International Business Law Advisor : Miami International Business Lawyer & Attorney : Santiago Cueto Law Firm : Florida and Global Business Litigation

 James Bond , Jason Bourne and other international icons of intrigue may soon need to look elsewhere to keep their secret bank accounts. A Swiss parliamentary committee recommended yesterday that the full Parliament back an agreement with the United States to hand over the bank details of UBS’ 4,450 American clients in spite of Switzerland’s long-standing bank secrecy laws.

The Parliament will vote later this month on whether to permit Switzerland to make the disclosure. The vote would effectively end Switzerland’s storied history as a secret money haven.

Although the Swiss government agreed in August 2009 to share some details of secret Swiss accounts to end a dispute, a Swiss court ruling in January blocked that accord. Support for the deal in the Swiss Parliament would avert the risk of new tax litigation against UBS.

The Swiss are well aware of the high stakes in the UBS case. Failure to back the settlement would probably reopen the U.S. government’s lawsuit against UBS. Ultimately, the bank’s license in the United States could be revoked.

The UBS tax controversy was part of a scathing report issued by the Swiss Parliament into the Swiss government’s handling of the credit crisis. The report is an interesting read and embedded in its entirety below (Scroll down to page 10 to skip to the UBS tax controversy):

Swiss Parliament Report on UBS

Does all this spell the end of Swiss banking? Hardly. Despite the recent changes, the Swiss banking sector will remain one of the world’s premiere financial centers due to its skilled pool of managers, currency stability and low taxes. In a new age of transparency, Switzerland is sure to thrive (not so much with the secret agent crowd).

  -Santiago

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There was a high increase in arbitration cases submitted to the court under the Swiss Rules of International Arbitration, according to the Swiss Chambers’ Court of Arbitration and Mediation.

According to the Swiss Chamber, a total of 104 new arbitration cases were filed in 2009, an increase of more than fifty percent over the number of cases submitted in 2008.

Statistics released by the Swiss Chamber indicate that 48% of the parties were from Western Europe, 24% from Switzerland, 6% from Eastern Europe and Russia, 12% from Asia/Middle East and 5% from Northern America. 43% of the new arbitrations were heard by a panel of three arbitrators, 53% by a sole arbitrator.

The increase in Swiss arbitrations is attributable to the expedited procedures available under the Swiss Rules. The expedited procedures have gained substantial international exposure for their cost-efficiency and speed.

Pursuant to Article 42 of the Swiss Rules, cases involving amounts in dispute of less than CHF 1 million are referred to expedited arbitration. In expedited proceedings, the parties are, in principle, limited to one Statement of Claim and one Statement of Defense.

Under the expedited rules, the arbitral tribunal must hold a single hearing for the examination of the witnesses and expert witnesses as well as for oral argument and the award shall be made within six months from the date when the file was transmitted to the arbitral tribunal.

Also contributing to the expediency of the process is the rule that the arbitral tribunal must state the reasons upon which the award is based in summary form only—no lengthy opinions here.

The Swiss Rules are embedded below:

Swiss Rules of International Arbitration

The Swiss Chambers expedited procedures are a welcome change over other arbitrations that can unnecessarily drag on indefintely. The success of the expedited procedures confirms the need of parties for lean and efficient arbitration particularly in smaller cases.

     -Santiago

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Swiss Parliament Must Still Approve Amended Protocol

The CBS news magazine 60 Minutes featured a story on January 3, 2010 concerning the tax controversy between Switzerland and the United States over Switzerland's secretive banking industry. At the time, it appeared there would be no end in sight to the impasse.

60 Minutes: A Crack in the Swiss Vault

Yesterday, however, the United States and Switzerland signed a landmark agreement to allow the Swiss government to provide information to the IRS on U.S. account holders of Swiss bank UBS. The agreement reached in Washington D.C. amends the income tax treaty between the two countries.

Watershed Moment for Swiss Banking

The agreement marks a watershed moment in the history of Swiss banking and its secrecy laws, which make the disclosure of client names a crime under Swiss law. With the Swiss government now on board, only Parliament’s approval is necessary to proceed with the disclosure.

In August 2009, the U.S. and Switzerland reached an agreement, under which the Swiss government was to hand over to the IRS for investigation information on approximately 4,450 UBS account holders.

In January, a ruling by the Swiss Federal Administrative Court threatened to torpedo the US-Swiss agreement. The court found shortcomings in the deal which the amended protocol now addresses.

Status as Bilateral Tax Treaty

The new protocol to the U.S.-Switzerland treaty establishes the necessary legal basis to allow the Swiss government to fulfill its obligations under the August 2009 agreement to provide information on UBS account holders to the IRS.

The protocol is designed to ensure the legality of the information release by raising the August 2009 agreement to the level of a bilateral tax treaty. According to the Swiss government, “the UBS Agreement now takes precedence over the older and more general convention, and permits Switzerland to provide treaty assistance in cases not only of tax fraud, but also of continued and serious tax evasion.”

