The Us Assault On Swiss Bank Secrecy and The Impact On Tax Havens

, THE U.S. ASSAULT ON SWISS BANK SECRECY AND..., 17 New Eng. J. Int'l &...
17 New Eng. J. Int'l & Comp. L. 317 New England Journal of International and Comparative Law 2011 Current Development THE U.S. ASSAULT ON SWISS BANK SECRECY AND THE IMPACT ON TAX HAVENS Stephen Troiano Copyright (c) 2011 New England Journal of International and Comparative Law; Stephen Troiano INTRODUCTION Tax havens, a common enemy to both the United States and members of the European Union, have emerged as an amorphous foe that siphons off valuable tax revenue from developed nations seeking to maintain their costly infrastructure and social welfare programs. 1 Tax havens have laws and tax codes that facilitate tax evasion, often with the purpose of attracting foreign investment. 2 Developed countries, such as those in the European Union and the United States, have led the fight to eradicate tax havens, as tax revenues are essential to maintaining their large infrastructure and social welfare programs. 3 Significant, recent action by the Organization for Economic Cooperation and Development (OECD), the European Union (EU), and the United States (U.S.) aims to eliminate harmful tax practices. 4 Until such measures are fully implemented, however, the possibility remains that capital flight will continue to occur in countries that engage in harmful tax practices. 5 The measures need to be multilateral in nature to assure a fair compromise, taking into account each State's sovereignty, while acknowledging that certain tax practices are inherently harmful. The recent U.S. action against the Swiss bank UBS, taken in context of the war against tax havens, shows that significant progress is being made toward eliminating the harmful tax practices of tax havens. 6 *318 This note will examine the recent actions by the OECD, the EU, and the U.S. in relation to the unprecedented unilateral action by the U.S. to pierce Switzerland's notorious bank secrecy laws. Part I will analyze the nature of global tax competition in regards to how it facilitates the existence of tax havens. Part II will define a tax haven and examine the actions that the OECD, the EU, and the U.S. have taken to combat their negative effects. Part III will examine the recent U.S. case against Swiss bank UBS in detail. This part will discuss the specific facts that led the U.S. to take such action, the compromises that were made in obtaining a resolution, and the future implications of the case. Part IV will discuss what the UBS case means in the context of the tax haven debate. The note will conclude with possible implications for the U.S., the EU, and the OECD. I. TAX COMPETITION Globalization has accelerated the mobility of capital through the increase in international banking, offshore financial centers, and technological improvements such as the electronic transfer of funds. 7 Historically, in terms of their level of tax, nations were concerned with the mix of government spending and services provided to their own states. 8 Reduction of trade barriers, one of the main tenets of globalization, has resulted in increased trade and international investment. 9 This has contributed to the increased mobility of capital and has promoted the increase of direct investment in foreign markets. 10 International tax competition is at the center of the debate over the future of tax havens. 11 Tax competition between states has increased dramatically in the last century due to the increased mobility of capital. 12 In response, many countries adopted tax policies and laws, which reduce taxes in order to attract capital. 13 There is a continuing debate over whether such activity is
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harmful or beneficial. 14 *319 The traditional argument for the benefits of tax competition is based upon the work of Charles Tiebout. 15 The Tiebout Hypothesis concluded that competition between governments is good because it promotes efficiency similar to firms acting in a free market. 16 Tiebout analogized the government's function to that of a firm, offering goods and services for a given price--the level of tax. 17 The argument against the Tiebout hypothesis, the race to the bottom, refers to the situation where tax competition would force countries to decrease their taxes out of fear of losing capital investment. 18 Erosion of a country's tax base is often cited as the most negative externality of tax competition. 19 This claim is based on the scenario in which one country's decision to become a tax haven results in another country losing tax revenue as capital is invested in the tax haven instead of the other country. 20 The argument against tax competition has been advocated most adamantly by welfare states, or states that maintain a large infrastructure and provide a large amount of social welfare programs to their citizens. 21 Most welfare states use a progressive tax system to fund their expensive government programs. 22 The income tax is a prime example of progressive taxation because it includes taxation of capital. 23 For this reason, highly developed welfare states that depend more on an immobile labor force than mobile capital have much to lose if capital is diverted to tax havens because they would be forced to shift their tax base towards consumption and payroll tax to mitigate the effects of diversion. 24 This could erode the tax base of the welfare states, decrease their productivity, and ultimately lead to the reduction of infrastructure and social welfare programs. 25 A. The OECD's 1998 Report on Harmful Tax Practices The countries that have been most negatively affected by tax *320 havens are members of the OECD, which released its manifesto in 1998 detailing harmful tax practices. 26 The goal of the 1998 OECD Report, Harmful Tax Competition: An Emerging Global Issue, was to develop measures to counter the distorting effect of harmful tax competition on investment and financing decisions and the consequences for national tax bases. 27 The report first summarized the tax competition debate and gave examples of how tax havens impose harm through their low tax rates: [B]y distorting financial and, indirectly, real investment flows, undermining the integrity and fairness of tax structures, discouraging compliance by all taxpayers, re-shaping the desired level and mix of taxes and public spending, causing undesired shifts of part of the tax burden to less mobile tax bases, such as labour, property and consumption, and increasing the administrative costs and compliance burdens on tax authorities and taxpayers. 28 The OECD then detailed three main tax competition scenarios: a country that imposes no or only nominal income tax; a country that imposes an income tax, but has preferential features that allow relevant income to be subject to low or no taxation; and a country that collects significant corporate or income tax, but at effectively lower rates than those in the second country. 29 B. Tax Treaties Varying levels of taxation are an inherent part of the world's nation-state system due to differences in taxation philosophies. 30 The two main bases for taxation are the territorial basis and the residence basis. 31 The territorial basis, largely used by Latin American countries, taxes only income from domestic sources. 32 Countries that adhere to the residence or worldwide approach impose taxes on income earned outside of its border, provided that income is earned by a person or corporation domiciled, incorporated, or with its center of *321 control within the country. 33 Thus, under the worldwide approach, income can be taxed twice: at the source as well as in the residence jurisdiction. 34
To mitigate the problem of double taxation, countries use tax treaties to determine how income should be allocated between the source and residence jurisdiction. 35 The treaties can be either bilateral or multilateral, and eliminate double taxation in addition to limiting taxation by the source country. 36 Generally, this is accomplished by withholding an amount stated by the treaty at the source where the income or capital gain arises, and then applying a Foreign Tax Credit (FTC) to the taxpayer in his or her country of residence. 37 The source jurisdiction receives its payment first through the withholding tax, then the person or corporation receiving the gain deducts the amount already paid as an FTC against the tax amount owed to the home country. 38 The three main types of treaties are the OECD Model Tax Convention, the U.S. Model Tax Treaty, and the U.N. Model Tax Treaty. 39 The treaties generally include the scope of transactions covered, the taxes covered, the withholding amount, and the exchange of information. 40 The treaties serve as models, and thus are a starting point for negotiations between States. II. TAX HAVENS An objective definition of tax haven is a place where foreigners may receive income or own assets without paying higher rates of taxes upon them. 41 This amorphous definition of a tax haven, however, could conceivably be applied to any country. The key characteristic of a tax haven is that it imposes little or no taxes on a particular type of transaction. 42 A tax haven must also be politically and economically *322 stable. 43 A politically unstable country raises uncertainty about the security of investments, making it undesirable as a tax haven. 44 Thus, reputation is extremely important for a tax haven. 45 Tax havens that establish themselves as secure, stable, and well-run are able to attract more investments than tax havens that lack such a reputation. 46 Additionally, the tax haven's attitude must be one which encourages foreign direct investment. 47 Taxes and fees should be low or nonexistent and the prospect for continued freedom from taxation should be tangible. 48 A tax haven should have favorable unilateral tax treaties and no exchange controls to restrict the movement of currencies. 49 A. The OECD Definition of a Tax Haven In its 1998 Report, the OECD identified tax havens as the major culprit in the negative externalities created by harmful tax competition. 50 The OECD stated that [t]ax havens serve three main purposes: they provide a location for holding passive investments (money boxes'); they provide a location where paper profits can be booked; and they enable the affairs of taxpayers, particularly their bank accounts, to be effectively shielded from scrutiny by tax authorities of other countries. 51 The OECD then identified the key factors for identifying a tax haven, which include: no or only nominal taxes, lack of effective exchange of information, lack of transparency, and no substantial activities. 52 The lack of taxes is a baseline requirement for a tax haven. 53 Countries can actually impose an income tax and still satisfy this requirement. 54 For instance, some countries have restricted the definition of source of income to the extent that almost no income is actually taxed. 55 *323 The lack of exchange of information requirement refers to jurisdictions that have strict secrecy rules, preventing the effective exchange of information. 56 The OECD acknowledges that there has been substantial progress in regards to access of information for criminal tax matters relating to crimes such as narcotics trafficking, as evidenced by the numerous mutual legal assistance treaties between non-tax haven countries. 57 The OECD contends, however, that tax havens do not allow access to bank information for the purpose of inhibiting tax evasion inquiries from the interested country. 58 This is often due to stringent secrecy laws, which prevent the disclosure of information. 59 Even in the absence of secrecy laws, administrative polices and prior rulings can result in a policy that the jurisdiction does not disclose information, supporting the country's reputation as being a secure and trustworthy tax haven. 60
