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

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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 As reported by the Wall Street Journal's Lynn Cowan today, China has taken the global lead in initial public offering activity for 2009.

As Ms. Cowan reported, should  the pace continue, China will come out on top of "every other country, and even entire regions such as Europe and North America, for all of 2009." 

Global IPO Dominance

China's global monopoly of the year’s IPOs hardly comes as a shock given the sheer magnitude of the market and the Chinese government's mandate to privatize more companies, according to Thomas B. Fox Jr., head of global capital markets for the Americas at UBS AG. 

"So many areas are still government-held -- natural resources, telecommunications, banks, transportation -- it's hard to imagine a  country having an economy the size of China's with virtually none of the companies being public," he said.

The figures compiled by research authority Dealogic, as reported in this article in Forbes Magazine, illustrate that 38 companies have raised a total of $15.4 billion in their IPOs in China so far in 2009, making China the world's largest IPO market this year.

Although U.S.-based deals were nowhere near the levels seen before 2008, when there were on occasion more than 50 deals in a quarter, it will take some time for more U.S deals to come into the market given the SEC's  three to fourth month processing period. As a result of the lag time, there will be a more significant flow in IPO activity next year, as the companies registering now start to launch.

SEC Application Process to Blame for Poor U.S. Showing?

In light of the SEC's delay in processing new offerings, an argument can be made that the bloated bureaucracy encumbering the pace of applications has made the U.S. less competitive in the global landscape when it comes to raising publicly-sourced funds for flourishing companies.  A quick look at the chart illustrates the glaring divide:  the U.S. can lay claim to only one IPO while China can boast eight (Chart via Wall Street Journal via Dealogic)

Trend to Watch: China Will Boast IPO Dominance Into the 2nd Quarter of 2010

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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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