UBS tax deal reduces uncertainty; problems remain

ZURICH Fri Jul 31, 2009 11:31am EDT

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ZURICH (Reuters) - A landmark agreement between Switzerland and the United States to settle tax litigation involving UBS is unlikely to result in a quick recovery at the Swiss bank, even if it reduces uncertainty.

The U.S. government said on Friday it had reached an agreement in principle with UBS, the world's second-largest wealth manager by assets, on the major issues in their tax evasion dispute and asked for another week to hammer out the details of a settlement.

UBS shares rallied as much as 6.1 percent after the announcement, but analysts said that the bank still had to reverse the client flows it has lost due to the tax spat and the subprime crisis.

"The share price going up kind of tells you that a settlement would definitely be a big step for UBS. But this does not mean that there will be no more problems," said Vontobel analyst Teresa Nielsen.

"If the tax issues come finally off the table, there is a basis to rebuild client inflows, but it will take some time."

UBS is expected to post a second quarter loss of 1.1 billion Swiss francs ($1.01 billion) on Tuesday and analysts expect the bank to continue to suffer billions of francs of client withdrawals at its wealth and asset management divisions.

"People are hoping for a rapid and final solution. This would remove a large uncertainty factor from the bank," said a Swiss-based trader.

The announcement of an agreement in principle follows months of efforts by Washington to overcome Switzerland's strict bank secrecy laws by forcing UBS to identify thousands of wealthy American clients suspected of using the bank to conceal their assets and evade U.S. taxes.

Florida federal court judge Alan Gold agreed on Friday to hold another status conference on August 7 to give time to UBS and the Internal Revenue Service to finalize a settlement and postponed a court hearing to August 10 from August 3.

The U.S. tax dispute has been a test to the resilience of Swiss bank secrecy and has been closely watched by the multi-trillion dollar global offshore banking industry, which is also coming under pressure from G20 nations seeking to hunt down tax money in offshore centers.

The U.S. Internal Revenue Service had said earlier this year it was preparing to pursue other non-U.S. banks for tax-related charges [ID:nN27438729] and European governments hungry for tax revenues are seeing if they can use the settlement framework to pursue European bank clients in offshore centers.

Shares in other wealth managers also rose, with Credit Suisse up 1.5 percent and Julius Baer up 4.6 percent.

DETAILS KEY

A full assessment of the impact of the settlement for UBS will only be possible once the details of the agreement are disclosed.

A settlement is expected to involve the sharing of some UBS client data with U.S. tax authorities and the two governments have been looking at ways to do so without formally breaching existing bilateral tax treaties, sources familiar with the situation told Reuters before Friday's announcement.

"This is definitely a step forward. But it is important to know the details," said Georg Kanders, an analyst with WestLB.

"We do not know at what costs for UBS a settlement will be agreed."

The Swiss justice ministry has consistently declined to comment on the deal.

Tax lawyers have said that if UBS were to give out the majority of the 52,000 names the IRS is seeking, this would amount to capitulation for Swiss bank secrecy.

Analysts have also said that if UBS were to agree to a multi-billion payment to settle the case as speculated by the Swiss press, it would seriously hamper the bank's recovery.

UBS Chairman Kaspar Villiger said earlier this month the tax talks were focusing on client names rather than on a potential payment by UBS and a source familiar with the issue has told Reuters anything above $1 billion would be a surprise.

UBS, which is struggling to recover from the subprime crisis after posting the biggest annual loss in Swiss corporate history last year, agreed in February to pay $780 million to settle separate but related criminal tax fraud charges.

The Swiss bank giant had to accept a 6-billion-Swiss franc state cash injection last year. When the bank raised $3.5 billion of new capital last month, the government said it had agreed not to sell its stake before August 4 as part of the deal.

(Editing by Sitaraman Shankar)

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