Lack of transparency in the operation of the legislative, legal, or administrative provisions of the purported tax haven is a key attribute of a tax haven as defined by the OECD. 61 The two conditions the OECD deems necessary in order to deem a jurisdiction transparent are: (1) the jurisdiction must detail [t]he conditions of applicability to taxpayers in such a manner that those conditions may be invoked against the authorities; and (2) details of the regime, including any applications thereof in the case of a particular taxpayer, must be available to the tax authorities of other countries concerned. 62 The final characteristic refers to the absence of activities that would suggest the jurisdiction is attempting to do anything other than attract investment based on its tax environment. 63 The basic test set forth by the OECD requires an evaluation of whether the jurisdiction provides any incentives-- other than low taxes--to attract investment. 64 These incentives could be in the form of a commercial environment consisting of trained workers, existence of natural resources, or other economic incentives. 65 Financial and management services are substantive activities that can qualify as an incentive. 66 The *324 OECD, however, is suspicious of services provided by so-called paper companies that do not perform any substantive business activity. 67 Other characteristics that may be considered, but are not essential, are the existence of an artificial definition of the tax base, failure to adhere to international transfer pricing principles, the exemption of foreign source income from the residence country tax, and access to a wide network of favorable tax treaties. 68 B. The OECD War Against Tax Havens The 1998 Report first established that tax competition was harmful, defined how it was harmful, and listed tax havens that were supposedly at the root of the problem. 69 Its next initiative was to propose a solution. In its discussion, the OECD acknowledged that harmful tax competition came from both tax havens and potentially harmful preferential tax regimes. 70 As a result, States that were not members of the OECD were skeptical of proposed solutions because some member States had tax regimes that could be classified as potentially harmful preferential tax regimes. 71 According to the OECD, the nature of tax competition as a global problem required a coordinated global solution. 72 The OECD proposed a two-pronged strategy. The first prong, or the peer pressure prong, consisted of an idea that all member States would write a model of best practices collectively, then adopt those practices and submit them for peer review. 73 The best practices model would include elements that were intended to deal with member states that displayed characteristics of harmful preferential tax regimes. 74 The second prong consisted of constructing a blacklist of tax havens, based upon the four main characteristics of tax havens. 75 In 2000, the OECD published Towards Global Tax Co-Operation, the follow-up to its 1998 report. 76 The new report formally issued a list *325 of member States with preferential regimes, specifically listing the Member State and the harmful activity. 77 In addition, the report formally created a blacklist, consisting of thirty-five countries that were determined to be uncooperative tax havens. 78 The report gave the uncooperative tax havens one year to make a scheduled commitment to develop an acceptable plan to achieve steady progress and end its harmful tax practices. 79 The 2000 report also listed measures that member countries could take against uncooperative tax havens: disallowing exemptions and credits related to transactions with uncooperative tax havens; imposing withholding taxes on payments to residents of uncooperative tax havens; and imposing transaction charges on transactions with such tax havens. 80 The effects of the blacklist are not immediately clear. By November 2009, there were no jurisdictions that had not committed to the OECD standard. 81 Nine jurisdictions agreed to the standard but had not yet substantially implemented it. 82 The defensive measures that essentially amounted to sanctions were also never implemented. 83
C. The European Response Preceding the 1998 OECD report, the EU issued its own report entitled Code of Conduct for Business Taxation. 84 The report, while not binding, expressed the Member States' aims to eliminate harmful tax practices within the EU and to refrain from establishing new harmful tax competition policies. 85 Since the majority of the EU States were also members of the OECD, they participated in the construction of both the 1998 Report and the subsequent Model Tax Convention. As expressed in the EU's own report, however, some members of the EU were themselves engaged *326 in harmful preferential tax regimes. 86 Additionally, Switzerland and Luxembourg abstained from endorsing the 1998 OECD Report. 87 In the 1998 OECD Report, Switzerland and Luxembourg wrote a joint statement, reiterating that they had both already agreed to the EU Code of Conduct. 88 Both Luxembourg and Switzerland, which have strong financial services sectors, but not as large of a manufacturing sector, felt that the Report should be extended to include industrial and other commercial activities instead of only focusing on the financial services industry. 89 In 2003, the EU passed the Savings Tax Directive which, although it would not become effective until 2005, required that all member countries exchange information related to cross-border interest payments. 90 The aim of the regulation was to prevent tax evasion within the EU, and was thus a continuation of the EU Code of Conduct from 1999, which called for a reduction in harmful tax practices within the EU. The information required to be exchanged includes the identity of the beneficial owner, the identity of the paying agent, and the account number of the beneficial owner. 91 The exchange of information requirement, however, does not apply to every EU country. Belgium, Luxembourg, and Austria are not required to exchange information during a seven-year transitional period. 92 During the transitional period, these three countries will impose a withholding tax on applicable payments in lieu of exchanging information. 93 The EU Savings Tax Directive does not contain a requirement for universal transfer of information. 94 Instead, it focuses on a withholding tax as a method to prevent tax evasion. 95 This method deviates from the OECD requirement of full disclosure and transparency. The OECD Model Tax Convention takes the view that *327 information exchange concerning tax matters should be provided to the widest possible extent. 96 The standard is prescribed for any information of foreseeable relevance. 97 In contrast to the OECD Model Tax Convention, the EU Savings Tax Directive was a compromise, which temporarily preserved the right of certain member and non-member countries to bank secrecy. 98 This deference to bank secrecy laws undermines the OECD's attempt to increase transparency through the universal exchange of information. 99 Also at issue in the EU Savings Tax Directive compromise is the fact that people can simply move their deposits and investments to a jurisdiction that is not a part of the agreement. 100 As most members of the EU are high tax, high welfare states, they have significant concerns that efforts to curtail advantageous use of their member states' tax codes will cause capital flight to more lenient jurisdictions. 101 Such a result would decrease their tax base and ultimately have a negative effect on their social welfare programs. 102 To address these concerns, EU members agreed that before adopting the Savings Tax Directive, they would enter into discussions with the U.S. and key third-party countries. 103 The key third-party countries include Switzerland, Liechtenstein, Monaco, Andorra, and San Marino. 104 There are several dependencies of the EU member states, however, that have had tax policies that fall under the OECD definition of tax havens. 105 These territories include the Channel Islands, Isle of Man, and dependent or associated territories in the Caribbean. 106 EU Member States agreed in principle to commit themselves to promote the adoption of the same measures in all *328 relevant dependent or associated territories. 107
