The criteria for the Swiss and UBS to apply in disclosing accounts held by U.S. persons is set forth in a document released yesterday. The criteria document is here; a Swiss Government chart of the Agreement titled "The Annex to the UBS Agreement at a Glance is here. The criteria document is an annex to an agreement makes the IRS request under the double tax treaty and interprets the Swiss obligation under the treaty broader than the Swiss have applied it in the past. That agreement is here. Accordingly, I think it is helpful to first summarize the key points of the agreement that might be relevant to the criteria and then summarize the annex which sets forth the criteria.
The key points of the agreement from my perspective for the present discussion of criteria are:
1. The agreement is the IRS request under the double tax treaty for information and documents from UBS, and the Swiss Confederation is required to process the request under the criteria set forth in the Annex. (Article 1.) However, in a declarations page attached to the agreement, the following is agreed:
Swiss Confederation declares that it will be prepared to review and process additional requests for information by the IRS under Article 26 of the existing Tax Treaty if they are based on a pattern of facts and circumstances that are equivalent to those of the UBS AG case.I think this means that a similar request can be made with respect to other Swiss banks.
2. The parties agree to signing a new protocol to the existing double tax treaty. (Article 2.) The protocol is here. The following appears to be the key provision (Article 3 amending Article 26 of the double tax treaty):
5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person. In order to obtain such information, the tax authorities of the requested Contracting State, if necessary to comply with its obligations under this paragraph, shall have the power to enforce the disclosure of information covered by this paragraph, notwithstanding paragraph 3 or any contrary provisions in its domestic laws.Now, turning to the Criteria Annex, the key criteria are:
1. The IRS does not have to provide the names of the U.S. persons in order to make the request. (Paragraph 1.) This provision is, of course, key, since the IRS does not know the names and seeks to get the names.
2. The request is to identify individuals in the following categories (these are exact quotes from the document):
A. US domiciled clients of UBS who directly held and beneficially owned "undisclosed (non-W-9) custody accounts" and "banking deposit accounts" in excess of CHF 1 million (at any point in time during the period of years 2001 through 2008) with UBS and for which a reasonable suspicion of "tax fraud or the like" can be demonstrated, orNote that there are some quotation marks in the provisions that indicate special definitions later in the agreement.
B. US persons (irrespective of their domicile) who beneficially owned "offshore company accounts" that have been established or maintained during the period of years 2001 through 2008 and for which a reasonable suspicion of "tax fraud or the like" can be demonstrated.
3. Parsing 2A, the U.S. persons fall into the following categories based on other provisions of the agreement.
a. All accounts for U.S. domiciled persons having CHF 1 million at any point during the period 2001-2008 if there is a reasonable suspicion of tax fraud or the like. This is the basic agreement, but paragraph 2a seems to expand the disclosure to include accounts of U.S. domiciled persons with CHF 250,000 or more during the relevant period where "tax fraud or the like" is present. Of course, the key question is what is "tax fraud or the like." The conduct is a "scheme of lies" which a footnote describes as follows:
n1 Such "scheme of lies" may exist where, based on the Bank's records, beneficial owners (i) used false documents; (ii) engaged in a fact pattern that has been set out in the "hypothetical case studies" in the appendix to the Mutual Agreement concerning Art. 26 of the Tax Treaty (for example, by using related entities or persons as conduits or nominees to repatriate or otherwise transfer funds in the offshore accounts); or (iii) used calling cards to disguise the source of trading. These examples are not exhaustive, and depending on the applicable facts and circumstances, certain further activities may be considered by the SFTA as a "scheme of lies".In addition, such conduct may be present where the U.S. domiciled person has failed to provide a Form W-9 for a period of at least 3 years (including 1 year covered by the request) and the UBS account generated revenues of CHF 100,000 on average per annum for any 3-year period that includes 1 year in the period 2001-2008.
b. U.S. persons (regardless of domicile) who beneficially owned "offshore company accounts during the period 2001-2008 for which there is a reasonable suspicion of "tax fraud or the like"). However, accounts that were below CHF 250,000 during the entire period are excluded. The "scheme of lies" is included in this group, again with a footnote definition as follows:
n3 Such "scheme of lies" may exist where the Bank's records show that beneficial owners continued to direct and control, in full or in part, the management and disposition of the assets held in the offshore company account or otherwise disregarded the formalities or substance of the purported corporate ownership (i.e., the offshore corporation functioned as nominee, sham entity or alter ego of the US beneficial owner) by: (i) making investment decisions contrary to the representations made in the account documentation or in respect to the tax forms submitted to the IRS and the Bank; (ii) using calling cards / special mobile phones to disguise the source of trading; (iii) using debit or credit cards to enable them to deceptively repatriate or otherwise transfer funds for the payment of personal expenses or for making routine payments of credit card invoices for personal expenses using assets in the offshore company account; (iv) conducting wire transfer activity or other payments from the offshore company's account to accounts in the United States or elsewhere that were held or controlled by the US beneficial owner or a related party with a view to disguising the true source of the person originating such wire transfer payments; (v) using related entities or persons as conduits or nominees to repatriate or otherwise transfer funds in the offshore company's account; or (vi) obtaining "loans" to the US beneficial owner or a related party directly from, secured by, or paid by assets in the offshore company's account. These examples are not exhaustive, and depending on the applicable facts and circumstances, certain further activities may be considered by the SFTA as a "scheme of lies".Also included is any submission of incorrect or false documents. Finally, included are accounts in which the U.S. person has failed to prove compliance with statutory tax reporting requirements with respect to the offshore company account (requiring the depositor to provide a consent to permit the Swiss tax authority to request a copy of the relevant FBAR from the IRS and failing such consent providing guidelines for disclosure to the IRS).
JAT comment: Of course, in the voluntary disclosure initiative that closed on 10/15, the IRS learned many of these names and, I suspect, most of them that relate to UBS. Certainly UBS depositors that fit the criteria -- which had been anticipated among those who practice in this area -- should have joined the voluntary disclosure program so that the disclosure under the treaty is not particularly important to them. But, I am sure that there will be enough who did not disclose to give the IRS some good targets to make a public deterrence statement via indictments and convictions.