Tax Information Exchange between Switzerland and the USA

Introduction to the New Regime


A. Background

1. The UBS Case

1. The Olenicoff matter marked the starting point of the UBS affair.

2. Evidence gathered in connection with the prosecution of the Californian tycoon Oleg Olenicoff for tax fraud and of the former UBS manager Bradley Birkenfeld – who pleaded guilty to conspiracy to defraud the IRS and cooperated with the prosecuting authorities – permitted the US to initiate a criminal investigation against UBS and to eventually threaten the bank with filing an indictment.

3. UBS was thus forced to enter into a deferred prosecution agreement with the Tax Division of the US Department of Justice and the US Attorney's Office for the Southern District of Florida in order to avoid a further escalation of the criminal case.

4. In that context UBS had to admit to certain wrongdoings and, more importantly, agree to exit its United States cross-border business. Henceforth, banking or securities services could only be provided to US persons through SEC registered entities, and any US persons wishing to continue their relationship to UBS had to supply a fully executed IRS Form W-9.

5. UBS, a key player in the private banking sector, was thus forced to desist from providing offshore services to US persons, and the example made of UBS prompted other Swiss banks to review their offshore private banking business practices to bring them in line with US rules.

6. On the other hand, the information obtained in the course of the prosecution of Messrs. Olenicoff, Birkenfeld and others, permitted the IRS to file an application in Florida known as the John Doe Summons, seeking the disclosure of information by UBS relating to 52'000 accounts believed to be held by US persons.

7. This second challenge of UBS and its US clients must be seen in conjunction with the publication by the IRS of a fixed penalty framework for voluntary disclosures on March 23, 2009.

8. Apparently, the John Doe Summons was an important element of a more comprehensive set of measures taken by the IRS to encourage US persons who held unreported off-shore accounts to come forward and voluntarily resolve their tax issues with the IRS.

9. The investigation and prosecution of UBS accordingly served mainly two objectives:

(i) to subject the US private client business of UBS and others to US control, and

(ii) to create an overall atmosphere of uncertainly to motivate US tax payers to make use of the voluntary disclosures program of the IRS.

10. The same tactics can now be seen in connection with Credit Suisse.

11. In February this year newspaper reports on arrests of Credit Suisse bankers were published. And also in February this year the IRS announced its second voluntary disclosure initiative to bring offshore money back into the US tax system.

12. The nexus is in my opinion quite obvious: Again, the US authorities try to create an atmosphere encouraging tax payers to come forward.

13. The statement made by IRS Commissioner Douglas H. Shulman on February 8, 2011 when officially announcing the new program illustrates this best:

"We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. The new disclosure initiative is the last, best chance for people to get back into the system." (IR-2011-14, February 8, 2011).

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Tax Information Exchange
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Bernhard Lötscher