The EU proactively engaged pertinent non-member States in order to garner support for the Savings Tax Directive among Member States. 108 The Commission initially targeted Switzerland and five other countries, including the U.S., Liechtenstein, Monaco, Andorra, and San Marino. 109 Switzerland is often at the center of the tax haven debate, even though it does not display many of the characteristics of a tax haven as defined by the OECD. 110 Since Switzerland does impose an income tax and is party to numerous tax treaties and information exchange agreements, its role in the tax haven debate is centered on its bank secrecy laws. 111 Swiss bank secrecy laws have existed for some time, are extremely strict, and apply to both Swiss and foreign authorities. 112 Swiss bank secrecy can only be pierced by a court order granted in criminal proceedings or specific civil cases involving inheritance rights. 113 Additionally, tax evasion is not a crime in Switzerland unless fiscal fraud has been committed. 114 Due to its strict bank secrecy laws and long history of consistent enforcement, Switzerland has been a haven for depositors from all over the world. 115 Due to the fact that a traditional haven for bank secrecy and deposits exists in the EU, it became necessary to pursue multilateral anti-tax evasion strategies that include Switzerland. The EU acknowledged this necessity and made an agreement with Switzerland--a precursor to the Savings Tax Directive-- in order to prevent capital flight towards Switzerland. 116 The agreement the EU reached with Switzerland is similar to the transitional period granted to Belgium, Luxembourg, and Austria. In lieu of exchanging information, Switzerland would apply a withholding tax on interest payments in *329 tiered increases that would result in a 35% withholding tax after three years. 117 Beneficial owners of the interest payments, however, have the option of authorizing their paying agent in Switzerland to report the interest payment to the competent authority in the beneficial owner's country. This includes the exchange of information criteria specified in the EU Savings Tax Directive. 118 Overall, the agreement with Switzerland should be considered a success despite the fact that it preserves bank secrecy and is not in conformity with either the EU Savings Tax Directive or the OECD Model Tax Convention. The EU has had additional success in reaching agreements with other third-party countries and dependent territories. As of 2008, Andorra, Liechtenstein, Monaco, San Marino, and Switzerland have agreed to levy a withholding tax on interest paid to residents of EU Member States. 119 Additionally, the following dependent and associated territories have agreed to levy a withholding tax: British Virgin Islands, Turks and Caicos, Guernsey, Jersey, Isle of Man, and Netherlands Antilles. 120 Despite the success in its sphere of influence, the EU has failed to garner support for the Savings Tax Directive in any form from the following jurisdictions: Australia, Canada, India, Japan, Turkey, Taiwan, and the United States. 121 D. The U.S. Response The United States has employed a multi-prong strategy to combat perceived problems and threats caused by tax havens. The U.S. has used unilateral action, treaties, statutory reforms, and, to some extent, participated in multilateral actions. 122 In 1962, in response to President Kennedy's recommendation for the elimination of the tax haven device anywhere in the world, 123 the House Ways and Means Committee acknowledged that many have taken advantage of the multiplicity of foreign tax systems to avoid taxation by the United States on what could ordinarily be expected to be U.S. source income. *330 124 While progress has been made and many treaties and actions have been taken, the U.S. battle against tax havens continues. As recently as 2009, President Obama declared that the U.S. tax system is rife with opportunities to evade and avoid taxes through offshore tax havens. 125 While the U.S. has certainly taken numerous unilateral actions and enacted statutory reforms toward eliminating the negative effects of tax havens in its recent history, it has long acknowledged the necessity of multilateral action. In a pragmatic and important report to the Commissioner of Internal Revenue, Richard Gordon, Special Counsel for International Taxation, stated, [t]he United States alone cannot deal with tax havens. The policy must be an international one by the countries that are not tax havens to isolate the abusive tax havens. 126
Unlike Europe, which was primarily concerned with the harmonization of tax rates due to its single market policy, the U.S. was not only concerned with lost tax revenue from tax havens, but also with the more devious use of tax havens in laundering money for the drug trade and (more recently) terrorism. 127 The U.S. championed the creation of the multilateral Financial Action Tax Force (FATF), a multilateral force associated with the G7. 128 FATF aimed at eliminating money laundering. 129 As the OECD did, the FATF published best practices and a blacklist of non-cooperative countries. 130 After the September 11, 2001 attacks, the U.S. passed the Money Laundering Abatement and Anti-Terrorist Financing Act. 131 The Anti-Terrorist Financing Act was part of the Patriot Act that included a requirement for financial institutions to identify foreign persons who owned U.S. bank accounts, along with various other anti-money laundering initiatives. 132 *331 Given the U.S.'s efforts to eliminate the negative impact of tax havens, it is counterintuitive that the U.S. would not wholeheartedly support the OECD's measures. When the OECD Report came out in 1998, the tax haven problem had hardly been reduced. For instance, a 2006 U.S. Senate Committee Report found that Americans illegally evade between $40 billion and $70 billion worth of taxes annually through the use of offshore accounts. 133 The Clinton Administration supported the 1998 OECD Report. 134 The Bush Administration also supported the OECD initiatives initially, but then acceded to the lobbying pressure spearheaded by the Center for Freedom and Prosperity (CFP). 135 The CFP is a conservative group organized in 2000, whose top priority at the time was to preserve jurisdictional tax competition, sovereignty and financial privacy. 136 The lobbying effort of the CFP was two-pronged: lobbying the U.S. government to resist the OECD initiatives and actively encouraging tax havens to disregard OECD pressure. 137 The lobbying effort of the CFP caused the U.S. to restrain its support of OECD initiatives, resulting in the OECD abandoning the use of sanctions and focusing instead on information exchange. 138 The CFP managed to persuade the Bush Administration that the OECD initiatives were not in the national interest because they infringed upon U.S. fiscal sovereignty by dictating tax policy as well as restricting capital flows. 139 Despite the successful lobbying campaign by the CFP, it did little to affect the overall U.S. policy towards the OECD. For instance, the Bush Administration publicly stated its opposition to the OECD initiative, but it did not withdraw Clinton Administration reforms regarding information gathering and exchange that were in conformity with OECD protocols. 140 After the attacks of September 11, 2001, the Bush Administration scaled back its opposition to the OECD initiative, which preserved information-gathering laws and contributed to the successful *332 passing of the EU Savings Tax Directive. The EU sought to gain a commitment from the U.S. that it would adopt a withholding tax scheme or automatic exchange of information agreement similar to what EU member states and other parties intended to adopt. 141 The U.S. already had a withholding tax on payments of U.S. source interest and dividend income of 30% if the payment was made to a foreign resident. 142 The Clinton Administration initially expressed support for the EU Savings Directive, leading the IRS to propose a new regulation that would have required financial institutions to gather information on all interest payments to foreigners. 143 Subsequently, however, CFP lobbying and opposition from the domestic banking industry led the IRS to propose a more limited rule that required gathering of information only from individuals from designated countries. 144 While the U.S. did not commit to universal automatic disclosure, its existing bilateral information sharing agreements, reporting regulation proposal, and existing withholding tax scheme were enough to satisfy EU member states' concern that capital flight to the U.S. would not occur. 145 Statutory reforms have been a method of reducing the negative effects of tax havens on the U.S. tax base for a long time. Statutory reforms alone, however, cannot stem the flow of money into tax havens. First, it is important to note that the U.S. differentiates between tax avoidance (which it deems legal) and tax evasion (which it deems illegal). 146 The U.S. has long recognized [t]he legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. 147
The major U.S. statutory reform to prevent loss of tax revenue from the use of tax havens is the Controlled Foreign Corporation (CFC) rules under subpart F of the Internal Revenue Code. 148 The purpose of the CFC rules is to prevent tax evasion by a corporation that exists abroad but is primarily owned by U.S. taxpayers. 149 A corporation qualifies as a CFC if it is more than 50% owned by U.S. *333 taxpayers. 150 Generally, U.S. taxpayer income from foreign operations is only taxed when it is repatriated or distributed. 151 CFC rules, however, tax U.S. taxpayers who own at least 10% of the CFC's voting stock. 152 In addition to subpart F income, the U.S. instituted a self-regulatory Qualified Intermediary (QI) program. This program aims to reduce tax evasion while balancing regulatory reporting burdens on financial institutions that handle foreign income payments by U.S. taxpayers. 153 The QI program, instituted by the IRS in 2001, allows qualified intermediaries--foreign financial institutions defined by the IRS--to enter into an agreement with the IRS to withhold taxes and report certain information from U.S. source income that is sent offshore. 154 The U.S. had a clear incentive to improve upon the withholding tax scheme: in 2003, non-resident aliens received $293 billion in income from U.S. sources. 155 If the U.S. had withheld the full 30% on these payments, it would have received $88 billion. 156 Instead, it only received $5 billion. 157 Much of this is likely due to treaty benefits with jurisdictions that have negotiated a lower withholding tax, in addition to exemptions. 158 The QI program, however, aims to reduce the amount of tax revenue lost through the use of tax havens. 159 III. THE UBS CASE In June of 2008, in an unprecedented act, the IRS issued a John Doe summons 160 for UBS to turn over account information relating *334 to certain U.S. citizens suspected of violating U.S. laws by failing to report the existence of secret bank accounts facilitated by UBS. 161 UBS, a financial institution specializing in private wealth management and investment banking, is based in Switzerland, but does a significant amount of business in the U.S. 162 At issue was the UBS practice of soliciting wealthy U.S. investors and structuring undeclared accounts in Switzerland that hid billions of dollars of cash and securities that were not disclosed to U.S. tax authorities. 