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(Jan 29, 2010) On January 21, 2010, the Swiss Administrative Court rescinded a decision of the Swiss Federal Tax Administration that would have released Swiss banking records to the U.S. Internal Revenue Service (IRS) (Bundesverwaltungsgericht, docket number A-7789/2009, Jan. 21, 2010, available at http://www.csbancari.ch/osservatorio/documenti/A77892009.pdf), even though Switzerland had promised to process this IRS request for disclosure in an August 19, 2009, agreement between the United States and Switzerland (Abkommen zwischen der Schweizerischen Eidgenossenschaft und den Vereinigten Staaten von Amerika, Aug. 19, 2009, Amtliche Sammlung des Bundesrechts 5669, available at http://www.admin.ch/ch/d/as/2009/5669.pdf, the English text is available at http://www.irs.gov/pub/irs-drop/us-swiss_government_agreement.pdf).

The August 19 Agreement was part of a settlement between the United States and UBS-AG, a Swiss bank, that allegedly, and in some cases admittedly, shielded its U.S. customers from the IRS by protecting their bank secrecy. The settlement was made in February 2009, and it also included the deferral of a prosecution of UBS, an admittance of wrong-doing and the payment of a fine by UBS, and an immediate release of some 300 hundred banking records by UBS (see Edith Palmer, Switzerland - Information on Tax Evasion, GLOBAL LEGAL MONITOR, Dec. 4, 2009, available at http://www.loc.gov/lawweb/servlet/lloc_news?disp3_l205401713_text).

In the August 19 Agreement, Switzerland promised to process some 4,450 banking records in accordance with the Swiss procedures normally applicable to requests for information under article 26 of the U.S. – Swiss Double Taxation Treaty (Convention for the Avoidance of Double Taxation with Respect to Taxes on Income, with Protocol, U.S – Switzerland, Oct. 2, 1996, TIAS; KAV 4915, available at http://www.irs.gov/pub/irs-trty/swiss.pdf), yet these records were to be processed under agreed-upon descriptions of the evidence that would suffice to indicate tax fraud and thereby lead to the release of the records.

The purpose of the August 19 Agreement was to overcome the difficulty resulting from article 26 of the U.S. – Swiss Double Taxation Agreement, according to which Switzerland will grant assistance only for fraudulent tax evasion, as described in Number 10 of the Protocol to the Treaty as the use of forged or falsified documents or other elaborate schemes of lies. This definition in the Protocol corresponds to Swiss domestic law, in which the withholding of information from the tax authorities is only an administrative offense (Bundesgesetz über die direkte Bundessteuer, Systematische Sammlung des Bundesrechts 61.2, arts. 174 and 175), while deceitful conduct such as forgery or complex schemes of lies is required to turn tax evasion into the crime of fraud (Criminal Code, Schweizerisches Strafgesetzbuch, Dec. 21, 1937, as amended, Systematische Sammlung des Bundesrechts (SR) 311.0, art. 146).

The criteria for defining tax fraud in the August 19 Agreement are contained in the Annex to the Agreement, and they list four categories of facts for the period 2001 through 2008. The qualifying criteria of one of these categories are: first, a U.S. resident customer of UBS failed to submit IRS Form W-9 to UBS for at least three years, thus leading to a failure on the part of UBS to file IRS Form 1099; and second, the UBS account of the U.S. resident produced annual income of more than 100,000 Swiss Francs (about US$95,558) for three years during the operative period.

The complainant in the case at issue fell into the above described category of having failed to report income from a large account. The Administrative Court struck down the Swiss agency's decision that would have released the data of the complainant and ordered the agency to pay the complainant 25,000 Swiss Francs (about US$23,958) in damages. The Court's decision is final and cannot be appealed to the Swiss Federal Court.

The Court examined whether the August 19, 2009, Agreement was binding on Switzerland according to article 26 of the Vienna Convention on the Law of Treaties (1969, UNITED NATIONS TREATY COLLECTION, available at http://untreaty.un.org/ilc/texts/instruments/english/conventions/1_1_196
9.pdf
), the general provision that treaties must be observed, and/or the Convention's article 31, which provides that a later treaty has precedence over a previous one with the same subject matter. The Court concluded that the August 19 Agreement was not a treaty within the meaning of the Vienna Convention; instead, the Court held that the August 19 Agreement was an executive agreement of understanding in accordance with article 25 of the U.S. – Swiss Double Taxation Treaty, albeit one that exceeded the permissible scope for such agreements in that it attempted to change that treaty. According to the Court, a change in the Treaty could only be effected through the constitutionally foreseen parliamentary ratification process for a treaty, and, in order to be valid, an executive agreement of understanding within the meaning of article 25 of the U.S. Swiss Double Taxation Treaty must limit itself to clarifying the existing treaty provisions and thereby facilitate their application.

The Court found that prevailing Swiss doctrines of Swiss law and international law state that an executive agreement of understanding may not change the Swiss –U.S. Double Taxation Treaty. According to the Court, the granting of assistance to the U.S. authorities for a tax evasion that consisted merely of failing to report large incomes would have changed the Treaty by granting exchange of information for circumstances that did not amount to tax fraud. The court explained that the failure to report large amounts of income over a lengthy period does not amount to fraud in Swiss law, and no Swiss court had ever held that such behavior amounted to fraud.

Earlier in January 2010, the Swiss Administrative Court had ruled on another case arising from the February 2009 settlement between UBS and the United States. On January 5, 2010, the Federal Administrative Court issued a judgment in which it held that the Swiss Financial Markets Supervisory Authority [FINMA, Eidgenössische Finanzmarktaufsicht] had acted unlawfully on February 18, 2009, when it ordered UBS to release its banking records concerning close to 300 U.S. customers to the IRS (Bundesverwaltungsgericht, decision of Jan. 5, 2010, docket number B-1092/2009, available at http://static.nzz.ch/files/8/2/2/urteilfinma_1.4468822.pdf; see Edith Palmer, Switzerland- Federal Administrative Court Chastises Financial Markets Authority for Releasing UBS Records to IRS, GLOBLA LEGAL MONITOR, Jan. 8, 2010, available at http://www.loc.gov/lawweb/servlet/lloc_news?disp3_l205401766_text). In that case, the Court held that FINMA had violated the privacy rights of the bank customers whose records were released and that FINMA had exceeded its powers in doing so.

Author: Edith Palmer More by this author
Topic: Banks and financial institutions More on this topic
Jurisdiction: Switzerland More about this jurisdiction

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Last updated: 01/29/2010