Legitimate Group Request or IRS Fishing Expedition?
Federal Supreme Court – Case no. 2C_269/2013, 5 July 2013
On September 26, 2011, the Internal Revenue Service (IRS) filed a request for administrative assistance with the Swiss Federal Tax Administration (FTA).
On April 5, 2012, the Federal Administrative Court granted an appeal that had been brought against the decision by the FTA, enjoining the FTA from transferring any information.
The court held that the request primarily concerned people who were at most guilty of tax evasion – an offense for which the Swiss-US Tax Treaty does not foresee the granting of administrative assistance.
As a result of this judgment, the FTA reconsidered decisions it had already issued in connection with the aforementioned request for administrative assistance. Among them was a decision concerning the individuals A.X., B.X., and C.X. as well as the legal entity Y. Ltd.
On July 3, 2012, the IRS filed a new request for administrative assistance asking for information pertaining to certain U.S. taxpayers who held domiciliary companies that held certain accounts or securities accounts with Credit Suisse.
The IRS requested the disclosure of information regarding US taxpayers who, at any point in the years 2002 to 2010, had a signatory right or power of disposition as to bank accounts with Credit Suisse or were the beneficial owners of accounts held with Credit Suisse.
In a decision, issued on November 8, 2012, the FTA concluded that A.X. and B.X. were the beneficial owners of Y. Ltd. and that all conditions to provide the IRS with administrative assistance were met in their case.
Subsequently, A.X., B.X., C.X., and Y. Ltd. filed a complaint before the Federal Administrative Court against the FTA’s decision.
On March 13, 2013, the Federal Administrative Court dismissed the complaint. It instructed the FTA to inform the IRS that the information transferred was only to be used in procedures that concerned A.X.
A.X., B.X., C.X., and Y. Ltd. appealed this decision to the Federal Supreme Court.
The Court was asked to answer whether granting administrative assistance based on non-individualized group requests was permissible under Art. 26 of the Swiss-US Tax Treaty or whether this amounted to a prohibited fishing expedition.
In a first step, the Court determined that the purpose of the exchange of information was to prevent the commission of tax fraud and the like. The Court furthermore noted that the exchange of information was not merely a preemptive measure in order to prevent tax fraud but should also be granted retroactively in order to ensure adequate prosecution of committed tax fraud.
The Court went on to consider what level of suspicion was necessary in order to grant the exchange of information.
It noted that the requesting authority (IRS) was required to describe the circumstances of the case to the intended grantor of information (FTA). However, this did not mean that the requesting authority necessarily be in possession of all relevant details at the time of making the request.
The Court deemed such a requirement too high of a standard, outside of the scope and therefore in violation of Art. 26 (1) of the Swiss-US Tax Treaty. Consequently, the names of individuals implicated by the requesting authority need not be mentioned as part of the request. Rather, as long as the circumstances in connection with presented facts showed that the individuals were involved in the matter. Interpreting Art. 26 of the Swiss-US Tax Treaty and noting the absence of a provision to the contrary in the corresponding Protocol, the Court confirmed that requests for information that were not individualized i.e. did not contain the names of suspects were permissible.
By contrast, a request must not constitute a fishing expedition – a pejorative term for non-specific search for (incriminating) information.
The request is forbidden if it does not comply with this expression of the principle of proportionality. Consequentially, if the authority seeking information cannot or will not mention the names of individuals in question, it must make up for this by describing the circumstances of the case in adequate detail and show how the request is necessary to prevent tax fraud or the like.
If it fails to establish a reasonable suspicion that tax fraud has or may have occurred, group requests will not be granted pursuant to Art. 26 of the Swiss-US Tax Treaty.
In this case, the Federal Supreme Court noted that the IRS’ request complied with the requirements of Art. 26 of the Treaty. Particularly the usage of domiciliary companies that were not subject to US taxation was described in satisfactory detail. The fact that such a structure was employed by A.X., B.X. and C.X. plausibly raised sufficient suspicion that tax fraud may have been perpetrated.
In conclusion, the Federal Supreme Court ruled in favor of the tax authorities and granted the exchange of information.