163 In a related criminal action, the U.S. arrested and charged UBS banker Bradley Birkenfeld who, along with a currently at-large business associate, defrauded the IRS of $7.2 million in taxes. 164 This was the first time the U.S. criminally prosecuted a Swiss banker for assisting a U.S. taxpayer in evading taxes. 165 Furthermore, the use of the John Doe summons on UBS was the first time the U.S. attempted to pierce Swiss bank secrecy laws to compel a Swiss bank to identify secret accounts held by a U.S. citizen. 166 In lieu of protracted litigation and complications regarding the thousands of accounts at issue, UBS entered into a deferred prosecution agreement with the IRS in February of 2009. 167 The implications of such a bold attempt *335 by the IRS to pierce Swiss bank secrecy are still unclear. The exchange of information regarding tax fraud is governed by a tax treaty between Switzerland and the U.S. 168 Exchange of information is not mandatory, however. 169 In a deferred prosecution agreement, UBS agreed to turn over information on 4,450 accounts in addition to paying a $780 million fine. 170 The extent of this effort to pierce Swiss bank secrecy through unilateral action should be viewed as a natural progression in the war against tax havens. The specific facts and criminal nature of the violations, however, hint that perhaps the IRS action against UBS was simply an anomaly, due to the audacity of UBS private bankers in skirting U.S. laws. A. UBS Violates its Qualified Intermediary Agreement Due to its status as a premier private wealth management firm, UBS's unique position ultimately left it vulnerable to aggressive unilateral action by the U.S. in an attempt to pierce its bank secrecy laws. 171 UBS had extensive banking relationships with wealthy U.S. taxpayers. Focusing only on undeclared accounts, UBS estimated it managed 52,000 such accounts, held by
U.S. taxpayers and containing approximately $14.8 billion in assets. 172 Additionally, in 2001, UBS entered into an agreement with the IRS in which it became a QI. 173 This further intensified its relationship with the U.S., as it subjected UBS to increased reporting obligations to the IRS. 174 The nature of U.S. taxpayers' undeclared accounts was an additional factor that made UBS vulnerable to unilateral action by the *336 U.S. 175 The term undeclared referred to a UBS internal designation on accounts it deemed to fall outside of its QI reporting requirements to the IRS. 176 Furthering suspicion, of the estimated 20,000 accounts domiciled in Switzerland for U.S. clients, only 1,000 were declared. 177 The Department of Justice (DOJ) was particularly concerned with UBS activities shortly after it became a QI. Internal documents that came to light through the related criminal prosecution of UBS banker Bradley Birkenfeld showed that UBS knew that honoring its QI obligations would defeat the purpose of many U.S. taxpayers in opening their offshore accounts in the first place. 178 Generally, under the QI program, foreign banks that have U.S. taxpayer accounts must provide IRS forms detailing income from U.S. investments. 179 If a taxpayer refuses to submit the forms to the IRS, then the QI must withhold 28% of that taxpayer's income. 180 If, however, the QI is prohibited by law from disclosing the account holder--which is the case with UBS due to Swiss bank secrecy--then the QI must ask the account holder to disclose his or her identity. 181 If this does not take place, the account holder must sell all U.S. securities from the account. 182 UBS chose to assist its customers in setting up sham corporations to hide their identities from U.S. authorities. 183 The apparent loophole in the QI reporting requirements, however, was known to U.S. officials. 184 The DOJ highlighted two methods in which UBS *337 proposed to assist its clients in avoiding the reporting requirements: (1) sell all U.S. securities from their accounts and only trade non-U.S. securities going forward; or (2) make it look as though a non-U.S. taxpayer was the owner of the account through the use of sham foreign corporations. 185 UBS realized the obvious illegality of option two, and released an internal memo advising clients that setting up sham corporations was only legal if they used a company other than UBS to actually do it. 186 By violating its QI agreement, UBS provided a jurisdictional hook for U.S. authorities to pursue disclosure of the identities of U.S. taxpayers, despite the existence of Swiss bank secrecy provisions. B. An Assault on Swiss Bank Secrecy UBS relied on historically strong Swiss bank secrecy to its detriment in enabling U.S. taxpayers to evade taxation through the use of its services. Swiss bank secrecy developed out of the Swiss people's deep rooted belief in the virtue of privacy. 187 Swiss bank secrecy reflects the value the Swiss place on personal privacy rights. In Switzerland, the right to privacy includes an individual's financial information. 188 In application, the duty of care of a banker is the obligation to maintain confidential client information. 189 Failure to do so results in criminal liability under Swiss law. 190 Not surprisingly, such regulation has resulted in Switzerland becoming a money haven for those involved in illicit activities such as tax evasion, organized crime, narcotics, and terrorism. 191 Recent measures by the OECD, the EU, and the U.S., through *338 tax treaties and multilateral pressure, have continued to decrease Swiss bank secrecy regarding tax evasion. Despite these measures, the principle of double incrimination has stymied the exchange of information. 192 In the context of tax information exchange, the principle of double incrimination refers to the situation where a country does not honor the request for information from another country if the purported violation is not a crime in the country receiving the request. 193 For instance, unlike in the U.S., tax evasion is not a crime in Switzerland; therefore, under the principle of double incrimination, Switzerland will not honor requests for information relating to the charge of tax evasion. 194 Although tax fraud is a crime in Switzerland, the Swiss construe the concept narrowly. 195 In contrast, most OECD countries, including the U.S., define tax evasion as a crime. 196 This narrow definition of tax fraud combined with the
application of the principle of double incrimination substantially restricts [Switzerland's] ability to exchange information in cases that would constitute criminal tax cases in the vast majority of OECD countries. 197 UBS used Swiss bank secrecy as a tool to hide undeclared accounts from U.S. authorities. 198 Furthermore, UBS promoted Swiss bank secrecy to U.S. clients by assuring them that their information would never be released to U.S. authorities. 199 Their belief that Swiss *339 bank secrecy protected them was partly true - the QI reporting regulations applied to the owner of the account, and not to UBS. 200 However, by assisting U.S. taxpayers in avoiding their reporting obligations, UBS violated its QI agreement with the IRS. 201 This violation provided the jurisdictional hook required to suspend UBS' QI status and ultimately file the John Doe summons. The DOJ and IRS considered the settlement agreement with UBS an unprecedented victory, but the shroud of Swiss bank secrecy, while in jeopardy, was not yet pierced. C. Tax Fraud Definition and Double Incrimination Threatens the UBS Agreement On January 21, 2010, U.S. efforts to compel disclosure of account information from UBS experienced a major setback when the Swiss Federal Administrative Court examined the appeal of one U.S. tax payer and ruled that account information could not be disclosed to U.S. authorities because it would violate Swiss bank secrecy. 202 The implications of this ruling jeopardized the entire UBS agreement. The ruling defined the term tax fraud and the like - the starting point in identifying the 4,450 accounts in the August 19, 2009 agreement - conclusively as tax fraud, thereby eliminating the possibility of turning over information regarding the thousands of accounts likely guilty of tax evasion, but not fraud, under Swiss law. 203 In the Annex to the August 19, 2009 agreement, the IRS laid out guidelines for the breakdown of the 4,450 accounts it thought would fall under the agreement. 204 Of those included, 250 accounts were *340 suspected of being guilty of fraud, while the remaining 4,200 were expected to fall under the continued serious tax offenses. 205 By sticking to the traditional narrow definition of tax fraud, the Swiss court upheld Swiss bank secrecy with respect to further disclosure of account information to U.S. tax authorities. The Federal Administrative Court's ruling is binding, and all cases that do not constitute tax fraud, as defined by Swiss law, will not be subject to disclosure to U.S. tax authorities. 206 The principle of double incrimination had reared its ugly head once again. U.S. tax authorities invested too much, however, to simply stand by while the Agreement fell apart. The Swiss government publicly disagreed with the ruling of the Federal Administrative Court and hoped to find an alternative method to enforce the UBS Agreement. 207 The Swiss Federal Council expressly approved the Treaty Request Agreement in which the lesser crime of continued serious tax offenses was approved for disclosure despite Swiss bank secrecy laws. 208 In regards to the recent decision by the Federal Administrative Court, the Federal Council said it views the legal situation differently and that it firmly believes that the ongoing threat of a conflict with the USA over legal and sovereignty matters - with all of its negative impact on Switzerland as a center of finance and business - can be eliminated by executing the UBS Agreement. 209 D. A Solution is Reached Despite the ruling of the Swiss Federal Administrative Court, the fact that the Swiss government desired to honor the agreement *341 with the U.S. signaled that they would find a way around the Court's ruling. The means by which the Swiss Federal Council sought to enforce the agreement was to put the agreement before the Swiss Parliament for formal approval. 210 Substantively, the formal agreement would extend Swiss cooperation by supplementing the existing bilateral tax treaty with the U.S. to include information exchange in cases of tax evasion. 211 In terms of the actual information request, the agreement would allow the SFTA to provide information on the 4,200 cases of continued and serious tax evasion. 212 The agreement only concerns one request for information, however, so ratification by the Parliament will not govern future treaty assistance
