Can the U.S. Tax Authorities Break Swiss Bank Secrecy?

By: Julian D. W. Phillips | Fri, Mar 6, 2009
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It would seem so clear that the U.S.A. Tax Authority attack on UBS is going to break the Swiss secret banking system. Will they succeed? After whacking them with a $780 million fine they are now coming in for another attack demanding the exposure of U.S. Swiss account holders in the bank. They had agreed to disclose the names of 300 U.S. based clients with accounts with U.B.S. in the States. They have and will not agree to disclose the names of U.S. citizens who hold accounts in Switzerland. But the entire body of U.S. citizens holding Swiss bank accounts are worried about this prospect. On top of that, all other foreign Swiss bank account holders are worried too.

The entire Swiss banking system stands as a holder of countless secret bank accounts going not just globally but back through many, many decades of such holdings. Banking for foreigners is so important to the Swiss that they passed the Banking Secrecy Act that imposes serious prison time on those who disclose such secrets. So this is not just a battle between U.B.S. the multinational Swiss Bank, but the Swiss government and the U.S. Tax Authorities.

When the South African Reserve Bank decided to hold Swiss Bank investment from a popular equity issue in the country, unless the beneficial owners of the funds disclosed themselves, Fritz Leutweiler, the then President of the Swiss National Bank flew to see the South African Reserve Bank Governor and said to him, unless these funds were released to the investment or allowed to be repatriated, there would be no more Swiss investment in South Africa whatsoever. The funds were released that day.

In the States, the Tax Authorities think they have the Swiss on the run now and they know that U.B.S. bank executives are in an invidious position. But these executive know full well that they are within the laws of both countries, provided they maintain the secrecy of their clients with accounts in Switzerland [not in the U.S. though where the Swiss laws hold no Jurisdiction].

U.S. newspapers are painting a picture that the Swiss will be broken and that Swiss banking secrecy is tantamount to a crime for U.S. taxpayers. Indeed the charges being leveled against both the bank and U.S. citizens that hold accounts there are that they are evading U.S. Taxes. It is sad to see such reports and charges take such emotional lines that have departed from the realities of international law.

In short, the authority of the U.S. tax authority is limited to the borders of the U.S. and those tax payers living there. Yes, it is true that even U.S. citizens living overseas are required to submit a report of their worldwide assets annually to the Tax authorities, but the power of the U.S. remains limited to the U.S. shores even here and these citizens cannot be forced to pay those taxes until they return to the States, except on the assets within the U.S. No nation outside the U.S. will impose U.S. Tax laws in their country.

Two obstacles stand in the way of U.S. Tax officials imposing their will on U.S. citizens in this regard. The first is Jurisdiction and the second is the reality of a legal entity.


It is the real experience of the author, not the academic theory, that Jurisdiction is paramount. Some real experiences will illustrate this.

Should a citizen of the U.S. be charged with tax evasion [not simply suspicion of tax evasion] in a foreign land, it is incumbent on every court to establish the correct Jurisdiction before proceeding with any court case. Should it be found that the court does not have the jurisdiction to impose any finding in a foreign jurisdiction the case will be dismissed. For instance, a German suing an Englishman in Sweden, for a matter taking place in Germany would have the case referred to the German courts as the Swedish court does not have the power to adjudicate on the matter. Taking this to an extreme, The President of Zimbabwe can starve his own people and no court other than the Zimbabwean courts can try him except the International Court of the Hague.

In this case, the laws of Switzerland govern the activities of the U.B.S. in Switzerland. U.B.S. activities in the U.S.A. are governed by U.S. law, but should those activities be Swiss based then the U.S. has no power to impose U.S. law in Switzerland. They can accuse Swiss officials in the U.S. as much as they like, but their jurisdiction applies only to activities inside the U.S.A. Any U.S. citizen that donated assets to a Swiss legal entity must report it to the U.S. Tax authorities [[Donation Tax will apply?], but any money made on the entity in Switzerland thereafter in the foreign legal entity is outside the scope of the U.S. Tax jurisdiction and this will come out in the present attack on the U.B.S. Under Swiss law, any U.S. citizens, against whom there is substantive evidence of a crime involving the money invested in Switzerland, the Swiss Authorities will cooperate with the U.S. authorities in passing it back to the U.S. and in its criminal investigation. However, Switzerland does not regard simple Tax Evasion as a crime!

