Switzerland is moving towards FATCA implementation

in Financial Services, 22.06.2012

On June 21, the Swiss Federal Department of Finance announced that the US and Switzerland will enter into an intergovernmental agreement. This agreement is different than the one published e.g. with Germany or France to the extent that all FFI’s need to enter directly into an agreement with the IRS and there will be no automatic information exchange. However, the US will be able to use the “administrative assistance” (Amtshilfe) in order to get the names of the recalcitrant account holders.

The following key elements have been agreed according to yesterday’s publication:

  • All FFI within Switzerland will need to become FATCA compliant
  • The reporting to the IRS of the account holder information will be allowed (waive art. 271 of the Swiss penal code)
  • There will be no withholding requirements for recalcitrant account holder

In return:

  • The US will allow to specifically define e.g. the local FFI rules for Switzerland (“deemed compliant status”)
  • No withholding applies to FFI’s within Switzerland (as every Swiss financial institution will be compliant) and for recalcitrant account holder
  • Certain relaxation for the FATCA implementation

Overall assessment

By this agreement the IRS is now a step closer to achieve their primary objective. They are interested in the names of the account holders and not in getting proceeds from withholding. We therefore consider this being a step towards implementation of FATCA in Switzerland. It somehow creates additional uncertainty, especially to the extent that certain relaxation for the FATCA implementation will be considered for Switzerland. It is however unclear what these exactly are.

Furthermore, it is now clearer that it will be dealt with the reporting and withholding restrictions around art. 271 of the Swiss penal code. Under the assumption that anyway all Swiss FFI’s are FATCA compliant, they will not face the withholding problem.

Implication for collective investments schemes

We believe that with the announcement of certain relaxation of the FATCA implementation, more counterparties, that are resident in Switzerland or another country that has or enters into a similar agreement with the IRS, will be considered FATCA compliant. That will certainly help in order to facilitate implementation of the requirements and ease the pressure on the value chains of the products (although a thorough value chain assessment is still required).

Implications for insurance companies

The issue around exiting recalcitrant account holders (i.e. a cancelation of a life insurance policy is not possible) seems now to be addressed. However, Insurance companies might now be faced with group requests under the “administrative assistance” (Amtshilfe) and need to prepare for that accordingly.

Implications for banks

Similar to the insurance companies neither an exit of a recalcitrant account holder nor the withholding on proceeds is anymore required. However, Banks will as well potentially face more group requests under the “administrative assistance”. The introduction of a layer of countries that are now entering into intergovernmental agreements will add another category of FFI’s, which in practice will increase the complexity for implementation. Currently, we do not believe that a large number of banks will profit from the new categories (smaller, local FFI’s) as the terms “small” and “local” as per proposed FATCA regulation is defined as USD 175 million total assets and 98% of the accounts need to be domestic. As a result the ongoing impact analysis projects of FATCA will not be significantly affected.


3 Comments

  1. [...] just came across this article http://blog.kpmg.ch/financial-services/switzerland-is-moving-towards-fatca-implementation/, I don’t recall if anyone has brought it up yet, but I wanted to share my thoughts on it for [...]

  2. Michael Schneebeli

    Thank you for your comment. FATCA has a significant effect on all FFIs (small to large) and in particular on their clients. Therefore we are committed to provide solutions to our client for implementing FATCA in a practical and efficient manner.

    The current publications by the two countries (Switzerland and U.S.A.) do reflect a mutual agreement to enter into discussion and set the principal framework on what the final agreement shall include. The principles are formulated on a high level and subject to negotiations. Nevertheless, we would like to provide you with some more insight with respect to your concerns:

    Background
    Article 271 “Unlawful activities on behalf of a foreign state” of the Swiss Penal Code states:
    “1. Any person who carries out activities on behalf of a foreign state on Swiss territory without lawful authority, where such activities are the responsibility of a public authority or public official,
    any person who carries out such activities for a foreign party or organisation,
    any person who encourages such activities,
    shall be liable to a custodial sentence not exceeding three years or to a monetary penalty, or in serious cases to a custodial sentence of not less than one year.
    2. Any person who abducts another by using violence, false pretences or threats and takes him abroad in order to hand him over to a foreign authority, party or other organisation or to expose him to a danger to life or limb shall be liable to a custodial sentence of not less than one year.
    3. Any person who makes preparations for such an abduction shall be liable to a custodial sentence or to a monetary penalty.”

    This article should not be confused with article 273 “Industrial espionage” of the Swiss Penal Code and Art. 47 “bank client confidentiality” of the Swiss Banking Law. Article 271 of the Swiss Penal Code “only” rules that no person can carry out activities on behalf of a foreign state, whereas article 273 SPC and article 47 BankL protect the data of the customers.
    It has to be noted that article 271 CPS has not been changed as per now. A change in law requires a predefined process, which might be subject to a referendum and hence a public vote.

    Why is Switzerland planning to adjust article 271 SPC while keeping Art 273 SPC and article 47 BankL?
    Article 47 BankL can be waived by the client as the bank confidentiality within Switzerland is a right of the client.
    If the client agrees that data can be exchanged, Art. 273 SPC is not applicable as the information is no longer a “secrecy”.
    Also the bank confidentiality can be waived, the collection of the data as well as the reporting on behalf of the IRS could still be seen as illegal under article 271 SPC. This as a consequence that the current framework requires the banks to report the data directly to the IRS.
    The same is thru with respect to the withholding agent function under which a Swiss Bank would collect taxes on behalf of the tax authority of a foreign country. Article 271 cannot be waived by any party.
    Other countries (Model I), which have similar bank confidentiality rules, avoid this issue by collecting and reporting the data on behalf and through the local tax authority as Swiss Banks did historically).

    Consequently, expect that the adjustment of article 271 SPC will enable Swiss Banks to report only customer information under a valid waiver as well as to withhold on FATCA relevant payments. We further expect that it will enable banks to report on the recalcitrant account holders (in aggregated format) without disclosing confidential data of the customer. Client data, for which no valid waiver is available, is still protected and reporting, without a proper administrative assistance (Amtshilfeverfahren), not possible.

    Nevertheless, you have to be aware that the administrative assistance will be eased and so called “fishing expedition” will most probably be possible.

  3. Jeff D Tom

    @Michael Schneebeli Thanks for that
    Not to forget 261bis CPS, anti-discrimination (“American” or US Person is an ethnic group or a group of the same) incorporating the Swiss constitutional protections of anti-discrimination, economic liberty, protection of the sphere privé, as well as the Art 2 CFS directive that the Confederation protect the rights of the people and the independance of Switzerland.

    FATCA implementation is inconsistent with Swiss democratic and constitutional principles.

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