On 2 July 2019, the IRS sent an information request to the Swiss Federal Tax Administration (SFTA). The IRS sought information relating to transactions that occurred between 1996 and 2017 involving a Swiss bank account that was owned by a non-US entity. The non-US entity invested in US securities. Form A submitted to the IRS defined “US Persons” as the beneficial owners of the non-US entity owning the bank account. Per the same Form A these US persons had placed several orders on the Swiss bank account that were not reported on the Form W-8BEN. In addition, the Swiss bank had neither a Form W-9 in its files nor did it provide a Form 1099 reporting taxable income from the transactions. As a result of the conflicting information provided about the account, the IRS requested assistance from the SFTA in obtaining more information.
On 5 July 2019, the SFTA ordered the Swiss bank to furnish it the requested information from the IRS regarding the bank account. When the bank complied with the SFTA’s order, two unnamed taxpayers demanded to review the SFTA’s dossier. After reviewing the dossier, the taxpayers objected to the exchange of information.
On 14 January 2020, the SFTA partially upheld its decision to assist the IRS with its investigative proceedings for the years January 2011 (as noted below, the reference to 2011 was a mistake) to March 2008. The taxpayers objected, appealed the decision to the Administrative Court, and asked it to reconsider the SFTA’s position. On 12 January 2022, the Administrative Court reaffirmed the position of the SFTA while also instructing the SFTA to clarify that any information that was furnished in accordance with Article 26 of the Switzerland-United States tax treaty could only be used against the two unnamed taxpayers. The taxpayers appealed this decision to the Court.
Judicial Findings of the Swiss Federal Supreme Court
The two unnamed taxpayers made several arguments to the Court:
- The lower court arbitrarily failed to consider facts in rendering its decision.
- The lower court violated Article 26 of the 1996 Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation ("Treaty") in two ways:
- The Treaty does not permit the exchange of information in connection with criminal tax matters.
- The requested information cannot be transmitted to the United States’ Department of Justice (DOJ) because it is a prosecutorial body, and not a “competent authority” under the treaty.
- The SFTA should have sought permission from the Swiss Federal Office of Justice (FOJ) before agreeing to provide assistance to the IRS, because the information was going to be transmitted to the DOJ. Therefore, the information supplied to the SFTA was in violation of Article 20(3) of the Swiss Act on International Administrative Assistance in Tax Matters.
Prior to responding to the taxpayers’ arguments, the Court first determined which laws governed the case. It held that Article 26 of the Treaty, paragraph 10 of the 1996 Protocol to the Treaty, and the Memorandum of Understanding to the Treaty governed the case.
There was no arbitrary failure to consider facts
The Court held that the facts were not omitted arbitrarily. Arbitrariness occurs when a piece of evidence isn’t considered that could materially change the outcome of the case. The taxpayers made several arguments in support of their position. First, they stated that the lower court omitted facts which indicated that the requested information would be provided to the DOJ for prosecutorial proceedings. The Court found that the IRS’s information request stated how the information was going to be used and that the omitted facts were mentioned in the lower court’s decision on appeal. Second, they argued about the definition of “conspiracy to defraud the United States”. The Court stated that the definition of the phrase wouldn’t change the outcome of the case. Third, the taxpayers contended that the DOJ is the prosecutorial body in the United States, and the lower court did not consider the evidence that they introduced to support that finding. They reasoned that the DOJ’s involvement would show that the information’s intended use was to prosecute them. The Court stated that the DOJ’s authority in the United States wouldn’t affect the outcome of the case.
Article 26 of the Treaty was not violated
Permission is not needed to exchange information relating to criminal tax matters
The Court held that under Article 26 of the Treaty, information can be exchanged to prevent tax fraud. It explained that the lower court analyzed Article 26 of the Treaty, and it found that the offenses alleged by the IRS were covered by the Treaty, and therefore, the IRS’s information request could be granted. The Court reasoned that the offenses alleged by the IRS supported the definition of tax fraud as stated in paragraph 10 of the 1996 Protocol to the Treaty. The Court stated that the information furnished to the IRS could be used when there is evidence that the taxpayers are attempting tax evasion. As such, the Court found that the IRS’s request for information regarding the bank account was in good faith, and that it was in accordance with the provisions of the Treaty. Moreover, the Court found that it was possible that the business structure and the documents provided were used to illegally reduce US tax liabilities and mislead the IRS. Furthermore, the Court found that Article 26, paragraph 1 of the Treaty authorized the use of information in prosecutorial proceedings. It continued to state that the information can be provided to the DOJ without prior authorization from the Swiss authorities.
The DOJ is a relevant authority
The Court held that the DOJ is a relevant authority under Article 26, paragraph 1 of the Treaty. It reasoned that Article 3, paragraph 1 of the Treaty provides general definitions to terms listed in the Treaty. There, “competent authority” is defined as the Secretary of Treasury or his representative for the United States. The Court stated that Article 26, paragraph 1 of the Treaty lists the authorities who can receive information; however, it mentions “concerned” authorities and not “competent” authorities. The Court declined to limit the scope of the authority that can receive information based on the concepts of “concerned” and “competent”. In addition, the Court stated that the question of whether the DOJ is a “concerned” authority under Article 26 of the Treaty falls under US law. It further ascertained that criminal tax matters fall within the DOJ’s jurisdiction, as stipulated on its website.
Article 20(3) of the Swiss Act on International Administrative Assistance in Tax Matters is not applicable
The Court held that Article 20(3) of the Swiss Act on International Administrative Assistance in Tax Matters is not applicable to information requested under Article 26 of the Treaty. Article 20(3) states that if the requested information is going to be used for a non-tax purpose or transmitted to another country, the SFTA must give its consent. Furthermore, if the information will be provided to prosecutorial bodies, then the SFTA and the FOJ must agree before providing the requested information. However, Article 20(3) cannot conflict with a tax treaty. The Court determined that the Swiss Act on International Administrative Assistance in Tax Matters was enacted to address requests for information to be used for non-criminal tax matters. The Court explained that the Swiss government wanted to adapt exchange of information clauses for tax matters to Article 26 of the OECD’s Model Convention on Income and Capital (“OECD convention”). The Court further reasoned that Article 26 of the OECD convention states how the requested information may be used, which includes criminal tax purposes. The Court found that under the OECD convention, the requesting state may not use the information for non-tax enforcement purposes unless both countries have laws that allow it to be used for a purpose not related to tax enforcement and the country providing the information authorizes that use. The Court reiterated that Article 26 of the Treaty determines when a request for assistance may be initiated and allows for information related to tax evasion to be provided to prosecutorial bodies. Recognizing that Article 26 of the Treaty and Article 26 of the OECD convention differ, the Court further concluded that neither Article 26 of the Treaty nor Article 20 of the Swiss Act on International Administrative Assistance in Tax Matters required permission from both countries before the exchange of such information.
In light of the Court's decision, taxpayers should be aware that the Treaty does not prevent an information exchange with the IRS when there is evidence of tax evasion. Furthermore, any information that is obtained by the IRS may be used in criminal tax proceedings if tax evasion is assumed. However, the use of that same information is impermissible for non-tax enforcement purposes.