OASIS

                        ORGANIZATION OF ADVOCATES SPECIALISING IN INTERNATIONAL SERVICES

SWISS DEVELOPMENTS 2009/2010

 Otto Guth, DUNAND GUTH MARDAM BEY

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Since the last Oasis meeting, the major changes in Switzerland relate to the banking secrecy. In order to understand those changes, the essence of Swiss banking secrecy should be reminded. 

Swiss banking secrecy means that criminal prosecution authorities might access to the banking files while administrative authorities, especially tax authorities have no right to consult the files of a bank. 

Tax evasion in Switzerland, i.e. the non declaration by a taxpayer of certain incomes or of certain assets is not considered as a criminal offence and therefore the banking secrecy cannot be lifted. 

There is one exception to the non accessibility of banking files in tax matters. This exception is the tax fraud which implies the use of forged documents. Tax fraud is in Switzerland a criminal offence and therefore the banking secrecy might be lifted. 

The same applied also to foreign clients with bank accounts in Switzerland. If they were implied in criminal activities or in tax fraud, Switzerland has granted judicial assistance to foreign Authorities and the banking secrecy was lifted. If the foreign client was implied only in tax evasion, having simply non reported incomes or assets, no judicial assistance was possible.

1.         The suppression of the distinction between tax fraud and tax evasion for foreign clients 

As mentioned already during the last Oasis Club meeting in March 2009, under the pressure of the G-20 meeting, the Swiss Government declared its willingness to grant to foreign Authorities administrative assistance also in case of tax evasion and, therefore, to lift the banking secrecy. 

In order to achieve this goal, the Swiss Government could have considered to adopt a law providing for the lifting of the banking secrecy in case of tax evasion. However, such a law had no chance to succeed in front of the Swiss electorate which might vote on every law. 

Therefore, the Swiss Government decided to maintain the banking secrecy which, in case of tax evasion by Swiss taxpayers, cannot be lifted. At the same time, Switzerland decided to conclude with a large number of countries new double taxation treaties providing for the lifting of the banking secrecy in case of tax evasion by foreign taxpayers. 

This means in substance that Swiss Authorities are thus granting to foreign Authorities rights which themselves, against Swiss taxpayers, do not have. 

Such double taxation treaties providing for administrative assistance in case of tax evasion were concluded with different countries, for instance with France, Great Britain, USA, Germany, Turkey, etc. 

In those different treaties, while they all admit the principle of administrative assistance in case of tax evasion, the conditions which must be met in order to grant administrative assistance are worded in different ways. As a general principle, it can be considered that no fishing expeditions are accepted and that the request of the foreign Authorities should mention the name of the foreign taxpayer, the name of the bank where the account is opened, and contain a substantiation why the foreign taxpayer is suspected of tax evasion. But, as mentioned, the wording of the conditions in the different treaties is not identical. 

For instance, the treaty with France mentions that “as far as possible” the request for administrative assistance should contain the name of the bank where the bank account of the foreign taxpayer is deposited. Formulations like “as far as possible” are obviously very vague and might give rise to surprising interpretations. 

In that respect, it should be mentioned that during the last year, the bank data of several ten thousand foreign clients were stolen from different Swiss banks HSBC and CREDIT SUISSE. The stolen bank data were sold and delivered to different foreign Tax Authorities. 

The Swiss Government declared that it will not grant administrative assistance in case the request for administrative assistance is based on stolen data, a statement which has hardly any meaning because there is no obligation for the foreign Authorities to indicate in the request for administrative assistance their source of information and, therefore, no foreign Authority would file a request for administrative assistance by stating spontaneously that it is acting on the basis of information obtained by a criminal activity. 

For the time being, none of the double taxation treaties was approved by the Parliament. They could also be rejected in a popular vote. 

In case the treaties enter into force, some of them provide for retroactive application concerning all tax claims not barred by statute of limitations.

2.         Conflict between US Tax Authorities and UBS 

        The second item in relation with the Swiss banking secrecy concerns the conflict between the US Tax Authorities and UBS. 

        As mentioned already in the last year’s report, the US Tax Authorities requested from UBS the delivery of the bank files of 55,000 US taxpayers having accounts with UBS. 

        As a first step, Swiss Tax Authorities accepted the delivery of the files of more than 300 US clients of UBS which appeared as beneficial owners of the bank accounts, in accordance with Swiss legislation, while for the same bank accounts, in accordance with the US financial intermediary legislation, an offshore entity appeared as beneficial owner. 

