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International convention on tax frauds
May, 18th 2009

Mobility of international capital coupled with access to tax heavens has facilitated amnesty and global tax holiday for owners of such capital said an anonymous tax administrator. To strike at the very root of what OECD also refers to as harmful tax practices pursued by jurisdictions encouraging tax evasion, it has done pioneering work in the past few decades by prescribing standards and directives, including ranking countries on their transparency and willingness to share information on tax defaulters.

The debate has surfaced with last year' reports that the German government had in its possession data on possible tax evaders and has offered to provide such information to countries. What has added fuel is the US IRS move to overcome the Swiss banking secrecy code to unearth information on US tax defaulters.

Back home, a public interest litigation petition was filed in the Supreme Court seeking suitable directions to the government to initiate action against Indians who have illegally siphoned off monies and deposited unlawfully in Swiss banks. The apex court is yet to admit the PIL.

Swiss banking secrecy code
The Swiss Banking Laws date to the early 30's and owes its origin to prevention of Nazi authorities' attempts to investigate assets held in Switzerland and belonging to Jews and "enemies of the state". The secrecy law firstly does not protect private banking information; instead, the protection is similar to confidentiality protection between an attorney and his client. The Swiss administration views the right to privacy as a fundamental principle which ought to be protected by all democratic countries. While secrecy is protected, in practice all bank accounts are linked to an identified individual, and a Swiss prosecutor or judge may issue a "lifting order" to grant law enforcement agencies access to information relevant to a criminal investigation.

Swiss law distinguishes between tax evasion and tax fraud. International legal assistance and cooperation is also granted for criminal investigations. Banking secrecy may be lifted by a court order in cases of 'tax fraud' or 'severe cases of tax evasion'. However, information is not provided if the request constitutes a mere fishing expedition. On part of Switzerland, no legitimate stance is spared to ensure that the confidence of the world's richest is maintained by the Swiss banking community which constitutes the backbone of the economy.

Exchange of information clause under the tax treaty
The OECD and UN model tax conventions underscore the importance of exchange of information by earmarking a separate article titled "Exchange of information" which provides a statutory recognition to a process by which treaty partners share information.

The information exchange should be relevant to carrying out provisions of the convention or domestic laws of the contracting state concerning only taxes. Generally, the convention cannot impose an obligation to collect and exchange information where administrative measures are at variance with the law of the other contracting state.

In other words, a contra-cting state is not bound to exchange information, which is not obtainable in the normal course of the administration of its state. For instance, if India views an act as an exchange control violation or money laundering and such acts are not considered as an economic offence in the treaty partner jurisdiction, information clause for such acts can not be invoked under international convention.

Tax treaties also provide for secrecy of information and govern its usage. This is based on the premise that reciprocal assistance between tax administrations is feasible only if each administration is assured that the other will treat the information with adequate confidentiality. The UN model specifically stipulates that exchange of information should be in particular, for the prevention of fraud or evasion of such taxes. However, this phrase is not present in the OECD Model convention. Indian tax treaties are predominantly based on the UN model convention.

Is the US IRS action against Swiss banks unilateral ?
Under the US-Swiss 2003 amended treaty, provisions that allow exchange of information protected by the banking secrecy code is permitted only where the information is necessary for the prevention of "tax fraud or a similar offence".

What drove the IRS was the administration's multi-pronged investigation in 2008 to uncover the identity of US citizens with secret accounts in a Swiss bank. This was followed by a Federal Grand order in January 2009 declaring the Swiss banks' head of wealth management a fugitive after he failed to surrender on charges of conspiracy for helping Americans to conceal assets and avoid paying taxes. On threat of prosecution, the Swiss bank agreed to pay a hefty fine and reveal details of Swiss accounts.

The US IRS simultaneously filed another suit against the bank to reveal its 52,000 American client details by issuing John Doe summons. A John Doe summons is issued when the prosecution does not know who might be violating the law. Some US legal experts believe that if it were intended that the summons power could be used to obtain information, which could not be obtained under the tax treaty, it is excepted that such intent be discussed in treaty negotiations. Hence, legal experts are circumspect about IRS overzealous actions. And more recently, the Obama administration endorsed a legislation to crackdown on offshore tax heavens, raising the stakes in a showdown between the US and bank secrecy nations.

What could be Indias challenge
The Swiss-India tax tre-aty provides for a standard exchange of information cla-use by virtue of which both countries can exchange information under their respective laws in the normal course of administration, as is necessary for carrying out the provisions of treaty in relation to taxes.

Attempts made by India in the past suggests that the Swiss authorities have refused to provide information (with regard to bank deposits) on the ground that such information was not at the disposal of the tax competent authorities and that the requisition was only for the enforcement of Indian domestic law such as FEMA or anti-money laundering.

Recognising the policy on banking secrecy law and information exchange has come under criticism, in March 2009, Switzerland agreed to renegotiate more effective tax cooperation with the United States to bolster tax information exchange. Exchange clauses under Indias treaty partners meet basic standards unlike the US, which besides being comprehensive are sophisticated and seek to obtain relevant information, notwithstanding banking secrecy laws of a treaty partner that otherwise prevents disclosure. The US administration drives such objectives with tactful negotiations and years of diplomacy.

Whilst, it would be interesting to observe unprecedented developments on international tax conventions, we shall separately witness the outcome of the writ petition in the apex court immediately after the courts summer break. I am confident either or both will contribute to (re)shape our policy and administration.

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