UBS May Escape ‘Game of Chicken’ as Lawmakers Vote on Treaty
UBS AG (UBSN) may escape a “game of chicken” played by Swiss lawmakers as the price of failure to back a tax treaty with the U.S. would be too high: the bank’s American operations and the country’s export industry.
Deputies in Switzerland’s lower house may support the treaty in a second vote today after last week rejecting the handover of details of as many as 4,450 suspected tax dodgers to U.S. authorities, according to academics and analysts, including Georg Lutz of the University of Lausanne.
The dispute stems from a U.S. crackdown on offshore tax evasion that led Switzerland to agree last August to give up account data. The parliament has to approve the accord, and the U.S. may opt to reopen a civil lawsuit and criminal prosecution unless the government honors the agreement.
“What we’re seeing at the moment is a high-stakes game of chicken,” said Evan Stewart, a lawyer at Zuckerman Spaeder LLP in New York, in an interview. Further legal proceedings “would seriously jeopardize UBS’s business in the U.S.,” he said.
The nationalist Swiss People’s Party, which voted against the deal last week in protest against a proposal to boost corporate taxes on bonuses, may back the accord today to avoid a clash with U.S. authorities.
“The People’s Party will eventually recognize the importance of the question and support the treaty,” said Martin Naville, the chief executive of the Swiss-American Chamber of Commerce, a lobbying group for Swiss and American businesses. Georg Lutz, a political scientist at the University of Lausanne, said the party “will give in” eventually.
UBS Chief Executive Officer Oswald Gruebel last week said he’s “confident” that parliament will approve the accord.
“Too much is at stake with this treaty,” This Jenny, a deputy in the upper house of parliament for the People’s Party, said June 9. “We can’t afford this posturing, and this going back and forth like adolescents. We should try to build bridges.”
UBS, Switzerland’s biggest bank, avoided U.S. prosecution in February 2009 by paying $780 million, admitting it helped wealthy Americans evade U.S. taxes from 2000 to 2007, and handing over account data on more than 250 U.S. clients. The next day, the U.S. sued Zurich-based UBS, seeking data on 52,000 Swiss accounts.
UBS settled that case in August, agreeing to hand over as many as 4,450 names to the Swiss government to review before passing them on to the Internal Revenue Service. Unless the Swiss disclose the names, the U.S. may extend the deferred-prosecution agreement beyond its term of 18 months and may reopen the lawsuit that sought 52,000 names.
The People’s Party and the Swiss Social Democratic Party voted against the accord in the lower house after they tied their approval to conditions. In the upper house, where the two parties’ support wasn’t needed, the accord was rubberstamped.
The Swiss legislature has until June 18, the last day of the current parliamentary session, to approve the treaty and circumvent a January court ruling that said the deal isn’t enforceable under current Swiss legal provisions.
If the lower house votes down the treaty, there won’t be another ballot, while the two houses will negotiate again if the lower house supports the treaty but asks for a referendum.
The People’s Party has said it will support the deal with the condition that lawmakers reject proposals to increase corporate taxes on bonuses. The Social Democrats are linking their support to a tax on bankers’ bonuses.
The People’s Party is the biggest party in the lower house with 58 deputies, potentially tipping the balance after the treaty was rejected with 104 votes to 76 last week.
John Cryan, UBS’s chief financial officer, said the bank would find it easier to recruit private bankers if the country backs the treaty, according to an analyst note from Helvea SA.
The accord also would help boost the morale of clients and staff in the U.S., who seem to have been “particularly spooked” by last week’s vote, said Peter Thorne, an analyst at Helvea, after attending a meeting with Cryan in London.
One face-saving option for the People’s Party is to accept the requests by all other parties to discourage “excessive” bonuses through higher taxation at the company level.
Christoph Blocher, the party’s vice-president and a former member of the government, was quoted by Tages-Anzeiger on June 9 as saying politicians may be able to “find a way out.”
Prosecution in the U.S. would put UBS “out of business the next day,” Robert Fink, a tax attorney at Kostelanetz & Fink LLP in New York, told Bloomberg News by telephone. “Financially, it could be catastrophic.”
“They could shut down UBS in the U.S.,” said George M. Clarke III, a tax attorney of Miller & Chevalier in Washington. “They could forbid the bank from accessing the Federal Reserve system. It could get ugly.”
Almost 37 percent of UBS’s 65,233 employees worked in the Americas at the end of 2009. UBS’s Wealth Management Americas unit managed 690 billion Swiss francs ($604 billion) at the end of the year.
A rejection would have a “massive negative effect on the entire Swiss economy,” the Swiss-American Chamber of Commerce wrote in a May briefing note, and Justice Minister Eveline Widmer-Schlumpf has said the agreement had removed “an existential threat” from UBS.
“Large and small Swiss companies with international business face uncertain times” regarding taxation, a potential tax haven status and possible discrimination in the U.S., the lobbying group said. “Overall, the potentially affected companies represent 35 percent of the Swiss economy with approximately 1 million jobs,” the chamber said.
Should lawmakers fail to approve the accord, the government may seek renewed negotiations with the U.S. authorities.
“I think Switzerland and UBS have a Plan B up their sleeves,” said Rainer Schweizer, a law professor at the University of St. Gallen. “I’m sure the government has examined some alternatives.”
Lawmakers are aware of the consequences.
“The Americans might not ask us whether they should implement retaliation measures,” Pirmin Bischof, a member of the lower house for the Christian Democrat People’s Party, said on June 7. “As a superpower, they will simply enact them, and we can gnash our teeth.”
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