Monday, 3 March 2008

Liechtenstein licked?

An interesting story is developing over Switzerland's impending entry into a border-free Europe. It looks like its tiny neighbor Liechtenstein may see its status as a tax haven challenged as a result of the change.

Switzerland is not part of the European Union, but the treaty which has dismantled the internal borders of continental Europe actually has nothing to do with the EU. It is a separate treaty called the Schengen Treaty (named after the town in which it was signed) and membership in the so-called "Schengen Zone" is separate from membership in the EU.

Switzerland is set to enter the zone in November, so after then there will be two large non-EU nations in the zone (Switzerland and Norway) and two large EU nations not in the zone (the UK and Ireland). There will also be no border between Switzerland and its neighbors. Good thing my brother and I got this picture at the France-Switzerland-Germany border while we could!

But ahead of Switzerland's entry to the zone it looks like some diplomats in Brussels may be using the opportunity to force Liechtenstein's hand in cracking down on tax cheats from other European nations. Many of Germany, France and the UK's wealthiest men and women domicile themselves in principalities such as Liechtenstein to avoid taxes in their home country.

The small nation, tucked in between Switzerland and Austria in the Alps, has just signed an agreement for it to be admitted into the Schengen zone but that still needs to be ratified by the other nations. Like Switzerland, Liechtenstein is also not in the EU, and right now it's borders with Switzerland are invisible while its border with Austria is secured. By dint of various agreements and treaties as well as culture, the country is in many ways part of Switzerland.

Yet now the ruling princes of the tiny nation have been warned that if they fail to sign a deal with the EU on fighting tax evasion by EU citizens, the large nations of the Europe may take their sweet time in ratifying the agreement for them to enter the zone, but speedily ratify the Swiss agreement, meaning the principality would have to erect guards and checks at their border with Switzerland for the first time in their history.

Given that one of the many cross-country agreements Switzerland has with Liechtenstein is a customs union, the large EU states know that forcing the two countries to erect a border between them would be a massive headache. Yet Liechtenstein has profited as a domicile for tax evaders for years and will be reticent to give up that status, especially when it has competition from other principalities such as Monaco and Andorra.

In the end it seems likely Liechtenstein will cave, which will be another victory for the 'carrot and stick' strategy in Brussels in which states are convinced to change policy by offering them EU rewards. So far the strategy seems to be working, but one wonders when it may go a step too far. Serbia certainly comes to mind.

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