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arrangements with the USA in the general and abstract sense. Rather, it resolves the legal and sovereignty dispute with the USA in a specific case. 213 On March 31, 2010, the Swiss Federal Council approved an amended protocol to the Agreement between the U.S. and UBS, which create[d] the necessary legal basis for the Swiss Federal Tax Administration [SFTA] to issue final decisions even in cases of continued and serious tax evasion, and permits Switzerland to fulfill the obligations under international law that it entered into with the original Agreement. 214 In order to get around the decision by the Swiss Court, the amended protocol is considered an international agreement that takes precedence over the current bilateral tax treaty between the U.S. and Switzerland. 215 On June 9, 2010, the Swiss Parliament approved the agreement between the U.S. and UBS. 216 The amended protocol to the agreement was therefore adopted and, for this specific agreement, the definition of tax fraud or the like was expanded to include continuous and serious tax evasion as an offense qualifying for treaty *342 assistance. 217 Therefore, provided that SFTA procedures are followed, [p]arliamentary approval means that nothing now stands in the way of UBS client details being disclosed. 218 IV. THE UBS CASE IN THE CONTEXT OF THE TAX HAVEN DEBATE The UBS case demonstrates the progress the OECD, specifically the EU and the U.S., have made in chipping away at the shroud of bank secrecy that is still present in certain major financial centers and tax havens. 219 In the UBS case, the Swiss Parliament approved the agreement between the U.S. and UBS despite the Swiss court's holding that turning over client data violated Swiss bank secrecy laws. 220 Nevertheless, the measure will not be binding on future cases of information requests under bilateral treaties with Switzerland, so it is uncertain whether Switzerland will honor future information requests for lesser offenses. 221 A. The UBS Case and the United States' War Against Tax Havens The UBS case suggests that the U.S. is intensifying its affront on tax havens. The UBS case is consistent with the historical U.S. multi-prong strategy of unilateral action, statutory reforms, and multilateral action. 222 Furthermore, it demonstrates that the Obama Administration's renewed focus on curbing tax haven abuse is showing tangible results. 223 The U.S., while cooperating with certain multilateral initiatives such as the OECD, has historically relied upon unilateral action and statutory reforms to thwart tax haven abuses. 224 A major unilateral tool of the U.S. has been its Tax Information Exchange Program (TIEA), which provides for the exchange of information on both civil and criminal tax investigations between the U.S. and the treaty *343 partner. 225 The TIEA program was created in response to a rise of tax havens and provides the tax haven jurisdiction some form of incentive to enter into such an agreement. 226 Statutory reforms have been enacted by closing IRS loopholes through tactics such as CFC rules and the implementation of the QI program. 227 Statutory reforms have been enacted as a result of closing IRS loopholes as well as tactics such as CFC rules and the implementation of the QI program. 228 The UBS case illustrates that the U.S. is upping the ante on eliminating abuse of tax havens by strictly enforcing statutory measures such as the QI program in addition to extending the reach of its existing bilateral tax treaties and TIEAs. 229 The Obama Administration outlined three goals for curbing tax haven abuse including eliminating loopholes for disappearing offshore subsidiaries, cracking down on the abuse of tax havens by individuals, and devoting new resources for IRS enforcement to help close the international tax gap. 230 The UBS case also demonstrated how the U.S. identified a particular blatant and egregious abuse of its tax laws by its own taxpayers and a foreign bank that had a significant U.S. presence. Certainly the extent of UBS's presence in the U.S., along with their practices of soliciting U.S. investors by offering them tax shelters, played a large part in UBS and Switzerland being targeted by this action. 231 It was UBS' status as a QI and the conditions of this agreement with the IRS, however, that provided
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the impetus for the unprecedented affront on Swiss bank secrecy. 232 This case highlights supplementation of recent statutory reform--the QI program--with tactics such as John Doe summonses and unilateral political pressure on the Swiss government, signifying an increased U.S. focus on eradicating tax havens. In furtherance of its goal, the U.S. should implement the measures proposed by the Obama Administration, as well as continue to enlarge its network of TIEAs with countries identified as tax havens. For instance, the Obama Administration should continue to coerce foreign banks to become QIs and to share information in accordance *344 with IRS QI provisions. Alternatively, taxes on payments to U.S. customers should be withheld, since failure to report information supports the presumption that they are assisting U.S. customers in tax evasion. 233 It should also pursue such actions as the one present in the UBS case in order to strengthen and supplement those agreements to break down bank secrecy barriers that rely on restrictive and lenient definitions of tax crimes. B. What the UBS Case Means for the EU War Against Tax Havens Switzerland's agreement to provide information that was previously protected by bank secrecy laws to the U.S. may signify that it is willing to provide similar information to equally influential countries in the EU. Members of the EU have a history of multilateral action against tax havens through both the EU and the OECD. 234 The EU has been successful in gaining concessions from Switzerland in the past, and perhaps the success of the U.S. will be an impetus for the EU to further pursue information sharing agreements. 235 For example, when designing the multilateral Savings Tax Directive, implementation of the final agreement was contingent upon garnering significant concessions from Switzerland and other relevant third-party countries. 236 At that time, the EU was unable to pierce Swiss bank secrecy, but the implementation of a tiered withholding tax was seen as sufficient. 237 One possible interpretation of the decision of the Swiss Federal Council to put the agreement with the U.S. to vote in Parliament, in contradiction of the ruling of the Swiss court, is that the Swiss government was concerned that failure to turn over information would negatively affect diplomatic relations with the U.S. 238 It is likely that maintaining positive relations with members of the EU is also important to the Swiss government due to its location in Europe. Further, if Switzerland was willing to concede to EU demands regarding the Savings Tax Directive, perhaps they would now be willing to extend their information sharing regarding tax investigations to members of *345 the EU. C. What the UBS Case Means for the OECD War Against Tax Havens The OECD initiative spearheaded the modern assault against tax havens and its success in convincing tax havens to commit to reforms has been exemplary. 239 Initially, Switzerland abstained from endorsing the OECD's 1998 Report on Harmful Tax Practices. 240 Since that Report, the OECD has worked to implement standards on transparency and exchange of information. 241 In 2009, the last four OECD member states agreed to endorse the transparency and exchange of information standards. These states include Switzerland, Belgium, Luxembourg, and Austria. 242 Further, as of 2009, there are no tax havens that have not endorsed the OECD standard. 243 The increased focus on exchange of information has been implemented in 200 TIEA's signed in 2009, as well as 110 double-taxation conventions. 244 Switzerland's agreement to endorse the OECD standards of information exchange should be seen in the context of the gradual worldwide acceptance of transparency and the exchange of information regarding tax matters. Furthermore, in the UBS case, Switzerland's agreement to sanction UBS to provide information beyond what the existing information exchange agreement with the US required is further evidence of its movement towards fully implementing the OECD standards. CONCLUSION
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Tax competition is an inherent part of the world's nation state system, and sovereignty of nation states should extend to allowing countries to decide how they should implement their tax structures. As developed countries have become welfare states with large social welfare systems, however, the importance of collecting all tax revenue due to these countries is paramount. If left unchecked, tax competition could lead to the proverbial race to the bottom, in which *346 no country will end up better off. To prevent this, a responsible and fair system needs to be implemented in order to curb the abuse of tax havens. Whenever possible, this should be accomplished through multilateral action so as to reach a sustainable consensus among the largest number of participants. Unilateral Tax Information Exchange Agreements and Double Taxation Conventions are a step towards global cooperation and elimination of the harmful tax haven. As the number of agreements grows, the effect is similar to that of multilateral agreements. Large numbers of these agreements can change the global tax environment for the better by promoting transparency and information exchange. The measures undertaken by the OECD, the EU, and the U.S. have made significant progress towards facilitating information exchange of tax information. Until every nation is on board, however, the possibility of capital flight to the next tax haven remains. Footnotes 1 Org. for Econ. Co-operation & Dev. [OECD], Harmful Tax Competition: An Emerging Global Issue, 2, 14 (1998), http://
www.oecd.org/dataoecd/33/0/1904176.pdf [hereinafter Harmful Tax Competition].
