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Past, Presence and Future of Swiss Bank Secrecy. Part 1

The topic of Swiss bank secrecy always attracts massive attention of politicians, bankers, lawyers etc. In the recent time, there are several movements on international level in direction of a wider transparency regime, which was called forth particularly with the OECD. Swiss bank secrecy is also touched. However, in the press (especially, Russian speaking one), the topic is covered by a series of myths. In order to put clarity, we speak with Cyril Troyanov, a Swiss lawyer.

С русской версией интервью Вы можете ознакомится по ссылке ->

Please read the second part of the interview here.

1. One can dispute a long time if there is no identical understanding what the parties are disputing about. That is reason why, we would ask you firstly to provide what shall be understood under “the bank secrecy” (under Swiss law and international standards)?
To my knowledge, there has never been an international standard on banking secrecy; on the contrary, international standards have always combatted banking secrecy and are now gradually leading to its complete and global abandonment in taxation matters, by the enactment of compelling international standards on transparency in tax matters.

In Switzerland, Swiss banking law prohibits banks from transmitting information about their clients to a third person. It is guaranteed since 1934 by Article 47 of the Federal Law on Banks and Saving-bank. In legal terms, banking secrecy is a “professional” secrecy obligation, like the medical secret. Violation of the bank secrecy is punished with up to 3 years of prison and by fines up to 250000 Swiss francs.

However, Swiss banking secrecy has never been absolute. The bank’s statutory duty of confidentiality does not apply in the context of domestic or international criminal proceedings. In international assistance requests in taxation matters, it could be lifted in case of tax crimes (tax fraud(1)), but its protection did work heretofore in cases of mere “tax evasion”(2). Therefore, Swiss banking secrecy has always been subject to exceptions, which in relation to taxation matters have widened substantially over the past years, as the international pressure on Switzerland and other banking secrecy jurisdictions has increased in the wake of the global financial and public debt crises of the last 6-7 years.

(1) Attempt to “deceive” the competent tax authorities, e.g.: by means of forged documents (account books, balance sheets, profit and loss accounts or wage certificates and other certificates produced by third parties, etc.) for the purpose of avoiding the payment of taxes.

(2) Intent or negligent omission to declare income / wealth to the competent tax authorities; as opposed to “tax avoidance”, which is the legitimate minimizing of taxes, using legal means approved by the competent tax authorities.

In this context, it shall be noted that the Swiss Tax Administration does not have direct access to the information held by Swiss banks, neither for foreign nor for domestic taxpayers. Such information can only be accessed by the Swiss Tax Administration though legal proceedings.

2. On 1st February 2013, the Swiss Federal Law on administrative assistance in tax matters has come into force (hereafter the TAAA). What were the grounds for Switzerland to adopt this legal act?
In the taxation context, it is this very distinction between “tax fraud” and “tax evasion” made by Swiss law which is being abandoned in response to international pressure on Switzerland for more transparency in tax matters.

In the spring of 2009, the Swiss Government announced a major policy change, i.e. its decision to commit itself to comply with the OECD standards concerning the exchange of tax-related information between governments and to incorporate Article 26 of the OECD Model Tax Convention into its bilateral tax treaties (3). This meant that from then on Switzerland would exchange information in cases of tax evasion with foreign authorities in the context of international mutual administrative assistance in tax matters, in individual cases and in response to specific, justified requests.

(3) In 2009, G20 blacklisted Switzerland and other countries which did not comply with OECD standards on exchange of tax related information. Switzerland declared this major policy change in order to be taken out of the black-list.

The implementation of this decision required the modification of existing Double Taxation Treaties (DTA), respectively the adoption of new DTAs. Since 2009, Switzerland has revised or entered into 45 DTAs or tax information exchange agreements in accordance with the international standard; 36 of these are in force.

In its provision relating to the exchange of information, each DTA sets the material standards on which information shall be exchanged between Switzerland and the contracting state upon request. As already mentioned, these conditions have been aligned on the standardized OECD principle (art. 26 of the Model Convention) which specifically requires the exchange of tax related information on request also in cases of mere tax evasion, i.e. in the absence of acts of “tax fraud” and the like. In other words, Swiss law cannot restrain the scope of the administrative assistance as defined in the OECD standard.

On February 19, 2014, the Swiss government announced its intention to unilaterally apply the exchange of information in accordance with the OECD standard also to double taxation agreements that have not yet been adapted to the standard. It has instructed the Federal Department of Finance to prepare a corresponding draft bill. This means that, in the future, the standard is to be applied to the remaining DTAs by means of a unilateral extension. However, this will be conditional on reciprocity, i.e. the partner states must also be able to exchange tax information with Switzerland upon request.

On the other hand, the procedural standards governing the exchange of tax-related information need to be determined by national legislation. This is the content of the Swiss Federal Act on International Administrative Assistance in Tax Matters (Tax Administrative Assistance Act or “TAAA”).

The TAAA entered into force on February 1, 2013, simultaneously with the Federal Ordinance authorizing Switzerland to exchange information on a case-by-case basis, upon a motivated request relating to persons which form a category based on “patterns of behavior by account holders or financial institutions”, also known under the term of “group requests” (the Ordinance on group requests). Such requests target several persons which are identified not by means of their names, but by sharing a pattern of behaviour in which foreign tax authorities are interested in (4) (5).

