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Update 16:55 (links added)  Bern, Switzerland (GenevaLunch) - The Swiss government Wednesday said it will ask Parliament to approve the August 2009 double taxation agreement with the US, raising it to the status of a tax treaty. The process will take time and, in the meantime, the government says it will continue to hold talks with the United States to resolve a five-day-old impasse over requests by the US for judicial assistance on 4,450 UBS clients’ accounts.

A high court decision last Friday, which cannot be appealed, limits the federal government to providing assistance in only 250 of the cases pending, where clear evidence of fraud under Swiss law appears to be present. Eveline Widmer-Schlumpf told journalists Wednesday that Switzerland has shared information on six accounts to date. The court’s ruling is based on three arguments, says the cabinet:

• that the agreement from August is an understanding only and does not carry the same weight as the 1996 double taxation treaty which is still in effect
• that the double taxation treaty makes a clear distinction between tax fraud and fraud-like activities versus tax evasion, even when carried out over time and involving large amounts of possible tax money owed
• that the August agreement cannot override the existing treaty.

The court itself suggested that the Federal Council ask for parliament’s approval of the agreement, which would then give it the force of a new treaty – as long as the US Congress also accepts it.

It would not normally go into effect until the treaty is signed by both countries, but the government says it has the legal right, given the danger to Switzerland of not respecting the agreement, to make the agreement’s approval date the effective one. This will allow Switzerland to continue working on the block of 4,450 cases.

Bern says in the short term it will ask the US to supply it with “detailed information on client accounts, gathered as part of the voluntary disclosure programme” under which 14,000-plus taxpayers turned themselves in. The US tax amnesty programme ended in mid-October. The Swiss cabinet notes that the US is calling the programme very successful. If Bern has sufficient information to indicate fraud, versus evasion, in at least some cases, it will be able to proceed with turning over information on these clients to the IRS tax authorities.

The Swiss government makes clear in its statement Wednesday its fear that if talks and negotiations with the US do not succeed the American government will return to its earlier legal threats. “The risk would be to see [the US] re-open its John Doe Summons civil lawsuit against UBS, which could result in an American court finding the bank liable and ordering it to turn over client information on the 4,450 accounts.”

Such a situation would pit US and Swiss law against each other, with UBS caught in the middle, legally obliged to follow two contradictory judgements.

Links to other sites: Business Week/Bloomberg, Le Temps (Fre)