a second."
Good evening, Ladies and Gentlemen
Impatience, especially in financial matters, often does not lead to the goal. This is no different in financial market policy. Persistence and persuasiveness are more likely to succeed. I would like to present to you tonight how Swiss financial market policy intends to succeed in the international environment.
First, I will describe some of the challenges Switzerland is facing in light of the international developments and then show the strategy the Swiss Federal Council has adopted to meet these challenges. By presenting this, I will of course go into more detail regarding our relations with the United States.
I am pleased to be able to do this here at Amcham's annual general meeting. Thank you very much for the invitation. The Chamber and its members impressively show how close and strong the links between our two countries are.
In no country beside Switzerland do as many people with Swiss roots live as in the United States, namely about a million. About 340,000 people work in Swiss companies in the US, and in turn US companies employ more than 70,000 people in Switzerland.
And this year, we are celebrating the 250th birthday of a Swiss man who emigrated to the United States when he was 19 years old and later became the longest-serving US Secretary of the Treasury. This was Albert Gallatin from Geneva, who served under Presidents Thomas Jefferson and James Madison as Secretary of the Treasury for 13 years at the beginning of the 19th century. No one since has managed to serve as long at the head of the Treasury.
President James Madison, incidentally, made clear what really counted in the financial realm. He said, "The circulation of confidence is better than the circulation of money."
In any event, Albert Gallatin, the Swiss emigrant from Geneva, deserved the trust invested in him. As Secretary of the Treasury in Washington, he managed to whip the public finances that had been battered in the wake of the Revolutionary War into shape and to reduce public debt. Apparently, the Swiss were better at saving than the Americans already a long time ago.
If you've ever been to the Treasury in Washington, then you've seen Gallatin's statue at the entrance. This is a sign of the respect for Gallatin and so far, he is the only Swiss to have ever made it onto a US postage stamp.
Gallatin, if you allow me to continue this brief excursion, was incidentally not only US Secretary of the Treasury, but later also US ambassador in Paris, one of the founders of the New York University and president of the National Bank of New York. He accepted the position as president of the bank for a low salary of two thousand dollars a year.
In 1840 – Gallatin was now nearly 80 years old – he published a 100-page-report on New York’s bank crash of 1837. His main conclusion: "The public authorities should avoid encouraging speculation and prevent the public from overborrowing." This advice probably would have been helpful several times, such as in the 1930s or after 2007.
1 – Three challenges
But I don’t wish to teach a history lesson here, and instead I will now speak about the challenges in financial market policy, as announced.
If we were to look only at ourselves, at our own navel, then we would note that we are doing relatively well compared with other countries. Switzerland was even able to reduce its public debt during the crisis. The economy has largely recovered, unemployment is low compared with other countries, and we still perform very well in international surveys about the most competitive countries.
But the task of policymaking is to look beyond one's own walls. And we have to note that Switzerland is becoming a target of intense international greediness. This has often been the case in the past. But the worldwide crisis, in conjunction with drastically growing public debt, has strengthened existing greediness and developments.
This lets us identify three challenges for Switzerland that I would like to discuss today:
First: The pressure on banking secrecy and on the Swiss tax system is burdening the future of the financial centre and business location. This requires a clear strategy.
Second: As a relatively small country with major financial institutions that are worldwide leaders, systemic risks are especially pronounced. These must be minimized without diminishing competitiveness.
The third challenge consists in the reforms of the international financial system aimed at enhancing financial stability. For Switzerland, the goal is to actively and constructively help shape these reform processes.
2 – How Switzerland intends to master these challenges
So how can we master these challenges? First, we must be clear about what we want. Our goal for the Swiss financial centre and business location is clear: Switzerland wants a competitive, safe, and internationally accepted financial and business location that generates prosperity, creates jobs, and pays taxes.
To achieve these goals, the Federal Council is pursuing a financial market policy with which we can tackle the three international challenges I mentioned before.
