Swiss Court Kills IRS-UBS Deal

The Federal Administrative Court of Switzerland (FACS) ruled that a deal between the IRS and Swiss bank UBS last summer violates Swiss law and cannot be executed. The agreement, reached after months of political and financial wrangling, would have revealed the identities of some 4,450 American users of anonymous Swiss bank accounts as part of larger efforts by the administration to crack down on the use of off-shore tax shelters.

The case was brought to the court on behalf of 26 UBS clients who didn’t want to have their data handed over to the U.S. government. The FACS, the second highest court in the country under the Federal Supreme Court of Switzerland, said that the deal didn’t take into account Switzerland’s extraordinarily strict financial privacy laws, a tradition that goes back to the medieval era, and was therefore illegal. According to Swiss law, such information can only be handed over in the event of active tax fraud. Despite failures to fill out a W-9 form in the U.S., the Swiss court did not believe that this constituted active tax fraud. The ruling threatens the entire deal, as it could be applied to any of the thousands of accounts that are being promised to the IRS.

The Swiss government is still deciding on what to do according to Forbes. It has three options: renegotiate the treaty (which, given how difficult it was to negotiate the current one, is not an attractive option), bring the law in line with the agreement (which would be extraordinarily unpopular with the Swiss who already fear for their financial privacy) or appeal to a higher court.

On the U.S. side, it’s worth noting that the deal was constructed as a condition to drop a civil suit seeking the identities of more than 50,000 UBS account holders. Should Switzerland not make good on its deal, there is a chance that the U.S. could resume its litigation against the neutral mountain country.