Were reports of the death of Swiss bank secrecy premature?

Just when the Internal Revenue Service was ready to work on the 4,450 estimated names of U.S. taxpayers who had “secret” Swiss accounts with UBS bank, a Swiss federal administrative court ruled in late January 2010 that UBS could not disclose most of those names.

Most observers had assumed that Switzerland would honor the settlement agreement signed on Aug. 19, 2009, between the United States and the Swiss Confederation.

But an anonymous U.S. taxpayer filed an objection with the Swiss federal administrative court — and won.

The key language is that under Swiss law, tax “fraud” is a crime, but tax “evasion” is not. The 2009 settlement agreement referred to the current U.S. income tax treaty with Switzerland (1996 with a subsequent Mutual Agreement), which allows sharing information relating to “tax fraud and the like.” The anonymous taxpayer had merely failed to file a W-9 with the IRS. Hence, he had committed mere tax “evasion” and was not covered.

The Swiss Minister of Finance has agreed to keep negotiating with the United States. She says the outcome of new negotiations would affect not just the future of UBS, but “also the stability of the financial centre and the economic situation of Switzerland.”

The issue may need to go to the Swiss Parliament, which might call for a national referendum.

So, Swiss bank secrecy is not dead — at least not yet.

Indeed, as part of the settlement the United States and Switzerland also signed an amendment to the Income Tax Treaty that would allow sharing of information for tax evasion as well as tax fraud. This protocol has not yet been ratified by Switzerland.

As this goes to print, the issue is on the March agenda for the Swiss Parliament, and a feisty debate is expected.