        As several account holders objected to the delivery of their files to the US Tax Authorities and seized the Federal Administrative Court of an appeal, the Swiss Supervisory Authority on the Financial Markets (FINMA) decided the transmission of the files to the US Authorities without waiting for the decision of the Court in the pending appeal cases. Thus, there was delivery of the bank data before any binding decision concerning their transmittal. 

        In January of this year, the Federal Administrative Court decided that the Financial Supervisory Authority had no right whatsoever to transfer the bank files to the US Authority before the Court decision concerning their transfer and that the transfer of the data was illegal. Whether Switzerland will have to indemnify the victims of such illegal data transfer is for the time being unclear. 

        Concerning the other more than 50,000 US clients whose bank files were requested by the US Tax Authorities from UBS, the Swiss Government signed in July 2009 a memorandum of understanding, accepting to deliver until August 2010 the bank files of 4,500 US citizens involved in “continuous and serious tax evasion”. 

        From the outset, it should be underlined that it is completely impossible to understand how the Swiss Government happens to sign a memorandum of understanding with the US Authorities in a conflict which is opposing not the US Authorities and Switzerland but the US Authorities and UBS which, though important for Switzerland, could not be mistaken for Switzerland. 

        In the memorandum of understanding, the Swiss Government declared that it will interpret the Swiss-US double taxation treaty of 1996 providing for assistance in case of “fraud and the like” in a sense that “fraud and the like” means “continuous and serious tax evasion”. 

        When the Swiss Authorities began to execute the treaty, certain account holders appealed against the transmission of their files to the Federal Administrative Court which admitted that “continued and serious tax evasion” is not “tax fraud and the like”. The Swiss-US double taxation treaty of 1996 states clearly that in case of tax evasion, no assistance can be granted. 

        The Federal Administrative Court has considered therefore that the Swiss Government cannot change the content of a treaty by signing a memorandum of understanding in which it declares that the treaty means something else than what it signed. As the treaty was approved by the Parliament, the Government cannot change the content of an act of the Parliament. If the Swiss Government intends to give assistance in case of “continued and serious tax evasion”, which is not provided for in the treaty approved by the Parliament, it has to submit the memorandum of understanding to the Parliament for approval. 

        Now, the Swiss Government, which was prevented by the Federal Administrative Court to fulfil the memorandum of understanding signed with the IRS and to transmit the bank files to the US Authorities, submitted the memorandum of understanding to the Parliament which will examine it during the month of June. At this stage, it is impossible to know whether or not the memorandum of understanding signed by the Government will be accepted or rejected by the Parliament and thus if the Swiss Government will be prevented from executing its undertaking towards the US Authorities. 

        Even if the memorandum of understanding is adopted by the Parliament, the problem of the non retroactivity of the memorandum remains. In fact, it is incompatible with the principles of good faith if a US citizen relying on the fact that in case of tax evasion, no assistance can be granted to the US Authorities, is trapped by a memorandum of understanding providing for assistance concerning facts for which, when they happened, this was not the case.

3.         Prohibition of minarets in Switzerland 

In November 2009, the Swiss electorate adopted a people’s initiative prohibiting the construction of minarets. Curiously, the major part of Swiss politicians considered before the vote that the initiative to adopt an article in the Swiss Constitution prohibiting the construction of minarets had no chances to be adopted by the Swiss electorate and were most surprised when the proposal was adopted at a large majority. 

Obviously, aims and expectations of politicians and voters are very different, but this vote might have been influenced by the Kadhafi / Libyan affair as the vote took place at a period when it was largely published in the Swiss media.

4.         The salaries of managers 

        Finally, it should be mentioned that the ever increasing salaries of managers of big Swiss companies (who earn in certain cases up to CHF. 70 millions a year) provoked an initiative against what is called “rip off” salaries. The initiative will be submitted to Swiss electorate at the end of the year. The purpose of the initiative is to limit salaries especially by shareholders’ votes. The problem is not only a Swiss problem, but a worldwide problem arising out from the fact that in big companies shareholders’ assemblies have no real control on management and the managers are deciding the amount of their salaries themselves, attributing to themselves ever increasing amounts which, in certain Swiss companies, implied an increase of the management salaries of more than 500 % during the ten last years.

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