Tom Burroughes Group Editor in London Wealth Briefing

Switzerland and the US have signed an agreement to implement the controversial FATCA tax law to make it easier for financial institutions in the Alpine state to comply with this recent US legislation.

The FATCA agreement was signed in Berne yesterday by state secretary Michael Ambühl and the US ambassador Donald Beyer. During its meeting on 13 February, the Swiss Federal Council had already given the financial officials approval for the agreement to be signed. Initialled on 3 December last year, the agreement simplifies how the US Foreign Account Tax Compliance Act operates, a statement from the Swiss government said.

The legislation, enacted in late 2010, requires what are called foreign financial institutions to report identified US accounts – or else pay a 30 per cent withholding tax. The costs of complying with this act have encouraged some organisations, reportedly such as HSBC and Deutsche Bank, to stop serving expat US clients.

Separately, the two countries have been negotiating on a possible deal under which US legal pursuit of Swiss banks for allegedly aiding tax evaders will be halted in exchange for industry-wide disclosure and settlement of any cases. Already, a number of Swiss banks, such as UBS and Julius Baer, no longer provide offshore account services to US clients.

FATCA requires all foreign financial institutions to conclude a contract with the US Internal Revenue Service that imposes reporting requirements on them regarding identified US accounts. In the case of grave errors being committed during implementation, the IRS may submit requests for information to the financial institutions concerned, about which it has to inform the Swiss authorities. On-site inspections by the IRS at the financial institutions concerned are not permitted, a statement from the Swiss government said.

The agreement, the government’s statement said, simplifies affairs for large sections of the Swiss financial industry. For example, social security funds, private pension funds and property and casualty insurers are excluded from the scope of FATCA.

Collective investment vehicles and financial institutions with a predominantly local clientele – at least 98 per cent of clients are from Switzerland or the European Union – are deemed FATCA-compliant under certain conditions and are subject only to a registration obligation and the associated obligations.

The statement said that the due diligence requirements for the identification of US clients, to which all other Swiss financial institutions are subject, are designed in such a way that the ”administrative burden is kept within reasonable limits”.

“The agreement ensures that the accounts held by US persons with Swiss financial institutions are disclosed to the US tax authorities either with the consent of the account holder or by means of group requests within the scope of administrative assistance. Information will not be transferred automatically in the absence of consent, and instead will be exchanged only on the basis of the administrative assistance clause in the double taxation agreement,” the statement said.

The US is phasing in the act from 1 January next year. Swiss financial institutions will be forced to implement FATCA from this date, irrespective of an agreement between Switzerland and the US, if they do not want to be excluded from the US capital market.

“Without an agreement, however, they could not benefit from simplified implementation and would thus be at a disadvantage relative to competitors in other financial centres. It is important therefore that the agreement can come into force on 1 January 2014,” the statement said.

“Owing to the urgency and importance of the matter, the Federal Council has decided to conduct an abbreviated consultation on the FATCA agreement as well as on the corresponding implementing act. Interested parties have four weeks to submit their views,” it continued.

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