Wednesday, June 1, 2011

The State of the John Doe Treaty Request to Switzerland (6/1/11)

U.S. double tax treaties have an exchange of information provision. After the U.S. put the full court press on UBS (John Doe Summons and criminal investigation), the matter was finally resolved with a deferred prosecution agreement for UBS (with a whopping fine) and an agreement with the Swiss government that it would process a John Doe treaty request -- i.e., a request for U.S. taxpayers identified only by characteristics (e.g., size of account and use of non-U.S. entities)). Because, prior to that time, Switzerland interpreted the US - Swiss double tax treaty restrictively, this solution required a treaty protocol. At more or less the same time, efforts at more transparency from tax haven jurisdictions were pursued by OECD and G-20 Ministers of Finance. The result is that Switzerland is trying to give the appearance of opening the kimono. (That is different than actually opening the kimono.)

All of this is laid out (or at least suggested) in the Joint Committee on Taxation, Explanation of Proposed Protocol to the Income Tax Treaty Between the United States and Switzerland (JCX-31-11), May 20, 2011. I recommend this report as an excellent summary of the issues with Switzerland and an historical summary of the developments in this area.

The question I have from all this is whether Switzerland will respond to similar John Doe treaty requests with respect to other Swiss banks.

I pull from the report some discussion of this issue (pp. 35-36, footnotes omitted):

1. Extent to which taxpayer names will continue to be required

The need to identify the taxpayers to whom the request for information relates is subject to varying interpretations about the extent to which information provided by the requesting treaty country is sufficiently specific. The proposed protocol mandates exchange of information only if made pursuant to specific requests for exchange of information and only if the request contains information sufficient to identify the taxpayer. It is not clear what information other than a name will be sufficient within the meaning of the proposed protocol to obtain the names of persons within an ascertainable class of persons. In the context of Code section 7609(f) and John Doe summonses in the United States, the persons whose tax data is sought must belong to an ascertainable class of persons who may have taken steps to avoid taxes. That standard was satisfied in the UBS controversy.

The ultimately successful treaty request submitted under the terms of the August 2009
settlement with UBS, which led to production of the information and withdrawal of the John Doe summons, was not the first time that a treaty request was considered in that case. Enforcement of the summons was sought in 2009 only after the United States, through the U.S. Competent Authority, had requested the information, despite long experience with Switzerland suggesting that the request would be futile both because the United States could not supply the names of the taxpayers involved and because it did not yet have information sufficiently probative of tax fraud or fraudulent conduct. The purpose of the request was to obtain those names. Only after enforcement proceedings were approaching a point at which Swiss courts would be asked to grant comity to a U.S. court order were the treaty countries able to agree that exchange of information was permissible under the treaty. Use of the treaty request under the agreement negotiated by the United States and Switzerland as well as the United States and UBS enabled the Swiss to preserve Swiss sovereignty while nevertheless providing the information needed by the United States.

Although the proposed paragraph 10 to the 1996 Protocol, which details the information to be included in a request, includes the word “typically” in listing items to be provided, the Committee may wish to inquire about the nature and extent of assurances provided by Switzerland that the language in the proposed paragraph 10 will be treated as illustrative and not prescriptive, and that it will not be interpreted in a manner that would thwart future attempts to acquire information of the type received under the UBS treaty request. In a decision issued February 13 and published February 15, 2011, the Swiss tax authorities referred to negative comments in the course of Phase I of its Peer Review to the effect that Swiss conditions for administrative assistance were too restrictive and could prove to be a possible hindrance to effective exchange of information. In response, to proceed to Phase II of the Peer Review, Switzerland said it would revise its position on the need for identity of the taxpayer and the person in possession of the requested information to state “Other means of identification should also be admissible in the future.”

