Web exclusive: A step in the right direction

Thursday, 18 July 2013
René Matteotti and Robert Desax provide an update on the US-Swiss tax dispute

18 July 2013

René Matteotti is Of Counsel and Robert Desax is an Associate with Baker & McKenzie, Zurich

There have been new developments in the resolution of the ongoing tax dispute between Switzerland and the US: the Swiss government confirmed it will set out parameters for the cooperation of Swiss banks with the US within the existing legal framework and the Swiss Supreme Court, for the first time, considered a group request made by the IRS under the existing Swiss-US double-taxation treaty.

Cooperation of Swiss banks with US authorities

The Swiss parliament refused to consider a new bill (Lex USA) that would have established the possibility, but also the conditions, for Swiss banks to cooperate with the US authorities (specifically the Department of Justice, (DoJ)) in order to settle their individual situations. However, the Swiss parliament issued a declaration in which it expressed its expectation that the Swiss government should take every measure within existing laws to enable the banks to cooperate with the DoJ. On 3 July 2013 the government confirmed that it will issue an authorisation pursuant to article 271 of the Swiss Criminal Code to individual Swiss banks that effectively grants them special immunity from criminal prosecution in Switzerland. The purpose of this special authorisation is to allow those banks to cooperate with the US authorities in order to resolve the current dispute. The Swiss government also made it clear that the exact modalities and conditions for such authorisation to be issued will depend on further negotiations with the US.

The authorisation will in particular cover the provision by the banks to the DoJ of information regarding employees, third-party service providers and what has been referred to as ‘leaver lists’. The latter would concern non-personalised data in connection with the closure of accounts and the associated transfer of funds to other banks in Switzerland or abroad.

The banks will have to inform affected third parties accordingly in advance (banks featured on the leaver lists also qualify as affected third parties). Data protection provisions and employment law will still have to be observed since an authorisation under article 271 of the Swiss Criminal Code does not lift these requirements. The Lex USA Bill would have been an independent legal basis pursuant to which the data protection law restrictions in particular would not have been applicable.

Thus current or former employees as well as affected third parties will have the option to challenge the provision of information in court. Just recently, a Geneva court prohibited a large Swiss bank from sending certain information related to a former employee to the US authorities.

Group requests

Another central element of the Swiss-US tax dispute is the question of group requests for information exchange under the double-taxation treaty. On 5 July 2013, the Swiss Supreme Court for the first time reviewed whether such group requests are permissible under the 1996 Swiss-US double-taxation treaty (ref. 2C_269/2013). The case concerned a US tax-resident who had been a client of Credit Suisse. That client had a structure in place involving an intermediate company which was the nominal holder of the Swiss bank account while the US tax-resident had to be considered the beneficial owner of the account. The US Internal Revenue Service (IRS) claimed that such schemes had been used to defraud the IRS. The criteria formulated by the IRS were the following:

  • the account is held by a domiciliary company (a ‘DC account’) with a US beneficial owner;
  • the account includes, at any point in time during the relevant period, US securities;
  • the account had, at any point in time during the tax period defined (measured at the end of each month), an aggregate balance in excess of USD50,000;
  • the bank has no record of the timely filing of accurate Forms 1099 naming the account’s US beneficial owners and reporting to the IRS all payments made to such US beneficial owners;
  • there exists a contradiction between Form A and Form W-8BEN (or other equivalent documentary evidence), or a Form W-8 or W-9 is not associated with the account; and
  • there is evidence that the US beneficial owner exercised control over the account in violation of corporate governance, for instance by giving investment instructions to the bank regarding the DC account without being an authorised officer, trustee, or director of the domiciliary company (DC) or without the express written authorisation of the DC, or by withdrawing funds from the DC account for personal use.

The 1996 Swiss-US double-taxation treaty (the 1996 treaty) stipulates that information shall be exchanged as is necessary for carrying out the treaty or for the prevention of tax fraud or the like. The Court concluded that information requests were admissible under the 1996 treaty regardless of whether the suspicion falls on one or more persons and whether the said persons are explicitly named. If the request fulfills strict requirements concerning the degree of detail in the description of the facts it does not constitute a ‘fishing expedition’. The schemes chosen by the bank clients were seen to have been described with sufficient detail to render the presence of tax fraud plausible.

The majority of the judges found that group requests have been possible since the 1996 treaty was signed. They discussed (and agreed on) the fact that the notion of group requests is rather recent in the field of international taxation and that, for instance, the OECD included the concept in the model convention commentary only as recently as 2012. However, they compared this situation to cases of criminal investigations under criminal law, which must be permissible whenever there is sufficient suspicion that a crime was committed, even if (or especially when) the perpetrator of the crime is not known. They found that similar questions arise in the area of financial markets supervision if, for instance, trading volumes suddenly increase prior to the publication of facts relevant to a stock price: if this could serve as a basis for a reasonable suspicion of insider trading then the Swiss authorities would also grant international administrative assistance in this area. One of the judges stated that group requests for tax information should, however, only be permissible where a tax-related offense was probably committed, but not if the requesting state was merely intending to issue a ‘normal assessment’ (i.e. if the request was made for mere controlling purposes).

One judge was fundamentally opposed to this conclusion and considered that group requests were inadmissible under the 1996 treaty. In particular, he argued that such group requests had not even been conceived of by the contracting parties upon signing the treaty in 1996 and that such requests were therefore not covered by the text of the 1996 treaty.

At the end of the four-hour public hearing, the vote showed a 4:1 majority in favour of admitting group requests under the 1996 treaty. It is noteworthy that the judges did not elaborate on whether tax fraud or the like was at all likely in the case at hand. This seemed to be an uncontroversial fact.

Implications

The Swiss Supreme Court’s judgment supports the Swiss government’s strategy of enabling individual Swiss banks to find bilateral solutions with the US authorities. Had group requests been dismissed, this would have jeopardised that strategy and would also have put into question a large number of comparable cases already decided by the lower Swiss Federal Administrative Court since 2009. It is arguably the Swiss Federal Administrative Court that had laid the conceptual foundation for group requests in its UBS judgment of 5 March 2009 (ref. A-7342/2008 and A-7426/2009). In connection with the Swiss government’s aforementioned ‘article 271 authorisation’, it will be interesting to see whether information gathered from individual banks (such as leaver lists) will be used as a basis of future potential group requests.

It should be emphasised that the Swiss Supreme Court’s judgment only applies to the double-taxation treaty that Switzerland concluded in 1996 with the US. The 1996 treaty departs from the current OECD standard of exchange of information as it provides for a ‘tax fraud and the like’ criterion that suggests at least non-compliance with tax laws. The OECD standard however merely requests ‘foreseeable relevance’ of the requested information to the requesting state’s internal tax laws, which is a lower threshold than ‘tax fraud and the like’. It remains to be seen how comparable group requests would be decided under a pure ‘OECD standard treaty’. The 2009 revision of the 1996 treaty with the US largely complies with the current OECD standard and does not refer to tax fraud and the like. It has however not yet been ratified as it is blocked in the US Senate. It is currently unclear when this will change.

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Irene McMillan

Irene McMillan is a Trainee Solicitor in the Private Client team at Kingsley Napley LLP in London.