(4) Examples: accountholders holding specified credit cards, or accountholders having invested in a certain financial product.

(5) On July 18, 2012, the OECD updated Article 26 of the Model Tax Convention to allow group requests, allowing tax authorities to ask for information on a group of taxpayers, without naming them individually, as long as the request is not a ‘fishing expedition’.

Thus, the TAAA lays the grounds for the rules of procedure applicable in Switzerland to the execution of administrative assistance requests submitted by foreign tax authorities pursuant to either DTAs, or to international conventions on the multilateral exchange of tax-related information.

On February 19, 2014, the Swiss Government announced that it intends to apply the exchange of information in accordance with the OECD standard also to double taxation agreements that have not yet been adapted to the standard. The standard is now to be applied to the remaining DTAs by means of a unilateral extension. However, this will be conditional on reciprocity, i.e. the partner states must also be able to exchange tax information with Switzerland upon request. Moreover, data protection and the principle of specialty must be preserved. A corresponding draft bill will be prepared for the Parliament.

3. What is the main content of the Tax Administrative Assistance Law? How does it touch the Swiss bank secrecy? What are the changes in comparison with the former regime the Tax Administrative Assistance Law has introduced?
As already explained, in response to massive international pressure, Switzerland had to limit the protection of its banking secrecy law by the adoption of DTAs compliant with article 26 of the OECD Model Tax Convention, henceforth allowing the exchange of tax related information on request also in cases of mere tax evasion (6). And the TAAA has set the procedural rules which the Swiss authorities have to apply when they execute tax related information requests made by foreign governments pursuant to any bilateral or multilateral conventions on the exchange of tax information.

(6) Under most DTAs, prior to the policy change, the information exchanged by Switzerland was limited to information needed to apply the DTA; it did not cover information needed to enforce domestic tax legislation.

Pursuant to the TAAA, the Federal Tax Administration is the competent body for the execution of such requests. TAAA requires the exchange of information to be limited to cases of a specific request (no automatic exchange is allowed by the TAAA) and prohibits the exchange when the information on which the foreign request is based has been obtained through means which are illegal in Switzerland (e.g. data theft). The exchange is prohibited in cases of fishing expedition (unsubstantiated requests), but this limitation has been blurred by the admissibility of group requests.

Eight months only after its entry into force, the TAAA had to be amended on a specific point to meet the demands of the Global Forum on Tax Transparency: in specific cases, where the requesting state asks for it, the TAAA now permits the information to be transmitted by the Swiss tax authorities to the foreign authority without the previous notification of the party concerned (depriving the person concerned of any legal means to block the transmission of the information by exercising appeal rights, i.e. potentially leading to undisclosed remittance of the information). This modification applies retroactively to requests made after February 1, 2013.

4. Could foreign official tax bodies file a request to receive assistance from Switzerland before entry of the Law and Ordinance into force?
The answer is yes.
The TAAA will apply to DTA requests for assistance which were made after its entry into force, on or after February 1, 2013. However, the TAAA actually replaced a Federal Ordinance on the same subject matter with identical rules which was rapidly enacted by the Swiss Government in 2010 to give effect to information exchange standards of the newly revised DTAs and which entered into force on October 1, 2010 (hereafter the OAATM). The standards of the OAATM therefore govern requests for assistance made between October 1, 2010 and February 1, 2013. Those of the TAAA will govern requests made after February 1, 2013.

This said, as already pointed out above, the material conditions which will govern the scope of the information to be remitted to a foreign state depend on the specific DTA applicable to the case at hand. The scope of a request therefore always is determined by the date on which a specific DTA was revised to incorporate the art. 26 OECD modell clause on exchange of tax related information.

In the case of Russia, the Federal Tax Administration will provide assistance to Russia under the rules of new DTA (and the TAAA) in relation to information needed to enforce Russian tax laws as from 1.1.2013. The information exchanged may cover information relating to taxable years beginning on or after 1.1.2013. See below.

In the future, the scope of information exchanged via DTAs could even be further enlarged by changes to existing global standards (e.g. Art. 26 OECD Model Tax Convention), or by the adoption of new international standards (information exchange). See below.

Swiss Bank Secrecy, Cyril Troyanov, Swiss lawyer, ALTENBURGER LTD legal + tax, Geneva, Switzerland, 2014, OECD, Swiss Federal Law on administrative assistance in tax matters, www.business-swiss.ch
Cyril Troyanov, Swiss lawyer

In this context, one shall not forget that the OECD standards are subject to the principle of “subsidiarity”: foreign tax administrations are required to exhaust their own domestic proceeding on tax evasion before making a request under a DTA.

Therefore, domestic taxation and tax reporting rules are most relevant when evaluating the issue at hand. Domestic taxation rules have undergone major changes, too, in their own jurisdictions over the last 6-7 years.

С русской версией интервью Вы можете ознакомится по ссылке ->

Please read the 2nd part of the interview here.

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