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Swiss tax fraud deal with U.S. comes with risk

Banks face fines for not reporting the holdings of American clients

AFP-JIJI

Switzerland is racing to end a bitter dispute with Washington over Swiss bank accounts held by U.S. tax dodgers, but observers warn the newfound peace could come at a high cost.

The lower house of the Swiss parliament voted Monday in favor of a law that will require Swiss banks to report the holdings of their current and future American clients to U.S. tax authorities.

The approval of the U.S. Foreign Account Tax Compliance Act, which aims to block Americans from hiding money from the taxman in Swiss accounts going forward, comes just over a week after the Swiss government agreed to a separate deal to help the country’s banks make amends for past wrongdoings.

Swiss banks are believed to have accepted tens of billions of undeclared dollars from U.S. citizens, though they now refuse such money, and Bern insists both recent deals are needed to end a dispute that has poisoned relations between the two countries for years.

Critics, however, warn that the deal aimed at settling past wrongs, which comes with stiff fines attached, could prove deadly for many Swiss banks.

“It’s devastating for Switzerland’s financial industry,” said business lawyer Douglas Hornung, warning that even bigger penalties could be lurking around the corner if European tax authorities decide to follow in Washington’s footsteps.

The deal offers individual Swiss banks the opportunity to avoid U.S. prosecution if they agree to hand over information on U.S. citizens’ accounts and to pay an “appropriate” fine — assessed at 20-50 percent of the value of undeclared accounts, depending on the time they were opened.

Banks that opened undeclared accounts for U.S. clients before 2009, when Washington launched its battle by slapping UBS bank with a whopping fine worth $780 million for complicity in tax evasion, will face lower penalties.

But fines will be stiffer for banks that scooped up tax-dodging U.S. clients after that.

Meanwhile, an unspecified number of banks already under investigation by U.S. authorities will not be eligible to take part in the arrangement.

The Swiss Bankers Association hailed the agreement as a way for the banks to “settle their U.S. past quickly and conclusively.”

But spokeswoman Sindy Schmiegel Werner acknowledged it was unclear how the Swiss banks would weather the storm.

“We don’t know how exposed each of our members is,” she said, insisting though that accepting the deal was necessary to clear away the legal uncertainty that had been dogging the industry for years.

Walter Boss, a tax lawyer with Poledna Boss Kurer AG in Zurich, said uncertainty was “one of the worst enemies in the financial world.”

But more clarity could come at a steep price, even for banks that maintain they have done nothing wrong.

Forced to cough up U.S. client records, they are basically being “deemed guilty until proven innocent,” Boss said.

Hornung was even more critical. “It’s not really an agreement, but more of a dictate from the United States,” he said.

And after suffering the onslaught from Washington, the biggest danger could lie ahead if European tax authorities decide to take the same route as their American counterparts, Hornung warned.

“Certainly, the European clientele is much bigger than the U.S. clientele. If the Europeans take the same road, the small banks simply can’t survive,” he cautioned.

Schmiegel brushed aside that concern, pointing out that U.S. tax law is very different since it is applied to all citizens, regardless of where they live or work in the world.

“I don’t think the European Union will proceed the same way the U.S. did,” she said.

Meanwhile, U.S. tax law is creating headaches in the runup to the implementation of FATCA, observers say.

Fearing the workload of ensuring compliance and especially the consequences if they slip up, “banks have been actively eliminating American clients,” Jackie Bugnion, a tax expert working for the American Citizens Abroad lobby group, said earlier this year.

“It is no secret that many Swiss and other non-U.S. foreign banks are already not seeking nor accepting U.S. clients,” agreed lawyer Samuel Lohman, who specializes in international law.

Since the Foreign Account Tax Compliance Act applies to all American citizens, regardless of their incomes or fortunes, this can have a devastating impact on a wide range of Americans, blocking access to mortgages and investments. So much so that a growing number of dual citizens have been giving up their U.S. passports.

For the banks, Americans have become “toxic,” Hornung said.

  • Brian Blackthorne

    The effective US tax rate is closer to 75% when all tax, surcharges, fees and supplemental taxes are added. Federal state and local agencies levy additional changes on businesses, these added coats are simply passed along to the customer, thus inflating the effective tax rate on the consumer

  • Brian Blackthorne

    Finally the tax dodgers and wealthy who have money to hid will now feel the pinch… this may be the catalyst for tax reform and the much need reduction in size of the US govt ( and its spending)