Mobility of international capital coupled with access to
tax havens has facilitated amnesty and global tax holiday for owners of such
capital — said an anonymous tax administrator. To strike at the very root of
what OECD also refers to as harmful tax practices pursued by jurisdictions
encouraging tax evasion, it has done pioneering work in the past few decades
by prescribing standards and directives, including ranking countries on their
transparency and willingness to share information on tax defaulters.
The debate has surfaced with last year’ reports that the
German government had in its possession data on possible tax evaders and has
offered to provide such information to countries. What has added fuel is the
US IRS move to overcome the Swiss banking secrecy code to unearth information
on US tax defaulters.
Back home, a public interest litigation petition was filed
in the Supreme Court seeking suitable directions to the government to initiate
action against Indians who have illegally siphoned off monies and deposited
unlawfully in Swiss banks. The Apex Court is yet to admit the PIL.
Swiss banking secrecy code :
The Swiss Banking Laws date to the early ’30s and owe its
origin to prevention of Nazi authorities’ attempts to investigate assets held
in Switzerland and belonging to Jews and ‘enemies of the state’. The secrecy
law firstly does not protect private ban-king information; instead, the
protection is similar to confidentiality protection between an attorney and
his client. The Swiss administration views the right to privacy as a
fundamental principle which ought to be protected by all democratic countries.
While secrecy is protected, in practice all bank accounts are linked to an
identified individual, and a Swiss prosecutor or judge may issue a ‘lifting
order’ to grant law enforcement agencies access to information relevant to a
criminal investigation. Swiss law distinguishes between tax evasion and tax
fraud. International legal assistance and cooperation is also granted for
criminal investigations. Banking secrecy may be lifted by a court order in
cases of ‘tax fraud’ or ‘severe cases of tax evasion’. However, information is
not provided if the request constitutes a mere fishing expedition. On part of
Switzerland, no legitimate stance is spared to ensure that the confidence of
the world’s richest is maintained by the Swiss banking community which
constitutes the backbone of the economy.
Exchange of information clause under the tax treaty, The
OECD and UN model tax conventions underscore the importance of exchange of
information by earmarking a separate article titled ‘Exchange of information’
which provides a statutory recognition to a process by which treaty partners
share information.
The information exchange should be relevant to carrying out
provisions of the convention or domestic laws of the contracting state
concerning only taxes. Generally, the convention cannot impose an obligation
to collect and exchange information where administrative measures are at
variance with the law of the other contracting state.
In other words, a contracting state is not bound to
exchange information, which is not obtainable in the normal course of the
administration of its state. For instance, if India views an act as an
exchange control violation or money laundering and such acts are not
considered as an economic offence in the treaty partner jurisdiction,
information clause for such acts cannot be invoked under international
convention.
Tax treaties also provide for secrecy of information and
govern its usage. This is based on the premise that reciprocal assistance
between tax administrations is feasible only if each administration is assured
that the other will treat the information with adequate confidentiality. The
UN model specifically stipulates that exchange of information should be ‘in
particular, for the prevention of fraud or evasion of such taxes’. However,
this phrase is not present in the OECD Model convention. Indian tax treaties
are predominantly based on the UN model convention.
Is the US IRS action against Swiss banks unilateral ?
Under the US-Swiss 2003 amended treaty, provisions that allow exchange of
information protected by the banking secrecy code is permitted only where the
information is necessary for the prevention of ‘tax fraud or a similar
offence’.
What drove the IRS was the administration’s multi-pronged
investigation in 2008 to uncover the identity of US citizens with secret
accounts in a Swiss bank. This was followed by a Federal Grand order in
January 2009 declaring the Swiss banks’ head of wealth management a fugitive
after he failed to surrender on charges of conspiracy for helping Americans to
conceal assets and avoid paying taxes. On threat of prosecution, the Swiss
bank agreed to pay a hefty fine and reveal details of Swiss accounts.
The US IRS simultaneously filed another suit against the
bank to reveal its 52,000 American client details by issuing ‘John Doe’
summons. A ‘John Doe’ summons is issued when the prosecution does not know who
might be violating the law. Some US legal experts believe that if it were
intended that the summons power could be used to obtain information, which
could not be obtained under the tax treaty, it is expected that such intent be
discussed in treaty negotiations. Hence, legal experts are circumspect about
IRS overzealous actions. And more recently, the Obama administration endorsed
a legislation to crackdown on offshore tax havens, raising the stakes in a
showdown between the US and bank secrecy nations.
What could be India’s challenge ? The Swiss-India tax
treaty provides for a standard exchange of information clause by virtue of
which both countries can exchange information under their respective laws in
the normal course of administration, as is necessary for carrying out the
provisions of treaty in relation to taxes.
Attempts made by India in the past suggest that the Swiss
authorities have refused to provide information (with regard to bank deposits)
on the ground that such information was not at the disposal of the tax
competent authorities and that the requisition was only for the enforcement of
Indian domestic law such as FEMA or anti-money laundering.
Recognising the policy on ‘banking secrecy law’ and
‘information exchange’ has come under criticism. In March 2009, Switzerland
agreed to renegotiate more effective tax cooperation with the United States to
bolster tax information exchange.
