Swiss court stops handover of tax information to US

A Swiss court has prevented the handover of information on US account holders to the Internal Revenue Service (IRS), the US tax agency, by the Julius Baer Group Ltd., a Swiss bank (A v. Federal Tax Administration, A-5390/2013 (Fed. Admin. Ct. 1/6/14)).

The IRS requested information from the bank on its customers who are US citizens based on its conclusion that Julius Baer employees have taken steps to assist US citizens to evade US taxes. Article 26 of the US–Switzerland tax treaty allows the two countries to exchange information “as is necessary … for the prevention of tax fraud or the like.” The protocol to the treaty defines tax fraud as “fraudulent conduct that causes or is intended to cause an illegal and substantial reduction in the amount of tax paid” to one of the countries.

The IRS made a broad request for the handover of information on US clients of Julius Baer under Article 26. The request asked for account information, information on possibly associated companies, correspondence, data from its internal management system, internal records, and other documents. The IRS also asked for a list of all US persons connected with the account.

The Swiss Federal Tax Administration (Eidgenössische Steuerverwaltung) concluded that the information should be provided to the IRS. The complainant (a Julius Baer customer who is unnamed in the suit) sued in Swiss court to prevent the release of the information.

The Swiss Federal Administrative Court (Bundesverwaltungsgericht) ruled against the Federal Tax Administration’s decision to grant the IRS’s request for information and held in favour of the complainant. The court held that while the IRS’s request made abstract descriptions of alleged conduct by the bank’s customers, it did not include evidence of tax fraud.

The case is appealable to the Swiss Federal Supreme Court, and an appeal must be filed within ten days.

The United States and Swiss governments have been moving toward greater co-operation as the United States goes after US citizens that it considers to be tax evaders, but there has been occasional resistance from the Swiss. This case is not the first one in which the Federal Administrative Court has rejected information requests from the IRS that were based on behavioural patterns. In April 2012, it reached the same conclusion in the case of a Credit Suisse customer (Credit Suisse Client v. Federal Tax Administration, A-737/2012 (4/10/12)). And in 2013, the Swiss parliament rejected a measure that would have created a legal basis for Swiss banks to resolve tax evasion cases with the United States.

—Alistair Nevius (anevius@aicpa.org) is editor-in-chief, tax for CGMA Magazine.