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February 26, 2010 2:20 PM

UBS Tax Case Still Twisting And Turning

Posted by Brian Baxter

The U.S. may have trumped Switzerland in Olympic men's hockey on Wednesday, but its tax battle with Switzerland continues.

Swiss news agencies reported on Wednesday that the government would ask Zurich-based banking giant UBS to reimburse it for outside legal costs stemming from the bank's long-running legal dispute with U.S. authorities over allegations of tax evasion by U.S. citizens holding UBS accounts.

A deal to resolve that dispute by releasing the names of 4,450 U.S. citizens with UBS accounts was tentatively struck last August. UBS relied on lawyers from Wachtell, Lipton, Rosen & Katz, Cravath, Swaine & Moore and Florida's Stearns Weaver Miller Weissler Alhadeff & Sitterson in those negotiations, while the Swiss government retained Pillsbury Winthrop Shaw Pittman international trade practice chair Stephan Becker and Palm Beach, Fla.-based attorney John Dotterrer on the matter. (UBS also paid a $780 million fine and agreed to turn over nearly 300 client names as part of a deferred prosecution agreement it struck with U.S. prosecutors in February 2009.)

According to Swiss news reports, the dispute between U.S. regulators and UBS has so far cost the Swiss government $2.3 million. UBS has agreed to reimburse the government, which hired Becker and Dotterrer to file briefs in federal court in Florida defending the bank, more than $931,000 of that $2.3 million. The Swiss could eventually incur another $34.4 million in costs as a result of helping U.S. authorities track down American tax evaders. (It's unclear at this point how much of those costs relate to legal fees paid to outside lawyers; Becker and Dotterrer did not respond to requests for comment.)

Those costs do not include almost $8 million in government funds spent to cover the cost of appointing more judges to the Swiss Federal Administrative Court this year, according to a release issued by the Swiss justice ministry. Also not included: costs related to treaty requests and bilateral agreements, because those powers are traditionally Swiss government functions. (UBS received a $60 billion bailout from the Swiss government in October 2008.)

Those costs will only increase for every day that the UBS tax evasion saga drags on. The case cannot be closed until the settlement reached last August is approved by the Swiss parliament.

The tentative accord was nearly scuttled last month when a Swiss court ruled that the country could not disclose information on a wealthy American UBS accountholder alleged to have evaded U.S. taxes. Bloomberg reports that a Swiss court has now tossed two more cases involving UBS accountholders, putting pressure on the government to reach a legislative solution on further disclosures.

In order to do that, the Swiss parliament must pass a special law that overcomes the court rulings. That's not a sure thing, say some U.S. lawyers, who note that the legislation could go to a public referendum.

"The opposition party there could push for one, which means the entire Swiss populace would vote on this," says George Clarke III, a tax partner with Miller & Chevalier. "The Swiss are a proud people and extra-territorial enforcement by the U.S. [isn't popular]. But based on my conversations with folks in Switzerland, and this is by no means a guarantee, it still seems likely it will be ratified."

With the tentative accord not yet approved, U.S. citizens that missed an October 15 disclosure deadline can still file amended tax returns before UBS officially turns over any names to U.S. authorities, says Caplin & Drysdale tax partner Scott Michel. While those who do come forward won't face criminal charges, Michel says, it's unclear how much in civil penalties they might have to pay.

"We have clients that have decided to go forward and make voluntary disclosures without second thoughts," Michel says. "I think people believe that the Swiss legal system is somehow going to accommodate this agreement with the U.S. and that one way or another these names are going to be turned over."

Another wrinkle in the UBS tax evasion was a bombshell dropped by Swiss finance minister Hans-Rudolf Merz on Thursday stating--without going into much detail--that the country would no longer accept untaxed money from abroad.

Miller & Chevalier's Clarke says that Merz's statement is likely grounded in Switzerland's continuing quest to preserve its coveted bank secrecy laws while remaining on good terms with foreign governments.

"The Swiss implemented this with [other European governments], where they give them the withholding tax," Clarke says. "They're basically saying, 'We won't tell you who has money here, but anyone who does, we'll make sure that you get your piece of it.' That's the way the mechanics work."

As a result, Clarke says, Europeans with money in Switzerland can earn interest on those accounts, while their home countries get the withholding tax. A similar plan was proposed with the U.S., Clarke says, but it didn't address a problem plaguing regulators stateside: where did the money come in the first place from individuals diverting funds to Swiss accounts?

"[Merz's statement] sounds like a plan to fix that problem," Clarke says. "Now the question is how do they enforce that? Is this just going to be a representation that the person who deposits the money is going to make? If so, then it's kind of a joke, because everyone knows what the game is."

A date for a parliamentary vote on a law allowing the disclosure of data on UBS customers has not yet been set.

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