Financial Regulatory Forum

UBS client wins Swiss appeal against data handover, tax deal in question

By Reuters Staff
January 22, 2010

ZURICH, Jan 22 (Reuters) – A client of Swiss bank UBS won an appeal to prevent her account data being handed over to U.S. authorities as part of a deal to give details on 4,450 clients to the U.S. taxman, a court said.

The Swiss administrative court said on Friday the existing double taxation agreement with the United States only allowed for data to be disclosed in cases of “fraud or the like”.

While the pilot case throws doubt on whether Switzerland will be able to hand over all of the 4,450 accounts the United States wants, an alternative criterion allowing for the deal to stand if at least 10,000 clients come forward voluntarily could make this irrelevant.

The Swiss cabinet is to discuss next Wednesday how to ensure the implementation of the Swiss-U.S. tax agreement following the court’s decision, it said in a statement.

UBS said it had taken notice of the court’s decision but did not comment further.

The U.S. Internal Revenue Service said that it had not yet reviewed the court’s decision, but it had “every expectation” that the Swiss government would honor the terms of the agreement. The U.S. Department of Justice declined to comment.

“The test case is to do with serious and advanced tax evasion. Administrative assistance can only be granted in cases of tax fraud in line with the existing double taxation agreement between the United States and Switzerland,” said administrative court spokesman Andrea Arcidiacono.

The question of whether the entire agreement between Switzerland and the United States could be put in danger remained open, Arcidiacono added: “It is up to the agreement’s parties how to proceed.”

The client had failed to file a tax form but this did not constitute fraudulent behaviour even if large sums of money were involved, the court ruled.

The Swiss tax department would have the opportunity to appeal against the outcome of the test case. A further 25 similar cases were still pending.

DOUBTS ON UBS DEAL

Friday’s decision cast doubt on whether Switzerland could hand over the accounts of people who did not give proper documentation, but did not act fraudulently, said Scott Michel, an attorney who represents wealthy clients, many of whom have turned themselves in voluntarily under the IRS’s voluntary disclosure programme.

The decision “has the potential to unravel the deal cut by the U.S., Switzerland and UBS last August in settlement of the John Doe summons case,” Michel said.

A person familiar with the situation told Reuters that a previous Dec. 31 deadline for the 10,000 UBS clients to turn themselves in to tax authorities had been extended by U.S. authorities to a new, undisclosed deadline.

The Swiss justice department said in November that most of the people whose accounts were to be handed over to the U.S. authorities were suspected of serious fraud rather than simple tax evasion.

The department said it would hand over the names of wealthy American clients of UBS with accounts holding more than 1 million Swiss francs ($986,200) where there was a reasonable suspicion of tax fraud.

Accounts of a lesser size, as low as 100,000 Swiss francs, could be included in certain circumstances when there was a “scheme of lies” identified.

The country would also hand over the names of U.S. citizens holding offshore company accounts with UBS if they were suspected of tax fraud or similar, regardless of whether they were resident in the U.S. or elsewhere.

The submission of information on clients suspected of dodging U.S. taxes by stashing away money in secret accounts, promises to end years of investigation and uncertainty for UBS.

Swiss financial watchdog FINMA has appealed against a court ruling that it broke Swiss law last year when it ordered UBS to hand over tax-sensitive data of nearly 300 clients to U.S. authorities in an unconnected case. [ID:nLDE60K1N4]

FINMA’s decision was a prelude to the Swiss government bowing to international pressure on tax havens and agreeing to soften its cherished bank secrecy laws in March, a competitive advantage for the Alpine country’s banks. (Additional reporting by Kim Dixon in New York, Oliver Hirt and Lisa Jucca in Zurich; Editing by Greg Mahlich)

((jason.rhodes@thomsonreuters.com; +41 58 306 7312; Reuters Messaging: jason.rhodes.reuters.com@reuters.com))

(Reporting by Jason Rhodes)

((jason.rhodes@thomsonreuters.com; +41 58 306 7312; Reuters Messaging: jason.rhodes.reuters.com@reuters.com))

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