UBS DEAL HERALDS NEW ERA OF TAX ENFORCEMENT / THE FINANCIAL TIMES

UBS deal heralds new era of tax enforcement

By Haig Simonian in Bern and Joanna Chung in New York

Published: August 19 2009 20:05

If on Wednesday’s deal between the US government, Switzerland and UBS, the country’s biggest bank, were a corporate balance sheet, the ledger would look very lopsided.

At a stroke, the US will gain the names of 4,450 rich Americans with secret offshore accounts that once held an estimated $18bn in assets. Switzerland, which for decades has defended bank secrecy, has recognised the same method of attack could now be used for other Swiss banks.

Moreover, although reluctant to accept it, the deal could open the door to “fishing expeditions” – precisely those attempts by foreign tax authorities to uncover client names without first knowing their identities – that the Swiss have said they would always resist.

For those reasons, the settlement of the long and bitter dispute between the US authorities and UBS, which escalated into a major row between Bern and Washington, will be closely watched by tax authorities around the world.

In an initial big concession in March, Switzerland said it would accept international standards on transparency and provide more help in future tax investigations via treaties to be negotiated with other countries. Last week, Liechtenstein agreed to a groundbreaking disclosure deal with Britain.

The US left no doubts about its determination to continue the battle. “We will work with other governments where possible to obtain the information we need. Wealthy Americans who have hidden their money offshore will find themselves in a jam,” said Douglas Shulman, commissioner of the Internal Revenue Service, the US tax authority.

IRS officials are already pursuing investigations against 150 UBS offshore clients whose names were delivered last February in a much smaller, settlement. They said they were looking hard to see if there were other banks or other individuals they should pursue.

“This heralds a new era in international law enforcement, particularly for business, as the Swiss for the first time are willing to bend their ultra-secret laws regarding bank secrecy,” said Anthony Sabino, professor of law and business at St John’s University in New York.

French officials yesterday welcomed the US-Swiss accord as a “move in the right direction... It is proof that the decisions taken by the G20 in London are having an effect”.

France will next week become one of the first European countries to sign a tax treaty with Switzerland that should greatly improve transparency and the ability of the French authorities to gain information about suspected offenders. French finance officials said the treaty marked a step change in Switzerland’s readiness to respond to requests for information after two less than satisfactory agreements – the latest signed only in January this year.

“There were so many hurdles it was almost impossible to get the Swiss to provide information and the request would go nowhere,” one official said.

Bern tried to put a brave face on the settlement. No less than three of the seven government members attended yesterday’s news conference – highlighting the importance of the issue for Switzerland.

Hans-Rudolf Merz, finance minister and head of state this year under the country’s revolving presidency, said the deal had removed an immense threat to UBS, a pillar of the Swiss economy and subject of a government bail-out last October. Equity analysts also noted the settlement had involved no fine on the bank and had removed some of the uncertainty impeding its recovery following the losses it sustained in the credit crisis.

Mr Merz also argued that the deal represented a success for Switzerland, in that it was negotiated in the framework of existing laws, rather than ad hoc emergency legislation, and stressed that UBS clients affected would retain the right to appeal.

Copyright The Financial Times Limited 2009