First concerning taxes, with regard to which I would again like to pick out three dossiers:
· A: The negotiations with Germany and the United Kingdom on regularizing untaxed existing assets and the taxation of future capital income of German and British banking clients in Switzerland. We expect to be able to conclude the negotiations with both countries in the not so far future.
With its "white money" strategy, the Federal Council made clear in February 2010 that Swiss financial market policy is consistently oriented toward the management of taxed assets.
On the one hand, countries have a legitimate interest in tax revenue, including from the income of their citizens' capital deposited in Swiss bank accounts. On the other hand, bank clients have an equally legitimate interest in the protection of their privacy. Additionally, banks have an interest in being competitive. For a long time, the management of untaxed assets was seen as such a competitive advantage. This has now changed. The understanding has won out that untaxed assets are in the interest of neither Switzerland nor the banks over the longer term.
The model of a withholding tax proposed by Switzerland combined with efficient administrative assistance upon request manages to reconcile the protection of privacy with the tax demands of governments. It is a model that does not primarily generate data, but rather money.It is a lasting solution that ensures legal certainty. A solution that could serve as a model for negotiations with other countries.
· B: The exploratory talks with the EU about the problem of "ring fencing". Here we are looking for solutions that take account of the financial situation of the cantons while ensuring the equal tax treatment of domestic and foreign companies and their income. So far, we and the EU are not quite ready to enter into concrete negotiations. But the basic position is clear: Switzerland supports tax competition – but the competition must be fair and not discriminatory. Yesterday’s decision in the Canton of Neuchâtel has shown in the right direction.
· C, the third tax issue, which is probably of the most interest to you, is implementation of the new US tax legislation, FATCA. I will go into this in more detail.
As you know, the US intends to use the Foreign Account Tax Compliance Act to ensure that US persons with banking relationships outside the United States are identified worldwide. The Act provides that a withholding tax of 30% is levied on all relevant payments from US sources that are made to a foreign financial intermediary. The financial intermediary can only prevent this by concluding an agreement with the US Internal Revenue Service and undertaking to provide information concerning US persons who directly or indirectly maintain an account relationship with the institution.
FATCA is therefore not a bilateral agreement between the United States and other countries, but rather a unilateral enactment that countries are expected to comply with and that has massive consequences for financial intermediaries worldwide. De facto, the US is trying to impose unilateral automatic information exchange worldwide for the benefit of its tax authority.
This is not a very favourable solution for the countries that must apply it, but presumably also not for the US, in light of potential disinvestments.
Clearly: We in Switzerland are not thrilled about FATCA either, and it is making the affected financial intermediaries anxious. For us, it is therefore important to find concrete solutions early enough so that Switzerland and Swiss financial players can deal with FATCA. Already in November last year, the Federal Council dealt with the options for taking further steps. For us, it is absolutely essential that the implementation of FATCA take account of the justified concerns of the affected participants in the financial sector. This has also been communicated on numerous occasions to the US authorities.
But we are not leaving it at that. Already last year, the State Secretariat for International Financial Matters made suggestions in initial contacts with the US authorities for a simplified implementation of FATCA. There needs to be a solution that is as clear and simple as possible to prevent unforeseeable legal risks. It cannot be the case that everyone doing business with the US already has one foot in prison without knowing it.
Looking toward the future, the implementation of FATCA should also be accompanied by a resolution of the fiscal problems of the past with the United States.
Another Swiss – US tax issue I want to mention is the revised double taxation treaty. The Swiss parliament has already accepted it and the US Senate will probably do so in the next weeks. We do then have a legal procedure for administrative assistance not only in concrete cases of tax fraud but also tax evasion. Further as agreed both countries have the intention to take up discussions on solutions for the inheritance tax and possible changes regarding the withholding tax on dividend payments. It goes without saying that Switzerland will carefully prepare its position and consult with the economic and political institutions.
