Switzerland’s cabinet to talk UBS tax deal

Switzerland’s cabinet will meet on Wednesday to discuss its response to a court decision which threatens to undermine a key tax deal involving leading bank UBS AG (UBS.N) (UBSN.VX) and authorities in the United States.

A UBS client earlier this week won an appeal to prevent her account data from being given to U.S. tax collectors as part of a U.S. probe into possible tax evasion among wealthy bank customers. [ID:nLDE60L1RV]

The case throws doubt on Switzerland’s ability to deliver details of all 4,450 UBS client accounts requested by U.S. authorities, in a bid to identify U.S. citizens who might have hidden billions of dollars in UBS bank accounts to avoid taxes.

Analysts and lawyers are unsure about which of a number of options the Swiss government will choose to try to tie up the legal loose ends left by the ruling.

These include the use of an emergency law that allows the lifting of Swiss bank secrecy in special cases, a renegotiation of the deal, retroactive approval of the treaty from parliament or the early introduction of a new double taxation agreement with the United States.

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“A political solution must be found which will not violate the (court’s) decision as its ruling is final,” said analyst Rainer Skierka at Swiss private bank Sarasin.

“Given the potential political pressure that might arise in the United States, we would expect a rather quick decision from the Federal Council,” Skierka added, referring to the Swiss cabinet.

The Swiss administrative court ruled on Friday that the client’s failure to file a tax form did not constitute “fraud or the like”, as required for data to be disclosed under a double taxation agreement with the United States.

Most of the people whose accounts would be handed over to the United States were suspected of fraud, not simple tax evasion, the Swiss justice department said in November.

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BANK SECRECY

Swiss bank secrecy gives account holders protection against outside scrutiny and the deal struck in August to drop the case against UBS in exchange for giving client names to the United States was a notable departure from that tradition.

U.S. tax authorities said they expect Switzerland to honour the deal, which strained relations between the countries last year. UBS was supposed to give names to Switzerland, which would evaluate them and turn over to the United States.

UBS declined to comment on the ruling last week, but Swiss daily Neue Zuercher Zeitung said on Tuesday without naming sources that the bank believed it had conformed to all points of the agreement.

“The most realistic solution currently is that the treaty is presented to parliament, which then has to make a decision,” said analyst Mathias Bueeler at brokerage Kepler Capital Markets.

This would make the court ruling obsolete but would likely face opposition from some political parties, he added.

Some argue a further clause in the agreement could make irrelevant the problems posed by Friday’s court ruling.

The United States said it would withdraw its legal ‘John Doe’ summons seeking names if it got 10,000 UBS account holder names voluntarily, but it is unclear whether that criteria has been met.

A U.S. tax amnesty program has yielded 14,700 names but authorities have not revealed how many of those were UBS clients.

“We expect more than 10,000 UBS clients to have turned themselves in and believe the U.S. John Doe summons to be closing soon,” said analyst Teresa Nielsen at private bank Vontobel.

Evan Stewart, a regulatory lawyer at Zuckerman Spaeder, questioned whether the summons would be withdrawn on this basis. While UBS clients worried they could be among the 4,450 might have disclosed their accounts voluntarily, there was no way of knowing how many or who they were.

“This is an odd situation, where everybody thought this was over, but the Swiss court’s decision puts UBS back to where it was before,” Stewart said.

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