However, the August 2009 agreement, having been raised to the level of a treaty, now must be ratified by the Swiss parliament. The Swiss government will not hand over any names until that ratification occurs, except in cases of persons who consent to the transfer or who have reported themselves to the IRS under last year’s voluntary disclosure program.  A non-conformed copy of the new protocol is below:

Amended Protocol Between the U.S. and Switzerland Amending August 2009 Agreement

Agreement Marks a Shift in Swiss Tax Law

Swiss law considers tax evasion — which it defines as the underreporting of income or filing incorrect returns — as a civil violation, different from tax fraud, which it views as a serious crime involving ill-gotten gains and the use of elaborate sham entities to hide assets. The I.R.S. views both tax evasion and tax fraud as criminal offenses.

The new protocol is significant because it shows that the Swiss government now effectively agrees with the American view that tax fraud and tax evasion are similar criminal offenses.

Switzerland to Remain International Banking Capital

Despite the changes, there are a number of reasons that Switzerland will continue to serve as a safe banking haven.  Apart from the controversy over its secrecy laws, Switzerland still has its advantages in safeguarding funds against such uncertainties as coup de main, coup d’etat, revolution and hyperinflation.

Moreover, a host of multinational corporations have recently moved their European headquarters to the Swiss power centers of Zurich, Geneva and Zug because of the rock-bottom tax rates these Cantons offer. I wrote about these tax advantages in an earlier post-- Why Relocating to Switzerland May be the Best Corporate Strategy

The current surge in the Swiss franc further serves to highlight Switzerland's appeal to international banking.  And the skiing is not too bad either.  

Swiss banking is here to stay. What do you think?

    -Santiago 

*This post follows-up on two previous articles I have writton the UBS tax controversy,  UBS Strikes Deal in U.S. Tax Case: The End of Switzerland's Bank Secrecy Rules a Boon to Singapore Banking? and Swiss Banks Shutting Out U.S. Clients Due to Unprecedented Banking Oversight.

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And Why Relocating to Switzerland May be the Best Corporate Strategy

There’s nothing more annoying than finding hidden fees buried deep inside obtuse and mangled contract language. The only thing worse than finding hidden fees is learning about these punishing provisions from someone else—after you’ve signed the agreement. 

If you thought hidden fees provisions were the exclusive craft of credit card and cable companies, I’ve got bad news. The biggest offender just might be the drafters of the proposed federal budget making its way through Congress.

International Tax Increase Buried in Proposed Bill

Thanks to the keen eyes of the Wall Street Journal’s Matthew Slaughter, U.S. based Multinationals have a chance to lobby against what may be the largest hidden fee--an obscure tax provision--ever levied against them. Matthew writes in the article “How to Destroy American Jobs:”

Deep in the president's budget released Monday—in Table S-8 on page 161—appear a set of proposals headed "Reform U.S. International Tax System." If these proposals are enacted, U.S.-based multinational firms will face $122.2 billion in tax increases over the next decade. This is a natural follow-up to President Obama's sweeping plan announced last May entitled "Leveling the Playing Field: Curbing Tax Havens and Removing Tax Incentives for Shifting Jobs Overseas."

A proposed $122 Billion international tax burden? Placed on pg. 161? On a chart? Apart from the obvious lesson to carefully scrutinize the details of everything, and I do mean e.v.e.r.y.t.h.i.n.g., that comes across your desk, the substantive point of the article is absolutely correct—the proposed tax hike on U.S. based MNCs will bankrupt those that earn a significant amount of their revenue overseas.

Proposed Tax Will Force US-based MNCs to Relocate Overseas

As one commenter noted, it is the fiduciary responsibility of the board of a company to protect the investors in that company, and to provide them with the maximum safe return on their investment. In the new tax and regulatory environment the U.S. is in the process of imposing, any company that earns a large percentage of their revenues outside of the US simply cannot remain U.S. based.

Under the proposed tax hike on U.S. based MNCs, what incentive is there for Coca-Cola to remain a US based multinational? Why not move the corporation to Switzerland, where the favorable corporate tax structure has long been lured the operations of large MNCs such as Johnson & Johnson and Burger King Holdings Inc.

Switzerland Offers Optimal Tax Environment for MNCs

The timing could not be better for companies looking to relocate their operations overseas-- and to Switzerland in particular.  The Wall Street Journal recently reported on an emerging trend among Swiss cantons to compete for the business of MNCs by lowering their corporate tax rates. In the article Switzerland’s States Compete on Tax Cuts, the cantons of Zug, Schaffhausen (just north of Zurich) and Lucerne have all cut their tax rates in a heated battle to lure more MNCs.

For U.S.-based MNC’s looking to dodge the proposed international tax bullet, Switzerland provides the most favorable corporate tax environment in which to relocate U.S. based operations.

