Swiss Bank Secrecy: will treaty be useful? will 52,000 US names be revealed?

To sum up, in very brief form, the ongoing saga about Swiss bank UBS and US tax enforcement efforts (covered in a number of postings, including here):

After an employee of the LIchtenstein bank provided information to various countries about the way the bank was helping their citizens stash money offshore without reporting income and the role of Swiss giant UBS in enticing wealthy US citizens into secreting their fortunes offshore to evade taxes, the US government became much more visibly involved in working to ferret out offshore tax evasion, especially in secret banking jurisdictions.  UBS averted prosecution for violating banking laws through its onshore pursuit of wealthy Americans' business and gave up a few hundred accountholders' names as part of the settlement. But it refused to provide information on an estimated additional 52,000 accounts in response to an IRS summons, claiming that would violate Swiss bank secrecy law.

Bank secrecy law, of course, is a genuine problem in terms of national enforcement of tax laws.  And the current Swiss-US treaty doesn't help, since its information exchange provision is a weakling.  If you don't have enough information from other sources to prove tax evasion (a crime), you usually can't get to the information on the accounts.  But the information on the accounts may be essential to proving tax evasion.  So the government, and tax law enforcement, is in a proverbial catch-22.

There are two new fronts on this story.

First, the US and Switzerland have announced an "agreement in principle" on a new tax treaty (but htey haven't announced the new treaty's provisions).  The claim is that the new treaty will "loosen" banking secrecy by allowing "an exchange of information on tax matters in individual cases where a specific and justified request has been made."  See, e.g.,  US and Switzerland agree to new tax treaty, swissinfo.ch, Jun 19, 2009; U.S. and Switzerland Agree to Share More Tax Data, NY Times, Jun 19, 2009; U.S., Swiss Complete Tax Treaty Talks, CBS News.com, Jun 19, 2009.  Geithner says the new protocol "will increase our ability to enforce our tax law and will help bring an end to an era of offshore accounts and investments being used for tax evasion."  CBS News.com.

I've got my doubts that such an information exchange provision will accomplish much.  It looks mostly like window dressing--a way for the Swiss to claim that they've gotten religion while continuing the same old sins.  A requirement of "specific and justified request" is likely to mean too much information will be necessary to get information, the same old catch-22.  What is really needed is an information reporting provision, not an information exchange provision.  Swiss banks should provide annual reports to the US on US citizens' amounts and account numbers that have aggregate activity of $10,000 or more, much as US banks provide information on transfers of that amount.  Such information reporting would permit US tax enforcement authorities to match return information to Swiss account information and spot those who are hiding assets and income offshore. 

Second, connected with the release of information about an agreement on a new tax treaty, there have been consistent rumors that the quid pro quo for the new treaty was IRS agreement to drop the drive for the information on the 52,000 secret accounts.  See, e.g., Watts, U.S. may drop tax case against UBS: report, Market Pulse (Jun 23, 2009); Browning, Settlement Anticipated in UBS Case, NY Times, Jun 23, 2009 (quoting an unnamed US official as thinking that it would not make sense to "have a complete meltdown in Swiss-U.S. relations" and that the Swiss "do not want this to be litigated").  The case is currently  scheduled for hearings on July 13-15, but the Swiss have claimed that the case itself might "jeopardize the progress of the tax treaty talks" and would, in any event, be against domestic Swiss law on banking secrecy.  U.S. and Switzerland Agree to Share More Tax Data, NY Times, Jun 19, 2009. 

Dropping the attempt to pin down those wealthy US tax evaders for the puny benefit of a slightly improved information exchange provision would be a catastrophic development.  I can just imagine those weathy account holders sitting back in their luxury condos having a nice chortle, along with their Remi Martine, about their ability to once again pull the wool over US tax enforcement and protect their assets to the detriment of the US fisc.  A settlement that involves the Swiss handing over names of those UBS clients that filed legal papers in Swiss courts challenging the summons, as suggested in the NY Times article, would only make sense if the Justice has some indication that those names amount to a large share of the most significant accountholders.

But, as with the actual text of the tax treaty, the final word isn't out on that one.  The US Justice Department has already refuted the NY Times story,  See, e.g., U.S. Justice Dept. not planning to drop UBS case, MarketWatch, Jun 23, 2009.  It claims all is on track, with a brief in support of enforcement of the summons to be filed on June 30.

To be continued.....

Comments

[Raza]

Exactly my thoughts, Linda. Great post, as usual. To the reporting provision for the activity over $10,000, I am just curious to know what you make of the TD F 90-22.1. Kind Regards, Raza

[Asher Rubinstein]

We have yet to see the final agreement; what was reported was essentially just an understanding between the two sides. There are many ambiguities in the agreement between Switzerland and the US, yet to be resolved:

1. The agreement is said to follow the Model Convention with Respect to Taxes on Income and on Capital, released by the OECD. Under the terms of that Model Convention, Switzerland would have to share banking information for acts that are considered criminal acts under both U.S. and Swiss law. Previously, only affirmative tax fraud was recognized as a criminal act in both countries. Non-disclosure of foreign income was not a serious crime in Switzerland. If the new agreement follows the terms of the Model Convention, Switzerland would now have to change its internal law to criminalize non-reporting of income. Yet whether this change in Switzerland's internal law will occur, is to be seen.

2. Along the same lines, the new agreement will be subject to approval of the Swiss Parliament and the Swiss Federal Council, as well as public referendum in Switzerland, where challenges to traditional Swiss banking secrecy have been met with vigorous opposition.

3. Will the tax information agreement be prospective only, or will it require disclosure of past accounts?

4. Will the new agreement be narrowly tailored to specific taxpayers with specific accounts, or will it allow for "fishing expeditions" like the one that the IRS is trying to enforce against UBS currently?

Lots of questions remain about this new agreement.

[LindaMBeale]

Asher. I agree that there are many points we don't know about the agreement, and the ones you point out are terribly important.

You seem to object to routine information sharing, since you use a derogatory term "fishing expeditions" to describe the current effort to acquire account information. There doesn't seem to be a reasonable basis for that objection. My colleague Mike McIntyre has pointed out that what is really needed is routine information sharing between countries. If you have no idea a person has an account, you cannot provide specific information about the person to get the information about the account. We have information reporting on wages, so why not full information reporting on such accounts? Funny that we always end up protecting the rich with the differential in rules, and it is the rich who are most likely to engage sophisticated tax advisers (and bankers) to help them avoid taxes.

That said, it is very unlikely that the current agreement will extend to provide that information.