No more Swiss Chocolates - Abhishek Joshi

Published: Tuesday, May 08,2012, 15:40 IST
Swiss Chocolates, Abhishek Joshi, UBS, usa, swiss bank, black money, Henry Dunant,Double Taxation Avoidance Agreement, DTAA, Income Tax Act

"The existing DTAA (Double Taxation Avoidance Agreement) signed between Swiss and Indian authorities is a farce and non committal to get the Illicit wealth back, specially in light of recent Credit Suisse verdict argues the author, Abhishek Joshi. Read on...

Great Swiss man, Henry Dunant and his own founded, now epitomized International Red Cross also could not potentially come to the rescue of Uncle Sam following homeland policies in International court room when it was made to skip its own heart beat.

IBTL Columns

The snub was an outcome of a recent federal administrative court verdict on 12thApril 2012, filed on back of an appeal by Credit Suisse client citing that a 1996 Tax treaty between United States and Switzerland does not allow the US Internal Revenue Services (IRS) to request the account details of potential tax evaders without clear evidence of fraudulent intent. Drawing exhaustively on a distinction between “Tax Fraud” and “Tax Evasion”, the federal court turned back the argument of appellant on its head mentioning, “Having failed to declare Swiss bank account does not provide sufficient ground to receive the data from Swiss Tax Administration”. The court further added to the criticism in the judgment that the premise of the request factored subjectivity of mere suspicion and were not based on specific evidence and failure to bring them on record with names of suspected and potential evaders identified by IRS, also do not qualify for any administrative assistance to be granted regardless of the high amount involved.

The brunt has been severe for US since it has paid heavily for not having yet ratified the DTA agreement of 2009 with Swiss Federal tax authorities which is pending passage in the senate. The new amendment with its in built provisions would have minimum allowed to circumvent the provisions of conduct and fraud as long as alternative form of identification would have been supplied, negating the need of specific names or personal details under the new DTA Convention between United States and Swiss Authorities. The DTA convention hinges on Swiss authorities having clearly differentiated between Tax Fraud –which is Illegal to Tax Evasion – which is not, under Swiss Tax laws.

Eleven Swiss banks including Credit Suisse, UBS and Julius Baer have been under investigation by United States‘s IRS and Federal agencies. US had some initial success in arm twisting UBS AG in 2009, when to avoid prosecution, it admitted that it had fostered solicited assistance to its customers for tax evasion and paid a hefty penalty of USD 780 Mn and also released information of more than 250 accounts. The second tranche of more than 4,500 American account holders were also released subsequently to US- IRS and other agencies.

The deal between UBS and IRS agencies was later suspended by Swiss Federal court in a separate judgment in 2009 which through indicted the “conduct” of UBS employees (similar to the “subjectivity of Credit Suisse employees of suspected behavior pattern amounting to tax fraud and the like, but not extended to the client”) soliciting tax evasion as a generic practice was short challenged over the “banking secrecy laws” under Swiss Federal Laws, which forced the Swiss government to approach the parliament passing an assistance to request motion in February 2010 to avoid any future legal wrangles with US on concomitant deals. This resulted in acceding to request of United States IRS’s agencies to approach Swiss Banks requesting information on suspected tax evasion cases.

The Credit Suisse client had appealed this decision of Bern, which has no further admissibility beyond Federal Administrative Court or could be challenged in Swiss Supreme Court. The inconsistency of “Principle of proportionality” laid the final closure on assistance since under Swiss laws, where a client data may be handed over as part of an administrative assistance procedure at Federal level and not directly by the bank. The present ruling is also critical of Swiss Federal Council who had cleared the request motion in parliament supporting United States requests.

The judgment though part of integral political situations between United States and Swiss Federal Council could perhaps succumb to the sustained pressure being built up by US in subsequent release of names in coming few months however the Indian story needs to be more than sufficiently bolstered in light of the recent federal court judgment. The new “amended” bilateral Double Taxation Avoidance Agreement (DTAA), tax treaty signed between Swiss and Indian authorities on October 7th 2010 does not even inch close to what the “amendment”, brandished as an achievement by ruling incumbent government was set to achieve.

In comparison to the US treaty which has been steam rolled into Swiss case laws accepting prior information, under “retrospective basis” subjecting to certain clauses, the Indian tax treaty limits itself to “prospective applicability” beginning January 2011. This takes away the “fraudulent intent” which otherwise would have offered scope to restitute illicit wealth and further applicability of domiciled criminal laws of both countries.

The newly “amended” DTAA agreement, signed originally in 1994 by India though having the reciprocity of information embedded in the treaty even earlier, a careful scrutiny brings out the “amended merits” through the new inclusions. Specific of interest is Article 26 – Exchange of Information. Article 26 continues to leverage the initial understanding between both countries for exchange of information, however the amended increases the scope subjectivity “through liberal means”. The information so sought however is “assumed” to be an extensions of enforcement of Indian tax laws, which anyways only defines“ tax evasion” as a criminal offence partly under Section 276(c), Income Tax Act (1961) which further has its eminence from old revenue principle of aggregated revenue deemed to be due, and its failure to be paid if demanded on notification.

The “Protocol “of Exchange of Information Article 26 Section (10) (a)(b)(c)(d)(e)(f) speaks “liberally “about the measures to be undertaken. Among the few provisions, “The requesting state should have exhausted all options under domestic laws prior making to obtain request for information including not making it binding to commit on contracting state to exchange information on an automatic or spontaneous basis”.

The enforcement limits only to cases of “tax evasion” which is not a criminal offence in Switzerland, and can best compel the Swiss authorities to obtain information, legally permissible as per local case laws regardless held by a financial institution, a bank or in fiduciary capacity. The treaty further shall have to meet the inherent “Principle of proportionality” and Federal banking case laws of Switzerland, differentiating between Tax Fraud and Evasion and will need to clearly document underlying request with complete details of information available, evidence on record of evasion (not fraud – that’s not even touched) and most importantly identifying the name of the person under investigation by Indian authorities under the Protocol provisions. Rhetoric’s around amended, liberal, new DTAA, bilateral strengthening of relationship between countries notwithstanding.

No wonder that the Federal Council which had rushed with the US requests to have a passage inserted into a state motion and continues to bilaterally remain engaged with US authorities, Indian Swiss treaty was quickly ratified by Swiss parliament, post mandatory 100 days waiting period in 2011.

This one non negotiated clause has let the evaders go scot free on all previous cases of criminal and fraudulent misconduct, bearing the fact that even “prospective applicability” erodes the nearer chances of seeking any information from Swiss authorities, prior pre assured for present or for future. The treaty continues to rest in peace on papers with our own illicit bulge remains tied to our waist forever. Never mind the temptation, someone just told us, sternly “no more Swiss chocolates”.

Author : Abhishek Joshi | Follow the writer on

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