The rule of interpretation included in proposed paragraph 10 to the effect that the procedural requirements for an administrative assistance request must not be interpreted in a way that frustrates effective exchange of information is the subject of a proposed resolution before the Swiss Parliament. On April 6, 2011, the Swiss Federal Council asked that the Swiss Parliament concur with a resolution to the effect that the February 13 decision is consistent with the rule of interpretation in the proposed protocol. At the same time, the Swiss Federal Council requested authority to amend nine other bilateral agreements already ratified by Parliament and announced its intention to renegotiate 20 other agreements in order to add such a rule of interpretation and bring the agreements into conformity with the February 13 statement. In doing so, the Swiss authorities also stated that the rule of interpretation and the administrative assistance practices “still have to be fleshed out by defining the rule on interpretation.”
Addendum 6/2/11 8:30 am:

Tax gadfly, Lee Sheppard reported today on a meeting of "101 countries met in Bermuda on May 31 and June 1 under the auspices of the Global Transparency Forum to assess each other's progress in meeting OECD transparency guidelines." Lee A. Sheppard, OECD Countries Address Transparency Progress, 2011 TNT 106-1 (6/2/11). Ms. Sheppard discusses the John Doe treaty request to Switzerland as follows  (citations omitted):


Switzerland was compelled to sign several newer-model TIEAs and information exchange protocols to its treaties in the wake of the UBS scandal and purchases of account holder information by European governments. Nonetheless, Swiss officials made noises that the new vaguely worded agreements would be interpreted restrictively, so that Switzerland would not entertain information requests when the requesting jurisdiction lacked the taxpayer's name and identifying information.

On February 15 the Swiss government issued a statement backtracking from this stance, stating that the law would be changed to permit other means of taxpayer identification. Following through on this statement will still require the Swiss parliament to pass a law, which may even go to referendum.

"My expectation is that they will pass it," said Mike Rawstron, the Australian tax administrator who serves as chair of the Global Forum. Saint-Amans noted that the peer pressure of the Forum was instrumental in the Swiss turnaround.

Switzerland will interpret other information exchange provisions narrowly. It requires identification of the taxpayer "without any doubt." It can still use bank secrecy to deflect information requests made under its older agreements, which account for half of its agreements. The peer review report notes that Switzerland still permits bearer shares and bearer savings account books, which are being phased out. The report also noted that the account holder's right to notification and challenge of disclosure can impede access to information.
Switzerland did put in place domestic secondary legislation, which will eventually be replaced by a law, enabling compliance with information requests. But the competent authority lacks coercive power to obtain information. Switzerland will refuse an information request for being out of line with article 5 of the OECD model treaty, made in bad faith, incompatible with the values of Swiss law, or based on information obtained in violation of Swiss law. These rules prevent turnover of information based on stolen bank account data. These rules, nonetheless, are not viewed as effective blockades by some, on the view that Switzerland will not know when stolen information is being used.
Switzerland will not exchange information it doesn't consider "foreseeably relevant" -- the magic words of the newest version of the information exchange agreements. If the treaty partner considers the requested information relevant but Switzerland does not, Swiss intransigence will show up in Phase 2 of the peer review, which will consider whether application of these rules is consistent with the TIEA standard. Switzerland already has received information requests under its new agreements, so there will be a track record on which to base the Phase 2 evaluation.
Addendum on 6/9/11:

Treasury Technical Explanation of Swiss Protocol 
Treasury Technical Explanation of Luxembourg Protocol 

Addendum on 6/11/11:

