Actions Amounting to Tax Fraud

Actions Amounting to Tax Fraud

Federal Supreme Court – Case no. 2A.233_2003, 22 December 2003

Summary

Facts

X., the founder and president of Y. Inc. and Z. Inc. was suspected of not having fully disclosed all income in the years 1996-1999. The IRS requested the Swiss Federal Tax Administration (FTA) to collect and provide all relevant information related to X., Y. Inc., and Z. Inc. as X. was under the suspicion of having invested undeclared funds with the assistance of a Swiss asset management company (F. AG).
F. AG produced documents to the FTA. Subsequently, the FTA complied with the request by forwarding the requested information to the IRS and issued a decision which the three taxpayers appealed to the Federal Supreme Court.

Issues

In this case, the Court’s focus was on whether the taxpayer’s actions amounted to “tax fraud and the like” as is required by Art. 26 (1) of the Swiss-US tax treaty to legitimize the exchange of information. The court also ruled on the issue of whether the disclosure of information to the IRS violated Swiss banking secrecy laws.

Decision

In determining the term “tax fraud or the like” the Court found that for the conduct in question to qualify, the taxpayer had to engage in actions that caused or were intended to cause an illegal and substantial reduction in the amount of taxes paid. Furthermore, the taxpayer making use of a manipulative scheme of lies or questionable business arrangements are further indicia of fraudulent behavior.

In this case, X. utilized a multitude of bank accounts in the names of his companies but some of the accounts were not reflected in the business records of his companies. An altogether intransparent, fraudulent scheme as viewed by the Court and in accordance with Art. 26 (1) of the treaty.

Additionally, the Court elaborated on the level of suspicion required in order to comply with requests for administrative assistance. The Court stated that the IRS, at the time of making the request, was not obligated to prove actual fraudulent behavior but rather show an adequately suspicious set of circumstances that warranted further inquiry. The Court also mentioned that the FTA was merely required to assess the legitimacy of the suspicion and not obligated to conduct investigations of its own.

Regarding Swiss banking secrecy and according to Art. 47 (4) of the Swiss Federal Bank Law, the Court noted that requests for administrative assistance in cases of tax fraud prevail over banking secrecy interests.

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