2 3 4
Id. at 13. Diane M. Ring, What's at Stake in the Sovereignty Debate?: International Tax and the Nation-State, 49 Va. J. Int'l L. 155, 184 (2008). Harmful Tax Competition, supra note 1, at 10-11; 1 Denis A. Kleinfeld & Edward J. Smith, Langer on Practical International Tax Planning 86:1:1 (4th ed. 2000); Bruce Zagaris, The Procedural Aspects of U.S. Tax Policy Towards Developing Countries: Too Many Sticks and No Carrots?, 35 Geo. Wash. Int'l L. Rev. 331, 332-35 (2003). Harmful Tax Competition, supra note 1, at 16. See, e.g., Press Release, Fed. Dep't of Justice and Police, Fed. Council to Put UBS Agreement to Parliament for Approval (Feb. 24, 2010), available at http://www.ejpd.admin.ch/ejpd/en/home/dokumentation/mi/2010/2010-02-246.html [hereinafter Federal Council Press Release]. Harmful Tax Competition, supra note 1, at 13; Reuven S. Avi-Yonah, Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State, 113 Harv. L. Rev. 1573, 1575 (2000). Harmful Tax Competition, supra note 1, at 13. Id. Id. at 14. Id. at 14-15. Avi-Yonah, supra note 7. Harmful Tax Competition, supra note 1, at 13. J.C. Sharman, Havens in a Storm: The Struggle for Global Tax Regulation 37 (2006). Id. Id. Id. Id. at 39.
5 6
8 9 10 11 12 13 14 15 16 17 18
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19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37
Id. at 38. Id. at 37. Ring, supra note 3. Avi-Yonah, supra note 7, at 1576. Id. Ring, supra note 3. Id. Harmful Tax Competition, supra note 1. Id. at 7 (quoting the Ministerial Communiqu of May 1996). Id. at 16. Id. at 19-20. Ahmed Riahi-Belkaoui, Significant Current Issues in International Taxation 2 (1998). 1 Kleinfeld & Smith, supra note 4, 2-2. Id. Riahi-Belkaoui, supra note 30, at 3. Diane Ring, International Tax Relations: Theory and Implications, 60 Tax L. Rev. 83, 117 (2007). Riahi-Belkaoui, supra note 30, at 11. Id. Org. for Econ. Co-operation & Dev. [OECD], Articles of the Model Convention with Respect to Taxes on Income and on Capital 20 (2008), available at http://www.oecd.org/dataoecd/43/57/42219418.pdf [hereinafter OECD Model Convention]. Id. Riahi-Belkaoui, supra note 30, at 12. Id. Id. at 17. 1 Kleinfeld & Smith, supra note 4, 5-4. Id. Sharman, supra note 14, at 107. Id. Id. at 108. Harmful Tax Competition, supra note 1, at 22. Id. at 21.
38 39 40 41 42 43 44 45 46 47 48
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49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76
Id. at 24. Id. Id. at 22. Id. at 23. Id. Id. Id. Id. at 29. Id. at 24. Id. Id. at 29. Id. Id. Id. at 28. Id. Id. at 24. Id. Id. Id. Id. at 30-33. Id. at 3. Sharman, supra note 14, at 42. Id. Id. at 44. Id. at 44-45. Harmful Tax Competition, supra note 1, at 70. Id. at 71. Org. for Econ. Co-operation & Dev. [OECD], Towards Global Tax Co-Operation: Progress in Identifying and Eliminating Harmful Tax Practices (2000), http://www.oecd.org/dataoecd/25/27/44430257.pdf. Id. at 12-14. Id. at 17.
77 78
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79 80 81
Id. at 19. Id. at 25. Org. for Econ. Co-operation & Dev. [OECD], Overview of the OECD's Work on Countering International Tax Evasion, A Background Information Brief, 15 (2009) [hereinafter Countering International Tax Evasion]. Id. Sharman, supra note 14, at 56. Rep. of the Code of Conduct Group (Business Taxation), SN 4901/99 (Nov. 23, 1999). Id. at 4. Id.; Sharman, supra note 14, at 42. Diane M. Ring, Democracy, Sovereignty and Tax Competition: The Role of Tax Sovereignty in Shaping Tax Cooperation, 9 Fla. Tax Rev. 555, 564 (2009). Harmful Tax Competition, supra note 1, at 73. Id. at 74. Commission Proposal for a Council Directive to Ensure Effective Taxation of Savings Income in the Form of Interest Payments Within the Community, Article 10 COM (2001) 400 final (Sept. 25, 2001) [hereinafter Taxation of Savings Income]. Council Directive 2003/48, Taxation of Savings Income in the Form of Interest Payments, 2003 O.J. (L 157) 38-48 [hereinafter Savings Directive]. Taxation of Savings Income, supra note 90. Id. Sharman, supra note 14, at 31. Id. Org. for Econ. Co-operation & Dev. [OECD], Model Tax Convention on Income and on Capital Condensed Version, Org. for Econ. Co-operation & Dev. [OECD], 349 (2008), available at http:// www.oecd.org/dataoecd/14/32/41147804.pdf [hereinafter Model Tax Convention]. Id. Sharman, supra note 14, at 31. Id. Ring, supra note 87, at 569. Id.; Reuven S. Avi-Yonah, All of a Piece Throughout: The Four Ages of U.S. International Taxation, 25 Va. Tax. Rev. 313, 336 (2005). Ring, supra note 87, at 569. Taxation of Savings Income, supra note 90, P 3. Id. P 4.