Joint Committee on Taxation, Testimony of the Staff of the Joint Committee on Taxation Before the Senate Committee on Foreign Relations Hearing on the Proposed Tax Treaty with Hungary and the Proposed Tax Protocols with Luxembourg and Switzerland (JCX-35-11), June 7, 2011.  In that testimony, the Staff said:
Nevertheless, there are several areas in which questions about the extent to which the exchange of information article in the proposed protocol may prove effective are warranted. The proposed revisions to paragraph 10 of the 1996 Protocol reflect complete adoption of the first element listed above in the Swiss negotiating position, "limitation of administrative assistance to individual cases and thus no fishing expeditions." The limitation poses issues regarding (1) the extent to which the Swiss will continue to reject requests that do not name the taxpayer as a result of the requirement that a taxpayer be "typically" identified by name, and (2) the standard of relevance to be applied to requests for information, in light of the caveat against "fishing expeditions." In addition, the appropriate interpretation of the scope of purposes for which exchanged information may be used may be unnecessarily limited by comments in the Technical Explanation. One such concern is the extent to which the agreement that information may be used for purposes beyond the purposes identified in paragraph 1 of Article 26, is consistent with the comment in the Technical Explanation that such authority will only be exercised if consistent with the Mutual Legal Assistance Agreements.


  1. Swiss banking secrecy was significantly eroded by the UBS case. The Swiss Parliament approved the UBS settlement and then took steps to modify internal Swiss law in order to effectuate that settlement.

    Now it seems that Switzerland may be attempting some sort of damage control or saving face, by suggesting that the kimono is open . . . but not really open.

    I`m not so sure about that. And I`m also not sure that the issue of identification of account holders by name is really much of an issue at all. The UBS case proved that John Doe summonses work, and the US did not have to provide names in order to force UBS to comply with that John Doe summons.

  2. Asher, the Swiss will try to make the process opaque in order to continue to attract clients seeking secrecy, but as I understand what occurred:

    1. The IRS first made a treaty request, presumably a John Doe request. The Swiss said no (I presume, couched in diplomatic terms, it was not hell no, but close).

    2. The IRS obtained court approval for a John Doe summons because UBS affiliates had a substantial U.S. presence which could be leveraged. Many Swiss banks do not have that type of presence, so the IRS ability to leverage is less.

    3. The John Doe summons got the Swiss to rethink their obstructionist stance on the treaty. They opened the kimono via a treaty "interpretation" for UBS only.

    4. The IRS dropped the John Doe summons proceeding because they got what they wanted (well, enough of what they wanted) through the interpretation of the Swiss treaty.

    5. So, the UBS case established only that the John Doe summons permits leverage for Swiss banks with a substantial U.S. presence. As I said, there are many offending Swiss banks without such a presence and IRS ability to leverage a favorable treaty resolution.

    6. There are ongoing diplomatic efforts by the U.S. and, perhaps more importantly, by other countries and organizations that collectively can get the Swiss to be a more productive interntational citizen (as opposed to just aiding and abetting crooks, thieves and despots).

    7. And, of course, the threat of prosecuting Swiss banks provided perhaps the heaviest hammer in the Swiss special interpretation of the treaty to permit the John Doe treaty request in the UBS case. Again, how effective that ultimately is will depend upon the Swiss banks' presence in the U.S. But, as we have seen from indictments of foreign individuals not likely to appear in the U.S. for prosecution, just an indictment of the Swiss banks without prosecution would make a powerful statement and the threat of that might make the Swiss behave.

    Jack Townsend

  3. The big question is whether pressure can be brought to bear on Swiss banks without a US presence. Credit Suisse has a huge US presence, but Swiss cantonal banks and private banks do not. The Swiss cantonal banks are also majority owned by local Swiss governments, so that might provide some more protection (although a government owned bank has no sovereign protection when operating in a purely commercial context).

    Ultimately, Switzerland will have to decide whether the huge role that 'private' banking plays in its economy is more important than the increasing importance of interconnection with the global economy.

  4. Here is an interesting article that states DOJ and the Swiss government are in negotiations on a settlement that will settle Credit Suisse and Julias Baer's involvement in tax evasion by U.S. taxpayers. According to the article it will involve fines and disclosure on account holders in order for the banks to avoid prosecution. Clearly the UBS John Does Summons was a key turning point in Swiss Offshore Banking. Hopefully, all of those that held undisclosed accounts at these or any other Swiss banks have disclosed. I think the 2011 OVDI will net more disclosures than 2009 OVDP. The writing is on the wall.


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