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FROM: JUL-AUG 2009 ISSUE | BY VERN KRISHNA
What is the difference between income tax evasion and tax fraud? Considerable, if you are the Swiss government shielding your largest bank from the prying eyes of the tax authorities or an individual with a Swiss bank account.
Switzerland is a full-tax jurisdiction but it also has infamous banking secrecy laws. On February 18, 2009, the United States Justice Department deferred criminal prosecution of the largest Swiss bank – UBS AG – in exchange for the bank revealing the identity of approximately 300 of its American customers. The bank acknowledged its participation in violating U.S. law and in a scheme to defraud the United States.
Deferral of the criminal prosecution did not prevent the Internal Revenue Service from pursuing claims against American taxpayers. The IRS issued “John Doe Summonses” to UBS AG asking for information on 52,000 accounts that the bank holds with an estimated value of $14.8 billion US in assets. The Swiss government refused to comply with the summonses, saying they violate Swiss laws of banking secrecy.
The United States – Switzerland Tax Treaty has an exchange of information clause that requires the respective tax authorities to exchange tax information for the prevention of tax fraud or the like. However, the Treaty also provides that neither country is obliged to carry out administrative measures that vary with their domestic regulations and practice or supply particulars that would not be procurable under domestic legislation.
The summonses have triggered an international legal battle that will test banking secrecy laws against tax treaty obligations. The Swiss government maintains that tax evasion is not in itself evidence of tax fraud.
The conundrum: UBS AG admits being party to fraudulent activities that resulted in the deferral of criminal prosecutions, but asserts that fraud is not the same as tax evasion and will not disclose the requested information.
We may never discover the difference between tax evasion and fraud. However, if the Americans enact new laws to combat tax fraud, we will see significant changes in the tax haven business that will make the distinction between evasion and fraud moot.
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