Wednesday, June 20, 2012

Rosenbloom Essay on Failure of Discourse between U.S. & Switzerland (6/20/12)

David Rosenbloom, here, of Caplin and Drysdale has published an interesting article in Tax Notes.  H. David Rosenbloom, Switzerland and the U.S.:  What We Have Here is a Failure to Communicate, 135 Tax Notes 1389 (June 11, 2012), here (published here with the permission of Tax Analysts).   Rosenbloom's point of departure is an apologia for Swiss banker's actions published by a Swiss law professor.   Peter Viktor Kunz, Roger Federer, Swiss Banking Will Both Come Back, (Bloomberg 4/30/12), here.  Professor Kunz's article begins with the statement (or complaint):  "Why is it, many Swiss are asking today, that the whole world seems to be out to get us?"  (Conjures in my mind the saying "I may be paranoid but that does not mean that they are not out to get me.")

Rosenbloom's essay is written in the context of the U.S. juggernaut first against UBS and then on an ongoing basis against U.S. taxpayers and persons, including Swiss banks and financial institutions, who enabled U.S. persons to evade or avoid U.S. tax by using Swiss financial accounts.  Rosenbloom directs the essay at "the apparently unyielding level of misunderstanding between the United States and Switzerland about the objectives and motivations of each country."  Rosenbloom notes his experience in the international tax area which gives him unique perspective to assess the dynamics of the U.S. and Swiss interactions.

Rosenbloom states the Swiss case as follows:
Switzerland's position is pretty clear -- or, to be fair, the position of a substantial portion of the Swiss population is pretty clear. On this view, the United States takes a moralistic view of taxation and sees Switzerland as a facilitator of tax fraud and evasion. The United States fails to appreciate the deeply felt Swiss respect for privacy. 
Further, Switzerland sees the United States as a bully and a law-breaker. Given the existence of the treaty, Switzerland cannot understand how or why the United States could bring criminal proceedings against UBS or resort to a summons enforcement action in U.S. district court, legal procedures wholly independent of the treaty's exchange of information provisions.
Rosenbloom states the U.S. case as follows:

The Swiss view of their country as a haven for those persecuted elsewhere goes back centuries and is admirable. Perhaps not everyone in the United States holds that view, but I certainly do. Thinking of Switzerland as merely a facilitator of fraud on the U.S. fisc is simplistic, ahistorical, and foolish. 
On the other hand, there is much more to the U.S. concern about offshore accounts, and about the behavior of Swiss banks, than moralism. Yes, the United States can be self-righteous about certain matters (as can the Swiss), but there are pragmatic considerations at play here. The United States is not a country of 11 million. Its population numbers about 312 million, and it has big governmental expenses. The U.S. tax system must produce revenue. When some U.S. taxpayers fail to report their income, through the use of offshore accounts or otherwise, there is a potential for havoc. Nothing threatens a voluntary compliance system like that of the United States as much as a spreading perception that similarly situated taxpayers are receiving disparate treatment because some are successfully avoiding their obligations. 
* * * * 
The proposition that the treaty represents the only means for the United States to seek names of U.S. owners of Swiss accounts is legally frivolous. UBS and Credit Suisse have enormous physical presences in the United States. Having chosen to develop those presences, they are fully subject to U.S. domestic laws. There is nothing about a tax treaty that excuses Swiss people in the United States from stopping at red lights. 
Nor is it appropriate to compare nondisclosure of bank information to religious belief, sexual orientation, or health status. The privacy of Swiss bank information has been relied on by U.S. persons to commit crimes. Switzerland may think that failure to report income should not be a crime, but the United States takes a different view, for reasons I have explained. And it would be the height of naïveté to deny that Swiss privacy laws dovetailed nicely with widespread violations of U.S. law.
It may be true that the use of a person's legally gained money is nobody else's business. But a fair amount of the money in question here was not legally gained, and the earnings produced by that money, if unreported, were not legally gained either. U.S. law treats all of a U.S. person's earnings worldwide, legal or illegal, including earnings in Swiss accounts, as reportable and fully taxable. Indeed, the 2011 reports are due in the United States in just a few weeks.
Rosenbloom does not try to resolve these competing visions or arguments, but does suggest that each side try to understand the other's perspective:
The United States would be well advised to try to understand Swiss sensitivities on the issue of privacy. There is a U.S. tendency to stake claim to the moral high ground and express explicit or implicit criticism of countries that come from a different place. My point is that, in the case of Switzerland, the reverse is also true. The situation would be much improved if each country tried a little harder to understand the other's position.
To me, this engagement  resembles the political discourse in the United States.  Various constituencies in our political spectrum see their pet notions threatened.  Rather than engaging, reasoning and understanding, these constituencies move into a defensive posture -- sometimes taking the offense (often offensive) -- marshaling their reasoning capacities to defend their own moral positions (often infused with parochial interests).  Among the observers of this phenomenon is Jonathan Haidt, Righteous Mind: Why Good People Are Divided by Politics and Religion, here.  My suspicion is that the Swiss moral outrage -- professed and perhaps even real in their minds -- is not driven by the moral superiority of their position (see Rosenbloom's statements of the position), but by the parochial interests in preserving secrecy as the only competitive advantage it has vis-a-vis the rest of the world economies.. Without its vaunted claims for secrecy, the Swiss may have to really compete in the world economy and that has to be troubling.

1 comment:

  1. In the US, bank deposit interest and capital gains (on stocks, for example) are exempt by law from US tax for non-resident foreigners.  Also, there is no reporting either to the IRS (form 1099) nor to other countries (except for Canada.)  There is quite a bit of money from Latin American clients in US banks, particularly in Miami.  Furthermore it would not be surprising if US bankers were traveling to Latin America engaging in the same shenanigans that UBS engaged in in the US (I have no knowledge about whether this is the case.)  For this reason the US is being accused of hypocrisy vis-a-vis Switzerland.

    Delaware (and Nevada, Wyoming, etc.) corporations pay tax on profits from US activity but not on income generated outside the US if the corporation is owned by non-resident foreigners.  Delaware shell corporations are just like Belize shell corporations in that regard.

    Finally, there is a broad spectrum in the conduct of Swiss and their clients, ranging from the very bad conduct of UBS and its convicted clients, to the opposite end of the spectrum, such as banks that did not send bankers to the US and took no active role in aiding tax evasion, as well as European-American dual citizens who had legally earned and taxed principal on deposit in Swiss banks, but who did not report interest income or file FBARs, which is far less serious behavior.


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