Sometimes, what seems like a little story is actually quite extraordinary.
That’s what happened earlier this month, when what seemed like business as usual thousands of miles away came and went without a lot of attention. That business, with the bang of a gavel, was the Swiss parliament amending their tax treaty with the United States.
You might not have heard much about it. It didn’t have the sexiness of a Peyton/Tebow trade or the shiny appeal of an Apple dividend. But in one fell swoop, it completely changed the international banking climate.
It’s been no secret for years and years that if you wanted to hide money, the best way to do it was a Swiss bank account. It was the stuff of international thrillers and blockbuster movies. And the Swiss were not only complacent in such a scheme, they openly welcomed it. The secrecy of Swiss bank accounts dated back to the Middle Ages but was made law in the early 20th century with the passage of the Banking Law of 1934. That law not only confirmed Switzerland’s commitment to banking secrecy but made it a crime to violate those secrecy laws.
That commitment to secrecy has been a thorn in the side of many countries, including fellow Europeans like Germany and the UK, who have been constantly thwarted in their attempts to identify those who were evading tax by opening accounts in Swiss banks. Frustrations hit a boiling point in 2008 when those countries stopped playing nice and started pointing fingers. Germany, in particular, came out swinging, with Peer Steinbrück, the German finance minister, out and out accusing the Swiss of trolling for tax evaders, saying:
Switzerland offers conditions that invite the German taxpayer to evade taxes.
Steinbrück went so far as saying that Switzerland should be added to an international blacklist of tax havens as reported by the the Organisation for Economic Co-operation and Development (OECD).
A year later, however, Switzerland, reacting to international pressure, agreed that it would “move towards transparency” – whatever that meant.
And then three letters changed the whole game: UBS.
UBS is the largest bank in Switzerland and is considered the world’s second largest manager of private wealth assets. The bank came under fire in 2008 when the U.S. publicly stated that it believed that private bankers at UBS may have helped American clients hide as much as $20 billion in offshore accounts to avoid paying tax. The U.S. demanded that the bank named names but the Swiss government said that they would seize financial records themselves from UBS rather than allow them to be turned over to the U.S. And the battle lines were drawn.
Throughout the scandal, the Swiss maintained that the U.S. did not have the authority to serve a so-called “John Doe” summons on Swiss banks without specific taxpayer information. That position made finding and prosecuting those who were hiding assets difficult.
The tax treaty changes all of that. Scott Michel, a tax attorney and president of Washington DC-based law firm Caplin & Drysdale, called the change “a big deal.”
Under the new tax treaty, the IRS can ask the Swiss to disclose names of U.S. taxpayers at a bank with evidence of “behavioral patterns” that might point to tax evasion. And where might the IRS get that evidence? A prime source could be the IRS’ own offshore voluntary disclosure initiative (OVDI) and subsequent amnesty programs.
Under the OVDI, taxpayers who had previously not reported foreign assets had the opportunity to do so. Now, according to Michel, that information may prove useful to the IRS under the treaty terms. In the past, the IRS had to name names. Now, however, if they have evidence that, say, seven taxpayers who had been hiding assets used a particular banker, they can ask the Swiss to identify every American who did business with that banker. And it doesn’t stop at bankers. It could include advisors such as attorneys and brokers. The IRS need only make a valid request to the Swiss federal tax authority who will then serve process on the bank. If the request has enough evidence, Michel believes that the turnaround on information disclosure will be fairly speedy, noting that, under these terms, “the Swiss are not going to drag their feet.”
Also noteworthy? Under the terms of the treaty, the U.S. won’t be limited to chasing the big banks like UBS and Credit Suisse who do business inside the U.S. Now, the U.S. will be able to request information from small banks that don’t even do business in the U.S. That is significant.
So is this just about some wealthy taxpayers getting their comeuppance? Not at all. It’s much bigger than that.
All of the sudden, it’s not such a good idea for foreign banks to try to woo U.S. taxpayers with promises of banking secrecy. If the U.S. can make Switzerland turn over those names, many other countries aren’t so sure that they can hold out either. And the U.S. is emboldened by this success. Michel notes that “where the U.S. believes there are tax havens, they may seek to include the same kinds of provisions” in those treaties as in Switzerland. It’s all part of a new U.S. attitude – and one that most countries appear to respect.
And that makes some banks think twice about even hosting U.S. account holders. I’ve seen it in my own practice; many of our clients have received the equivalent of “Dear John” letters where the banks advise that, really, they’re just not that into them anymore. Michel agrees, noting that they have “many clients who were kicked out of their banks.”
Of course, with Foreign Account Tax Compliance Act (FATCA) looming, there will be a mandatory information exchange in place for banks all over the world. It will be, says Michel “a rare bank that doesn’t comply with FATCA.”
What does all of this mean? Switzerland has changed the game. Nobody wants to be “that guy” who doesn’t comply. Countries want to get off the blacklist. And, Michel adds, there is a “consensus growing that information exchange for tax and fiscal purposes alone is something to be promoted.” It’s not just about fighting terrorism or money laundering anymore. There appears to be a new understanding that information exchange is good for the global economy (Greece, anyone?).
Of course, whether you buy into that logic or not doesn’t matter. What’s done is done and with a couple of pen strokes, the U.S. government – largely acting in response to concerns from IRS – has succeeded in doing what even the Nazis could not do in terms of breaking down the walls of Swiss banking secrecy. That’s huge. And the consequences of that remain to be seen.
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