2.2. Too big to fail
This leads me to the second challenge, namely financial market regulation. Last week, the Swiss Council of States was the first chamber of Parliament to approve the Federal Council's proposed law on strengthening stability in the financial sector. This package of measures to alleviate systemic risks is intended to prevent the difficulties of a major bank from endangering the entire national economy, so that the government would have to bail out such a bank with tax money. The core points of the proposal are more equity capital, better risk management, and organizational precautions for an emergency. We are convinced: A regulation that enhances stability is a competitive advantage. The national economic utility of stable banks is undisputed.For once, Switzerland is influencing the international debate and not the other way around. We will closely observe how the international standards for systematically relevant banks develop and how they are implemented. It is, incidentally, not the case that Switzerland is in all areas stricter than the international standards. For instance, Switzerland is not envisaging a special bank tax like other countries.
Taking a look at the United States, we see on the one hand that the capital requirements there are not as high as envisaged in Switzerland. And the US was already very restrained in implementing the Basel II rules. But on the other hand, the financial market reforms in the United States within the framework of the Dodd-Frank Act go further than in Switzerland. Large, interconnected banking groups above a threshold of 50 billion US dollars will in principle have to meet stricter prudential requirements. The possible measures by US authorities are far-reaching. Companies can be obligated to withdraw from certain areas of business. Growth through mergers or acquisitions may be prohibited under certain circumstances.
In the eyes of the Federal Council and the majority of Parliament, the Swiss mix of measures is a promising path toward the future of a successful and stable Swiss financial centre.
2.3. IMF, G20, FSB
This leads me briefly to the third challenge. How can Switzerland assert itself within the international financial structures? First of all: As a strong national economy with its own currency, a significant financial sector, and concrete regulatory proposals, we certainly have something to show on the international stage. We may not be a member of the G20, but we have a good position in the most important international bodies preparing and implementing the G20 recommendations.
• The IMF is the key multilateral body for combating the debt crisis and strengthening international financial stability. The current personal turmoil does nothing to alter this fact. Switzerland benefits from stable international financial markets and therefore contributes strongly to these goals. In our view, it is necessary to link the IMF's lending to hard-hit countries to strict conditions relating to budget discipline and structural measures. This is indeed in line with the United States' position. By heading a voting group and being represented on the 24-member Executive Board, Switzerland is able to actively participate in the design of these conditions. We intend to continue to do this.
• The Financial Stability Board (FSB) in turn is a leader when it comes to measures for international financial market regulation. As a member of this illustrious circle (G20 countries and 4 others), Switzerland is able to represent its regulatory standards effectively at the international level. And it is acknowledged that Switzerland not only demands something from others, but is also able to serve as a role model with good ideas.
3 – Conclusion
In conclusion: Switzerland is in comparatively good shape – but it is looked at with some mistrust internationally, even by friendly countries like the United States, with which we maintain good relations and with which we share common ideals of free entrepreneurship, legal certainty, and self-responsibility.
If we want to continue to be an attractive and competitive financial centre and business location in the long term, we need a certain degree of international acceptance. It is necessary that we present ourselves proactively and do not always react from the defensive. This means that we want to influence the international debate to the extent possible and not simply wait around to accept and implement the results. Specifically, we are doing this
· with our "white money" strategy, which is consistently oriented toward the management of taxed assets;
· with an ambitious yet measured financial market regulation that not only demands high standards from others, but also applies them to itself;
· with international networking in important financial bodies, which are all the more important for our country, given that it is not institutionally integrated into the EU, the G20, or NATO.
The United States is an important partner for us to achieve these goals. The goals are not easy to achieve, however, and can hardly be met with a single shot. Rather, we have to move forward persistently and step by step, as the US-Swiss dual citizen Albert Gallatin knew, of whom I spoke at the beginning. In a letter to a friend, he described his work very pragmatically:
"I was almost exclusively employed in (…) settling as many of the points of difference as was at the time practicable."