For some reason President Sarkozy of France has cast his stone at the Swiss [he appears to like the stage] and suggested that Switzerland be added to a blacklist of Tax havens. He would not do this if he believed that the Swiss could be broken by the U.S. Tax Authorities.

In the seventies the Bank of England wanted to explore the Swiss based activities of certain British citizens and sent a detective to Switzerland to investigate. This official was promptly locked up for breaching Swiss banking secrecy laws. The same would happen to a U.S. Tax Official. Perhaps we will see this happen?

Taken further, any U.B.S. official who passes bank account details of U.S. citizens against whom there is no [Swiss agreed] tax evasion evidence to U.S. Tax authorities would likely be imprisoned on his return to Switzerland.

Legal Entities

A foreign legal entity is under the Jurisdiction of the country in which it is formed. No outside Tax authority can impose taxes on it. If the entity carries on legal business what should happen is that any cash flow from that entity to the originator in a foreign land has the right to impose taxes on the repatriation of that cash flow. What also happens in some countries is that where a Tax Authority deems the entity to be placed in the foreign location solely to avoid taxes it can impose anti-avoidance taxes on the flow of cash and tax it as though there were no legal entity there in the first place. But the cash flow has to come home first. That taxation is then imposed on the individual or entity originating the foreign entity but in the country of origin. The Tax Authorities cannot step over into the foreign jurisdiction and impose their laws there!

Important Notice:

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Evasion & Avoidance

Many individuals and corporate structures are set up in a way so as to avoid taxes. This is vastly different to evading taxes. Avoidance is ensuring that taxes are not due, whereas evading [in most countries] is criminally ducking taxes due. One is within the laws of the U.S. the other is outside it. The chest beating of the U.S. Taxman seems to be obscuring that difference. But nevertheless the difference is clear. The U.S. has often barked about "Dummy Corporations" in foreign Jurisdictions but a corporation is a legal entity or it is not. It is governed by the laws of the Jurisdiction it is in. The concept of a "Dummy Corporation" implies tax evasion in the U.S. but not elsewhere. Its existence, in reality, may well facilitate tax avoidance only. Even there, the U.S. Tax Authorities must establish evidence of Tax evasion and gather evidence to confirm it. Where it is legally permissible corporations set up primarily to minimize tax can be simply a re-routing of cash flow in such a way as to avoid or postpone taxes. The important feature of this is that the letter of the law is obeyed. However, in many cases the Taxman is shouting about the 'spirit of the law', which may be different. It is comforting to realize that even the U.S. Taxman has to obey the letter of the law!

It appears that U.B.S. paid the huge fine primarily to pacify these authorities so they could continue business within the U.S. and did not admit to Tax Evasion support. If they did support such in the U.S. then we are sure that the executives concerned will be hung out to dry by their own people. Swiss bankers are extremely precise and in the U.S. they would also obey the laws of the U.S. What is tragic is that at the end of the day, U.B.S. may well depart the shores of the U.S. battered and bruised but with its Swiss secrets intact. Switzerland has been a haven for money by all types of individuals for the last 400 years. It is perhaps the main commercial activity in Switzerland. This service has gone hand in hand with the neutrality of Switzerland a policy guarded by nearly all Swiss citizens. They are unlikely to change these laws because of the huffing and puffing of U.S. Tax officials.

As this goes to print we have just received the news that the Obama administration is not interested in escalating a dispute between the United States and Switzerland over bank secrecy laws. The tensions have been rising and led to a meeting between Switzerland's top Justice official and her counterparts from the U.S. Justice Department.

Jurisdiction rules!

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.

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