January 28, 2010 - Phil Hodgen

Will the Swiss buckle again to U.S. pressure?

As noted in an earlier post, a Swiss court has ruled that a U.S. customer of UBS may rely on Swiss bank secrecy laws to prevent disclosure of identity to the United States tax authorities. In a Tax Notes Today article (2010 TNT 18-2 for those of you who own the Very Expensive Key to Unlock Lexis) we see that the avalanche of uncertainty continues to roll.

The Swiss Federal Council has published its response to the court decision.

From the Swiss Federal Council’s announcement, we can glean the following key points:

Swiss court decision is correct

This court decision is seen as a correct application of Swiss law from the perspective of the Swiss government. The bureaucrats are boxed in. The Swiss Federal Council understands that it cannot act further on its own. The test case person wins, and the 25 cases behind the test case will be disposed of consistently with the test case. Bottom line: these 26 people are safe from involuntary disclosure of their identity to the U.S. government.

The Federal Council must acknowledge the Court’s ruling and put it into action. It has thus instructed the Federal Department of Finance (FDF) to cancel a further 25 final decisions that are still pending before the Federal Administrative Court.

Basis for decision is far-reaching

If the Swiss court decision had only been a “facts and circumstances” decision about whether the test case’s facts could be characterized as “tax evasion” (no disclosure) compared to “tax fraud” (this may not be disclosed), this would be encouraging. But in fact the ruling went further.

This is also a matter of an attempted private renegotiation of a diplomatic treaty without proper Parliamentary action. The Court’s position was that the bilateral agreement between the U.S. government and UBS was a mutual agreement but not a binding change to the definitions in the bilateral income tax agreement between the U.S. and Switzerland.

It classified the Treaty Request Agreement of August 19, 2009, as merely a mutual agreement that permitted no change to terms that had been given binding definitions in the bilateral double taxation agreement.

The agreement between the USA and UBS had attempted to redefine the meaning of “tax fraud and the like” and the Swiss court ruled that such a private renegotiation of a government-to-government treaty cannot be permitted.

Logical. A treaty is a contract between two governments. The only people who can change a contract are the parties to the contract. Changes to treaties are done in prescribed ways, and in Switzerland that means Parliament approves it. (In the United States, the Senate ratifies treaties).

If the test case had been a “facts and circumstances” decision we would have thousands of court cases in Switzerland challenging disclosure. Now the game has moved to a different level — full government action in the Swiss Parliament is needed.

4,450 = 4,200 happy people and 250 frightened people

The second thing is that the 4,450 number now makes sense.

The Swiss Federal Council’s announcement says there are 250 names for whom the “tax fraud” appellation will apply. This means to me that there are 250 people who have proactively taken steps to hide themselves, and they are at risk. If you used corporations, trusts, foundations, nominees, etc. you are in this category. And if you are in this category I think you will sleeping with the fishes. The Swiss cannot wait to turn over your name to the IRS.

The other 4,200 people are in the same boat as the test case:

  • Human being’s name on the account;
  • Didn’t report the income to the USA for tax purposes;
  • Didn’t disclose the existence of the UBS account; and
  • Didn’t give UBS a Form W-9.

Those people can sleep a bit easier. They’re not fully out of harm’s way. If the world stopped today they’d be safe. The Swiss court decision which protected the test case person will protect them.

Memo to “tax fraud” people

If you think you might be in the category of people who would satisfy the “tax fraud” status requirements in Switzerland, it is time to plan on coming clean with the U.S. government.

Yes there are 250 people in this category at the moment. The IRS will want blood. UBS will be scouring its database for more people in this category because their identities can be disclosed without trouble, despite the recent Swiss court ruling.

Recommended: it is time to spend some serious time and serious money with a seriously good lawyer in Switzerland to understand the precise nature of your risk — does your situation look like “tax fraud” even a little bit? The Swiss need to feed the shark and they’ll reach for every scrap they can find. Don’t f— around. People in this category are likely to get the “Hell hath no fury like a federal employee scorned” treatment from the IRS.

Next steps in Switzerland?

The Swiss Federal Council will talk to the U.S. government. This is mostly in the “Houston, we have a problem” category of activity as near as I can tell.

More importantly, here is the indicated way out: put the UBS Agreement to a vote in Parliament for ratification. This would cause the UBS Agreement to be a properly-ratified amendment to the USA-Switzerland income tax treaty. (Note: the informal “amendment” wasn’t properly ratified in the USA but that’s not an issue.) This would be a retroactive ratification under “urgency” authority. If this is done, there will — I am sure — be litigation in Switzerland about the proper application of this urgency authority in the case of retroactive application of the UBS agreement.

An amendment to the Agreement should permit its provisional application from the date of signature. Here, the Federal Council is basing its actions on the authority granted to it under governmental and administrative organization law, which permits such steps to be taken to safeguard Switzerland’s important interests, and in cases of particular urgency. This means that UBS can continue to fulfill its obligations to the Swiss Federal Tax Administration (SFTA). For its part, the SFTA can continue to conduct the treaty request process and issue the necessary final decisions. Although client dossiers in legally enforceable cases may not be sent to the US authorities until the Agreement has been approved by parliament, this approach makes it possible to comply with the deadlines set in the Treaty Request Agreement, which remains binding under international law.

This makes the UBS agreement a national political issue in Switzerland. That’s bad news for bureaucrats.

Those pesky Swiss voters. Who do they think they are? Etc. Swiss politicians might just put this to a referendum by the voters, because that’s less dangerous to the politicians’ future job prospects. If this issue goes to a nationwide referendum vote in Switzerland, it cannot be good for the IRS and its effort to flush U.S. taxpayers out of the bushes like so many pheasants.

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