Swiss FTA to Pass HSBC U.S. Depositor Information to IRS Under Treaty (7/27/16; 7/28/16)

Reuters reports that the Swiss Federal Tax Administration announced that it will respond to an IRS treaty request for information on U.S. depositors meeting certain characteristics.  John Miller, Swiss to pass information on HSBC accounts to U.S. tax agency (Reuters 7/26/16), here.  The request appears to be a group request (or what I call a John Doe Treaty request) whereby the U.S. depositors are not named (indeed, the IRS in most cases would not know their names) but certain characteristics of material potential U.S. tax noncompliance are suggested.  As reported:

The Swiss government said it made the announcement about its plans on Tuesday to alert HSBC account holders whom it has been unable to locate, and to give them the chance to lodge a legal appeal if they object to having their information sent to the U.S. Internal Revenue Service (IRS). 

The move comes after the IRS asked Swiss tax authorities in April for assistance on HSBC Private Bank (Suisse) SA accounts held by Swiss-registered "domiciliary companies" with U.S. beneficial owners between 2002 and 2014. 

The Swiss Federal Tax Administration said the IRS targeted HSBC accounts "where there is evidence that the U.S. beneficial owner exercised control, directly or indirectly, over the account in violation of corporate governance ... by withdrawing funds from the account for personal use." 

HSBC said it was cooperating. 

"Following an information request in April 2016 from U.S. authorities to the Swiss Federal Tax Administration (SFTA), the bank has provided certain files, mostly related to former clients, to the SFTA," said Lonnie Frisby, a spokesman for HSBC's Swiss private bank. "The Swiss authorities may forward part or all of this information to U.S. authorities in accordance with applicable laws and treaties. Anyone subject to this request has been notified." 

* * * * 

A spokesman for Switzerland's tax agency in Berne declined on Tuesday to say how many HSBC accounts were involved in the IRS request, citing Swiss privacy laws.

The article does note the SFTA appeals process for U.S. depositors to try to divert or derail the turnover of information.  Good luck on that.

Addendum 7/28/16 8:00am:

As noted by a commenter below (David), the actual announcement can be reviewed here.  The announcement, in pdf format, is in German for the first three pages and in English for the following pages.

Then, another commenter named Bert has the parameters for the request.  I will cut and paste them from the pdf document linked above (bold-face supplied by JAT):

Information was requested concerning accounts of U.S. beneficial owners, whose names are unknown, with HSBC Private Bank (Suisse) SA (including accounts that had been taken over from HSBC Guyerzeller Bank AG), which fulfilled all of the following criteria during the time period from 1 January 2002 to 31 December 2014:

a. the account is held by a domiciliary company with a U.S. beneficial owner;
b. the account contained U.S. securities;
c. the aggregate account balance exceeded USD 50,000 at some point during the taxable period;
d. there is evidence that the U.S. beneficial owner exercised control, directly or indirectly, over the account in violation of corporate governance, for instance, by withdrawing funds from the account for personal use or by using credit cards linked to the account held by the domiciliary company to pay for personal expenses or expenses that were not justified vis-à-vis the domiciliary company or by giving investment instructions to the Banks regarding the domiciliary company account without being an authorized officer, trustee, or director of the domiciliary company or without the express written authorization of the domiciliary company;
e. there is a contradiction between the Form A (or the information on the account showing that the actual beneficial owner is a U.S. person) and the Form W-8BEN (or substitute form or documentation as provided for by the «Attachment for Switzerland» to the Banks’ QI Agreements);
f. the Banks have no record of the timely filing of an accurate Form 1099 naming the account’s U.S. beneficial owners and reporting to the IRS all payments made to such U.S. beneficial owners;
g. no backup withholding within the meaning of section 5.13(C)(4) of the QI Agreements was levied on any asset of the account.  

All of the criteria are important and show that the request is designed to hit a limited subset of persons with accounts during the period.  I suspect that most readers will be familiar with the terminology used in the request.  I will go through only a couple of the terms.

Domiciliary company.  I am not an expert in Swiss law, but my understanding of the domiciliary company is as follows (which is an amalgam of various descriptions I have read):  A type of corporation that is both foreign-controlled and managed from abroad with only a minimum footprint in Switzerland (via a registered office (often a lawyer's premises, but with no other material physical presence or employees in in Switzerland).  No business is conducted in Switzerland; all income is foreign sourced.  Such companies are ideally suited to make the ultimate beneficial ownership more opaque.  The IRS has shown particular interest in U.S. taxpayers using domiciliary companies since news of the treaty requests began to surface.  See e.g., The Swiss Government Begins Disclosing Credit Suisse Accounts to IRS (Federal Tax Crimes Blog 11/8/11), here; Credit Suisse Sends U.S. Customers Notice of Compliance with Refined U.S. John Doe Treaty Request (Federal Tax Crimes Blog 8/9/12; revised 8/11/12), here; U.S. Treaty Request for Julius Baer Domiciliary Company Accounts with U.S. Beneficiaries (Federal Tax Crimes  Blog 5/28/13), here.  In this regard, virtually all of the indictments of U.S. taxpayers since the initiative started in 2009 have involved some type of entity, usually at least one form of corporation.  A domiciliary corporation meeting the other characteristics for the accounts would almost certainly be a controlled foreign corporation with direct U.S. taxation of subpart F income, if it were not treated as a sham altogether.  Hence, another requirement is that there be no indication of Form 1099 naming U.S. beneficial owners or backup withholding.

U.S. Securities.  This limitation probably relates to the withholding requirements.  However, since, for U.S. taxpayers, all income from whatever source derived, my understanding is that it was not uncommon for these entities to avoid U.S. securities in order to avoid the QI Agreement requirements.  So, this requirement for disclosure may be a significant limitation on the scope of the request.

Evidence of U.S. Beneficial Owner Control.  Most of the requirements are fairly objective, but this is not an objectively determine requirement.  Precisely what the evidence must be is not definitively stated.  Perhaps the Swiss bankers filtering the request will simply know it when they see it.  My experience is that this type of evidence will fit into patterns, as the forms of assisting U.S. taxpayers became routinized over time with certainly some individual variation that might not get caught by the request as stated.

Thanks to both of the commenters for pointing me and other readers through me to the document.  I would appreciate readers offering more detail or understanding of the scope of the request.

Thanks particularly to Dave and Bert.