82 83 84 85 86 87
88 89 90
91
92 93 94 95 96
97 98 99 100 101
102 103 104
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Org. for Econ. Co-operation & Dev. [OECD], Overview of the OECD's Work on Countering International Tax Evasion, A Background Information Brief 15 (2009) [hereinafter Countering International Tax Evasion]. Taxation of Savings Income, supra note 90, P 3. Id. Proposal for a Council Decision on the Conclusion of the Agreement Between the European Community and the Swiss Confederation Providing for Measures Equivalent to Those Laid Down in Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments and the accompanying Memorandum of Understanding, COM (2004) 64 (Apr. 29, 2004) [hereinafter Proposal for a Council Decision]. Id. 1 Kleinfeld & Smith, supra note 4, 141:1:10. Id. 141:5. Id. 141:1:10. Id. Id. Id. P 141:1:1. Taxation of Savings Income, supra note 90. Proposal for a Council Decision, supra note 108. Id. at 7. Commission staff working document: Presenting an economic evaluation of the effects of Council Directive 2003/48/EC on the basis of the available data, at 13 tbl. 4, SEC (2008) 2420 final (Sept. 9, 2008). Id. Id. 1 Kleinfeld & Smith, supra note 4, 86:1:1; Zagaris, supra note 4. David R. Tillinghast, Tax Aspects of International Transactions, pt. 5, International Economic Law 231 (2d ed. 1984) (quoting H.R. Rep. No. 87-1447, at 57-58 (1962)). Id. at 232. Press Release, Office of the Press Secretary, Leveling the Playing Field: Curbing Tax Havens and Removing Tax Incentives for Shifting Jobs Overseas (May 4, 2009). Richard A. Gordon, Tax Havens and Their Use by United States Tax Payers: An Overview: A Report to the Commissioner of Internal Revenue, The Assistant Attorney General (Tax Division), and The Assistant Secretary of the Treasury (Tax Policy) 10 (Jan. 12, 1981). Sharman, supra note 14, at 31-32. Id. Id. Id. at 34-35.
106 107 108
109 110 111 112 113 114 115 116 117 118 119
120 121 122 123
124 125
126
127 128 129 130
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Suzanne Walsh, Taxation of Cross-Border Interest Flows: The Promises and Failures of the European Union Approach, 37 Geo. Wash. Int'l L. Rev. 251, 285 (2005). Id. Comm. on Homeland Security and Gov'l Aff., Permanent Subcomm. on Investigations, Tax Haven Abuses: The Enablers, the Tools and Secrecy 1 (2006). Avi-Yonah, supra note 101, at 334. Ring, supra note 3, at 187 (quoting CF&P At-a-Glance, Center for Freedom and Prosperity, available at http:// archive.freedomandprosperity.org/Glance/glance.shtml). Id. Id. Sharman, supra note 14, at 62-63; Walsh, supra note 131, at 267-68. Sharman, supra note 14, at 67-68. Avi-Yonah, supra note 101, at 336. Taxation of Savings Income, supra note 90, P 3. 1 Kleinfeld & Smith, supra note 4, 78:3. Walsh, supra note 131, at 265-66. Id. at 266-67. Id.; Avi-Yonah, supra note 101, at 336. Gregory v. Helvering, 293 U.S. 465, 469 (1935). Id. 1 Kleinfeld & Smith, supra note 4, 86:1.1. Id. Id. Id. Id. I.R.S. Announcement 2000-48, 2000-4 I.R.B. 387, available at http://www.irs.gov/pub/irs-drop/a-00-48.pdf. GAO-08-99, Tax Compliance: Qualified Intermediary Program Provides Some Assurance That Taxes on Foreign Investors Are Withheld and Reported, but Can Be Improved, U.S. Gov't Accountability Office (Dec. 2007). Id. Id. Id. Id. Id.
132 133
134 135
136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154
155 156 157 158 159
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The use of a John Doe Summons is an IRS tactic to procure information regarding tax evasion when the identity of the taxpayer is not known. See 26 U.S.C 7609(f). Here, the John Doe summons relates to the investigation of an ascertainable group or class of persons, that is, United States taxpayers, who at any time during the years ended December 31, 2002 through December 31, 2007, had signature authority (including authority to withdraw funds, to make investment decisions; to receive advice or solicitations) with respect to any financial accounts maintained at, monitored by, or managed through any office in Switzerland of UBS AG or its subsidiaries and for whom UBS AG or its subsidiaries (1) did not have in its possession Forms W-9 executed by such United States taxpayers, and (2) had not filed timely and accurate Forms 1099 naming such United States taxpayers and reporting to United States taxing authorities all reportable payments made to such United States taxpayers. There is reasonable basis for believing that such group or class of persons may fail, or may have failed, to comply with one or more provisions of the Internal Revenue laws. The information sought to be obtained from the examination of the records or testimony (and the identity of the persons with respect to those whose tax liabilities the summonses have been issued) is not readily available from other sources. In the Matter of the Tax Liabilities of: John Does, Pet. to Serve John Doe Summons, at 2- 3, June 30, 2008, available at http://www.justice.gov/tax/ John_Doe_Exparte_Petition.pdf. U.S. v. UBS AG, Decl. of Daniel Reeves, at 3, Feb. 19, 2009, available at http://www.justice.gov/tax/UBS_Declaration_DReeves.pdf. Id. Tax Haven Banks and U.S. Tax Compliance: Hearing Before the Permanent Subcomm. On Investigations for Homeland Sec. & Gov't Affairs, 110th Cong. 3 (2008), available at http://hsgac.senate.gov/public/index.cfm? FuseAction=Hearings.Hearing&Hearing_ID=3b2c1960-1147-4025-91a0-ed2cb728c962 [hereinafter Tax Haven Banks and U.S. Tax Compliance Hearing]. Id. at 2. Id. at 2-3. Id. at 3. Press Release, Dep't of Justice, UBS Enters into Deferred Prosecution Agreement (Feb. 18, 2009), available at http:// www.justice.gov/opa/pr/2009/February/09-tax-136.html [hereinafter Dep't of Justice Press Release]. Convention Between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, U.S.-Switz., art. 25-26, Oct. 2, 1996, available at http:// www.irs.gov/pub/irs-trty/swiss.pdf [hereinafter Double Taxation Convention]. Convention Between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, U.S.-Switz., art. 25-26, Oct. 2, 1996, available at http:// www.irs.gov/pub/irs-trty/swiss.pdf [hereinafter Double Taxation Convention]. Agreement Between the United States of America and the Swiss Confederation on the Request for Information from the Internal Revenue Service of the United States of America Regarding UBS AG, a Corporation Established Under the Laws of the Swiss Confederation, U.S.-Switz., art. 1, Aug. 19, 2009, available at http://www.irs.treas.gov/pub/irs-drop/us-swiss_government_ agreement.pdf [hereinafter IRS UBS Agreement]; Dep't of Justice Press Release, supra note 133. Tax Haven Banks and U.S. Tax Compliance Hearing, supra note 163, at 9. Delc. of Daniel Reeves, supra note 161, at 8. Tax Haven Banks and U.S. Tax Compliance Hearing, supra note 163, at 9. Id. Id. Id.
