“The first tentative signs of addressing tax evasion came in 2005-06 with the first EU directive on saving products,” said Bernard Lhoest, a former banking leader at the consultancy EY, now retired, in Delano’s office on 28 July 2023. He explained that Luxembourg and Austria managed to convince their partners that “they could not exchange financial information.”
Three topics became pressing: “more regulations, more transparency and more governance.”
“Two options were retained,” noted Lhoest. Either European countries started exchanging financial information, “an option elected by France, Germany and the UK, or they applied an anonymous withholding tax.” Luxembourg chose the latter.
“The first serious impulse on greater transparency occurred in 2009 at the G-20 in London,” said Camille Seillès, secretary general at the Luxembourg Bankers’ Association (ABBL) to Delano in Kirchberg on 26 July 2023. Coming out of the great financial crisis, heavily indebted governments agreed to “reach out to the non-declared assets hidden in some countries.”
Three topics became pressing: “more regulations, more transparency and more governance,” said Lhoest.
“With more than 15,000 EU civil servants, Luxembourg could hardly say ‘no’ forever to large countries,” said Lhoest. Moreover, Luxembourg had just elected a new government with limited experience in 2013 and therefore had a relatively weak political position.
Seillès explained that the initial steps of exchange of information--on demand-- started briefly after the global financial crisis and became increasingly generalised, including in Luxembourg and Switzerland. From the outset, the ABBL has been promoting the exchange of information “to ensure a fair competition between the financial participants and the financial centres.”
Two models on the menu
The process experienced an acceleration with the introduction of the foreign account tax compliance act, or Fatca, in the US. Two models were offered to states and financial institutions.
The model 2, or the Swiss model, required financial institutions to sign a convention with the US Internal Revenue Service, or IRS, under which the banks would deliver financial data directly to the IRS. This option, favoured by the Swiss, had “the benefits of not creating a precedent involving their state,” said Seillès.
The model 1, preferred by several European countries, required “governments to collect domestic financial data and automatically exchange them with other governments,” explained Seillès.
Pressure across countries and sectors for model 1
“A debate on models 1 or 2 took place in Luxembourg,” recalled Seillès. He noted that there was little appetite for the banks to interact with the IRS as the former risked violating Luxembourg banking secrecy.
The Luxembourg fund industry was in favour of model 1 as Dublin, a strong fund competitor, had already reached an agreement with the US based on model 1. Indeed, the fund industry in Luxembourg was not keen to interact directly with the IRS as Luxembourg banks and the funds based in Ireland were.
In the end, Luxembourg elected the model 1, “the most robust and recognised approach at the international level.” Seillès believes that Luxembourg took the right decision as the Swiss subsequently adopted the model 1 as well. Austria is the only remaining country under the model 2 regime.