Conclusion

According to KPMG’s Corporate and Indirect Tax Survey 2009, the current effective U.S. Corporate tax rate is 40%, while in Switzerland the effective tax rate is 21.2%--and considerably less in some cantons. Under the proposed bill, the tax gulf will only grow wider.

It will be interesting to see what happens with the proposed tax. Until then, MNCs should take a look at Switzerland.

Trend to Watch: If the Proposed International Tax is Enacted Look for an Exodus of U.S.-based MNCs to Switzerland and to Other Favorable Tax Climates.

       --Santiago

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on my visit to Switzerland with my wife and daughter this past April, there was a palpable sense of uneasiness in the unusually damp alpine air. As we made our way down Zurich’s Bahnhofstrasse---the main artery running through the city’s financial district, I could not help but notice the sheer number of jaw-clenched bankers passing us by. Given the current regulatory climate, the bankers' uneasiness is understandable. As Mark Scott of Business Week’s Europe Insight blog explained in his post U.S. May Target Other Swiss Banks in Tax Probe, Swiss bankers are coming under intense scrutiny concerning the portfolios of their  wealthy U.S. clients:

Swiss banks also are becoming more reticent towards U.S. clients. Several bankers, who declined to give their names due to the sensitivity of the topic, say the extra oversight involved in managing American money -- coupled with the bad publicity associated with the UBS case -- has taken the shine off providing wealth management services to U.S. high-earners. Despite the sizeable American market, many would prefer to tap the growing wealth from Asian economies, instead of dealing with the added pressure associated with U.S. clients.”

Although I touched on this topic in an earlier post, it remains to be seen whether Swiss banks will continue to limit or even eliminate private wealth services to U.S. clients.  Due to the ongoing saga between the IRS and UBS, many Swiss banks have chosen to shut out U.S. clients entirely.  At present, it's mostly the smaller Swiss banks that have announced their intent to limit their services to non-U.S. clients. Wegelin & Co., Switzerland's oldest bank,  for example, has instructed wealthy clients to sell their U.S. assets, or switch banks, because of concerns that new rules will burden investors with tax obligations in the U.S. At least two of the major Swiss banks -- Julius Baer (JBHGF) and Credit Suisse Group (CS) -- have yet to publicly announced whether or not they will change their procedures for handling U.S. clients. 

As this banking saga continues to unfold, it will be up to Switzerland to draw the line on banking reform. Swiss foreign minister MichelineCalmy-Rey put it succinctly when she told Reuters, "For us this is not primarily about UBS. It is about Switzerland's sovereignty. We want our laws to be respected. It is also about our financial center and about jobs. A solution in the UBS case must fall within Swiss laws."

 Trend to Watch: Look for increased tension between Switzerland and other nations as France and Germany step up their efforts to further erode Swiss bank secrecy laws.

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On August 3, 2009, UBS reached a deal with U.S. authorities to turn over the names of 5,000 U.S clients holding secret Swiss bank accounts. Although this amounts to a mere 10 percent of the names Washington was after, the controversy surrounding Switzerland and UBS will continue to swell. The pressure on Switzerland and UBS to stop shielding the wealthy from paying their dues will likely increase as U.S. authorities step up their efforts to stem the tide of illicit capital flight entering the offshore banking world.

Swiss officials have downplayed the deal, asserting that the settlement plan would do nothing to impart Swiss banking secrecy.  From this Washington Post article:

“The proposed resolution to a U.S. government demand for information about thousands of Americans suspected of using Swiss accounts to evade taxes would leave Swiss bank secrecy intact, a top Swiss official has said.”

Notwithstanding this assertion, Swiss banks will be subject to much greater scrutiny now – at least as far as their Swiss operations go. Many Swiss institutions are setting up operations in Singapore, which is growing quickly as a rival to Switzerland as a banking haven. By cutting personal income taxes to 20% and tightening account privacy, Singapore is quickly becoming a go-to haven for Asia’s growing number of millionaires.

In advising a client on the placement of funds offshore, Singapore may hold more sway in comparison to Switzerland. The deal reached between UBS and the U.S. all but eviscerates the competitive advantage long held by Swiss banks. If it is no longer possible for U.S. citizens  around the world privately to stash cash in Switzerland, then why not bank at the local branch of Bank of America?

There are a number of reason why Switzerland is still a viable option as a banking safe haven.  Apart from the controversy threatening its secrecy laws, Switzerland still has its advantages in safeguarding funds against such uncertainties as coup de main, coup d’etat, revolution and hyperinflation. Moreover, a host of multinational corporations have recently moved their European headquarters to the Swiss power centers of Zurich and Geneva. The resultant surge in international activity is sure to buoy Swiss banks until the UBS controversy subsides.

Trend to Watch: While Singapore Banks may bode well in the short term, the Swiss banking industry will remain a strong contender in the pageant of offshore banking havens.

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