161 162 163
164 165 166 167
168
169
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171 172 173 174 175 176
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Id. Decl. of Daniel Reeves, supra note 161, at 10. In the Matter of the Tax Liabilities of John Does, Decl. of Barry B. Shott, Deputy Commissioner IRS, at 3, June 26, 2008, available at http:// www.justice.gov/tax/BShott_Decl_UBS_AG.pdf [hereinafter Decl. of Barry B. Shott]. Id. Id. Id. Decl. of Daniel Reeves, supra note 161, at 11. Tax Haven Banks and U.S. Tax Compliance Hearing, supra note 163, at 25 (U.S. persons may evade taxes by masquerading as foreign corporations... U.S. tax law enables the owners of offshore corporations to shield their identities from IRS scrutiny, thereby providing U.S. persons a mechanism to exploit for sheltering their income from U.S. taxation. Under current U.S. tax law, corporations, including foreign corporations, are treated as the taxpayers and the owners of assets of their assets and income. Because the owners of the corporation are not known to [the] IRS, individuals are able to hide behind the corporate structure.) (quoting 2007 GAO Report on QI Program 21). Decl. of Daniel Reeves, supra note 161, at 10. Id. at 11 ([W]e cannot recommend products (such as the use of offshore companies...) to our clients as an alternative to filing a Form W-9. This could be viewed as actively helping our clients evade a U.S. tax, which is a U.S. criminal offence. Further, such recommendations could infringe upon our Qualified Intermediary status, if, on audit in 2003, it is determined that we have systematically helped U.S. person [sic] to avoid the QI rules. What we can do is suggest that clients seek external professional advice and offer them a choice of approved service providers if they request it.) (quoting a UBS Memo). Milton Grundy, Offshore Business Centers: A World Survey 139 (7th ed. 1997). Urs Martin Lauchli, Swiss Bank Secrecy with Comparative Aspects to the American Approach, 42 St. Louis U. L.J. 865, 867 (1998). Id. at 866. Id. at 868. Grundy, supra note 187; Greg Brabec, The Fight for Transparency: International Pressure to Make Swiss Banking Procedures Less Restrictive, 21 Temp. Int'l & Comp. L. J. 231, 246 (2007). Brabec, supra note 191, at 251. Id. Walsh, supra note 131, at 279; Gregory v. Helvering, 293 U.S. 465, 469 (1935). Id. Id. Id. (quoting Improving Access to Bank Information for tax Purposes: The 2003 Progress Report, OECD 9 (2003), available at http:// www.oecd.org/dataoecd/5/0/14943184.pdf). Staff of Permanent Subcomm. On Investigations for Comm. On Homeland Sec. and Gov't Affairs, Tax haven Banks and U.S. Compliance 86 (Comm. Print 2008), available at http://hsgac.senate.gov/public/_files/071708PSIReport.pdf. Id. at 87 (In a letter sent to U.S. clients, UBS went to great lengths to assure its U.S. client's that their information would be protected. The letter read, Dear Client:...The sharing of customer data with a UBS unit/affiliate located abroad without sufficient customer
180 181 182 183 184
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consent constitutes a violation of Swiss banking secrecy provisions and exposes the bank employee concerned to severe criminal sanctions. Further, we should like to underscore that a Swiss bank which runs afoul of Swiss privacy laws will face sanctions by its Swiss regulator...up to the revocation of the bank's charter. Already against this background it must be clear that information relative to your Swiss banking relationship is as safe as ever and that the possibility of putting pressure on our U.S. units does not change anything. Our bank has had offices in the United States as early as 1939 and has therefore been exposed to the risk of U.S. authorities asserting jurisdiction over assets booked abroad since decades. Please note that our bank has a successful track record of challenging such attempts. As you are aware of, UBS (as all other major Swiss banks) has asked for and obtained the status of a Qualified Intermediary under U.S. tax laws. The QI regime fully respects client confidentiality as customer information are only disclosed to U.S. tax authorities based on the provision of a W-9 form ... Consequently, UBS's entire compliance with its QI obligations does not create the risk that his/her identity be shared with U.S. authorities).
200 201 202
Id. Id. at 89. Press Release, Fed. Dep't of Justice and Police, Fed. Council Aims to Execute UBS Agreement with USA (Jan. 27, 2010), available at http:// www.ejpd.admin.ch/ejpd/en/home/dokumentation/mi/2010/2010-01-270.html [hereinafter UBS Agreement with USA Press Release]. Id. The Annex provided a method for identifying which accounts would be selected since, in contrast to most requests for tax exchange information, the identities of individual U.S. taxpayers are unknown. Therefore, the following two classes of accounts would be selected: (1) U.S. domiciled clients of UBS who directly held and beneficially owned undisclosed (non-W-9) custody accounts and banking deposit accounts in excess of CHF 1 million (at any point during the period of the years 2001 through 2008) with UBS and for which a reasonable suspicion of tax fraud or the like can be demonstrated; and (2) U.S. persons (irrespective of their domicile) who beneficially owned offshore company accounts that have been established or maintained during the period of years 2001 through 2008 and for which a reasonable suspicion of tax fraud or the like can be demonstrated. See Annex Criteria for Granting Assistance Pursuant to the Treaty Request. IRS UBS Agreement, supra note 170. Id. (Herein lies the crucial distinction that could exclude 4,200 of the 4,450 accounts. The Annex divides tax fraud and the like into two distinct categories, the first being fraud, the second being more like tax evasion: (1) Activities presumed to be fraudulent conduct...including such activities that led to a concealment of assets and underreporting of income based on a scheme of lies' or submission of incorrect and false documents and (2) Acts of continued and serious tax offense for which the Swiss Confederation may obtain information under its laws and practices). UBS Agreement with USA Press Release, supra note 202. Id. Id. Id. Press Release, Fed. Dep't of Justice and Police, Fed. Council to Put UBS Agreement to Parliament for Approval (Feb. 24, 2010), available at http://www.ejpd.admin.ch/ejpd/en/home/dokumentation/mi/2010/2010-02-246.html [hereinafter Federal Council Press Release]. Id. Id. Id. Press Release, Fed. Dep't of Justice and Police, Amending Protocol to Treaty Request Agreement UBS-USA Signed (Mar. 31, 2010), available at http://www.ejpd.admin.ch/ejpd/en/home/dokumentation/mi/2010/2010-03-311.html. Id.
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Press Release, Fed. Dep't of Justice and Police, Parliament Approves UBS Agreement (June 9, 2010), available at http:// www.ejpd.admin.ch/ejpd/en/home/dokumentation/mi/2010/2010-06-17.html. Id. Id. Harmful Tax Competition, supra note 1, at 23. Federal Council Press Release, supra note 180. Id. 1 Kleinfeld & Smith, supra note 4, 86:1:1; Zagaris, supra note 4. Press Release, The White House, Leveling the Playing Field: Curbing Tax Havens and Removing Tax Incentives for Shifting Jobs Overseas (May 4, 2009), available at http://www.whitehouse.gov/the_press_office/LEVELING-THE-PLAYING-FIELDCURBING-TAX-HAVENS-AND-REMOVING-TAX-INCENTIVES-FOR-SHIFTING-JOBS-OVERSEAS [hereinafter White House Press Release]. See generally 1 Kleinfeld & Smith, supra note 4, 86:1:1; Zagaris, supra note 4. Zagaris, supra note 4, at 333. Id. Id. 1 Kleinfeld & Smith, supra note 4, 86:1:1; Announcement 2000-48, supra note 153. White House Press Release, supra note 223. Id. Decl. of Daniel Reeves, supra note 127, at 11. Decl. of Barry B. Shott, supra note 143. White House Press Release, supra note 223. Harmful Tax Competition, supra note 1, at 73. See Savings Directive, supra note 91. Id. Proposal for a Council Decision on the Conclusion of the Agreement Between the European Community and the Swiss Confederation Providing for Measures Equivalent to those Laid Down in Council Directive 2003/38/EC of 3 June 2003 on Taxation of Savings Income in the Form of Interest Payments and the Accompanying Memorandum of Understanding, COM (2004) 75. UBS Agreement with USA Press Release, supra note 202. OECD, Promoting Transparency and Exchange of Information for Tax Purposes 3 (Mar. 10, 2010), available at http:// www.oecd.org/ dataoecd/32/45/43757434.pdf [hereinafter Promoting Transparency]. Ring, supra note 87. See generally Promoting Transparency, supra note 239. Id.
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Id. Id.
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, THE U.S. ASSAULT ON SWISS BANK SECRECY AND..., 17 New Eng. J. Int'l &...

2012 Thomson Reuters. No claim to original U.S. Government Works.

2012 Thomson Reuters. No claim to original U.S. Government Works.

2012 Thomson Reuters. No claim to original U.S. Government Works.

2012 Thomson Reuters. No claim to original U.S. Government Works.

2012 Thomson Reuters. No claim to original U.S. Government Works.

2012 Thomson Reuters. No claim to original U.S. Government Works.

2012 Thomson Reuters. No claim to original U.S. Government Works.

2012 Thomson Reuters. No claim to original U.S. Government Works.

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