Switzerland has expeditiously approved a recent IRS treaty request for account holder information from Union Bancaire Privee, UBP SA (“UBP”), a Category 2 Swiss bank. Pursuant to the DOJ Program for non-prosecution agreements or non-target letters for Swiss banks (the “Swiss Bank Program”), any participating Swiss bank requesting a non-prosecution agreement (i.e., Category 2 Swiss banks) must, as a condition, “provide all necessary information for the United States to draft treaty requests to seek account information; such cooperation will include but not be limited to the development of appropriate search criteria.” Swiss Bank Program, II. D. 4. Therefore, although UBP is still in the process of negotiating a non-prosecution agreement under the Swiss Bank Program, it is still required to cooperate with the treaty request condition presently. Similarly, other Category 2 Swiss banks have provided information for such treaty requests, which are being expeditiously approved by the Swiss Federal Tax Administration (the “SFTA”), although still in the process of negotiating a non-prosecution agreement under the Swiss Bank Program.
In a recent treaty request sent by the IRS to the SFTA regarding U.S. account holders at UBP, the SFTA approved the treaty request within three days, which is unusually fast compared to prior requests and seems to indicate that the IRS and SFTA worked out an arrangement to facilitate the swift approval of all IRS treaty requests involving Category 2 Swiss banks. This notion is generally supported by the comments previously made by then AAG for the Tax Division Kathryn Keneally, who testified before the Senate Permanent Subcommittee on Investigations on February 26, 2014, indicating that the U.S. and Switzerland had made such an arrangement, but could not disclose the details of that arrangement.
It appears that the IRS/DOJ is using information provided by the Category 2 Swiss banks under II.D.2 of the Swiss Bank Program – the so-called “leaver data list” – to make these treaty requests. It also appears that the IRS/DOJ is “cherry picking” only certain accounts to avoid possible rejection by SFTA, or even worse, a negative court decision in Switzerland on the grounds that the request does not meet the “tax fraud or the like” standard set forth in Article 26 (Exchange of Information) of the 1996 U.S.-Switzerland income tax treaty. The fear for the IRS/DOJ here is that if the treaty requests for Category 2 Swiss banks, which are based on the “leaver data” information, are insufficient to show “tax fraud of the like” then a Swiss court would deny the treaty request if challenged.
For prior IRS treaty requests involving Swiss banks, the history is checkered. In the UBS matter, ultimate resolution required a special protocol to the U.S.-Swiss income tax treaty (signed on August 19, 2009) incorporating an agreed-upon criteria for determining “tax fraud or the like” under the treaty to finally withstand a challenge brought in Swiss court (the so-called “4450 UBS cases”). In the Credit Suisse cases, after some back and forth, the Swiss Federal Supreme Court ruled ultimately on July 8, 2013, that U.S. “group requests” were permissible under the treaty if the request included enough detail to establish “tax fraud or the like.” However, a subsequent Swiss court decision on January 6, 2014, invalidated a treaty request for client data from Julius Baer attempting to draw a distinction between a detailed group request that is considered valid and the treaty request under review that was deemed a “fishing expedition” and therefore invalid under the treaty. This most recent decision also referenced the 2009 protocol that is still stalled in the U.S. Senate, which would remove the distinction between “tax fraud or the like” and tax evasion, thus facilitating the exchange of information under the treaty and potentially obviating future legal challenges in Switzerland.
What seems clear at this time is that the IRS and DOJ are being more circumspect about the scope of these Category 2 bank treaty requests. However, what still seems unclear at this time is the following: (i) whether these treaty requests will include individual account holders, which does not seem to be the case thus far; (ii) whether there is an established criterion for these treaty requests as was done in the UBS matter; and, most importantly, (iii) whether these treaty requests would meet the “tax fraud or the like” standard if challenged in Swiss court. On this last point, you should bear in mind that the IRS considers any challenge subject to the notice requirements on the Attorney General of the United States under 18 U.S.C. 3506, and failure to do so will cause a taxpayer to be ineligible for the Offshore Voluntary Disclosure Program.