August 6, 2009 / 2:31 PM / 11 years ago

SCENARIOS-UBS nearing U.S. tax settlement

ZURICH, Aug 6 (Reuters) - A protracted U.S. tax dispute with Swiss bank UBS UBSN.VX (UBS.N) is set to end with an out-of-court settlement that could be announced on Friday.

The settlement will be the result of a broader compromise that the governments of Switzerland and the United States are negotiating behind closed doors to end the damaging tax row.

U.S. Judge Alan Gold, who is presiding over the case, is holding a status conference on the case at 1245 GMT on Aug. 7 with lawyers from UBS and the U.S. Department of Justice. A trial against UBS is tentatively set for Aug. 10, but would be called off if an agreement is reached.

WHAT IS AT THE HEART OF THE MATTER?

As it fights tax cheats, the U.S. Internal Revenue Service (IRS) ordered UBS to disclose the identities of 52,000 U.S. clients suspected of having used secret Swiss accounts to dodge taxes. The request was called a “John Doe summons” as the IRS does not know the clients’ identities. [ID:nN19534438]

But UBS, backed by Berne, has refused to hand over the data, calling the blanket U.S. request a “fishing expedition” that would breach Swiss bank secrecy laws and existing bilateral tax agreements.

UBS has admitted wrongdoing in a separate but related tax fraud case and agreed in February to pay $780 million and hand over about 250 client names to settle criminal charges.

HOW CLOSE ARE WE TO A DEAL?

Talks on the UBS tax case reached a breakthrough on July 31 when UBS and the IRS told Judge Gold they had clinched an agreement in principle on the major issues. But they asked for more time to hammer out the details.

“There are some other issues that need to get resolved and we expect to be able to resolve them during the coming week,” U.S. Justice Department Attorney Stuart Gibson said at the time.

Sources familiar with the situation have told Reuters they expect a final agreement on Friday, but said the details of the deal would not be immediately made public.

COULD A FINAL DEAL BE POSTPONED AGAIN?

This is not to be ruled out. Although UBS and Washington have reached a framework for a settlement, they may need more time to iron out complex technical details and could ask for another postponement of the trial.

“Should we not reach a deal which is in line with our Swiss laws, a deal would be put in question,” Swiss Justice Minister Eveline Widmer-Schlumpt told Swiss newspaper Sonntag, although she added that she was optimistic a deal could be reached.

WHAT COULD THE TAX DEAL ENTAIL?

Switzerland, UBS and the U.S. government have kept mum with regards to the details of the draft tax agreement.

Contrary to what was reported by Swiss media, UBS is not going to pay a fine to settle the case, a U.S. government and a Swiss source familiar with the situation have said.

Sources familiar with the situation have also told Reuters that, as part of the deal, data related to some U.S. clients of UBS will be transferred to U.S. tax authorities.

The sources have not said how many client names would be passed on, but one U.S. government source indicated UBS would probably have to transfer data related to the largest accounts.

Two top Swiss newspapers have reported shortly after the July 31 agreement that UBS will pass on about 5,000 client data. But some U.S. lawyers have more recently speculated that the number could be 10,000 or more.

The deal may also involve a shortening of the administrative procedure that Switzerland uses to pass on data to the United States. The process involves potentially lengthy court appeals.

WILL SWISS BANK SECRECY BE DENTED?

The deal will not formally breach Swiss bank secrecy and Berne will not agree to an automatic exchange of bank data.

“The Swiss legal system is maintained because the U.S. has promised to act on the basis of current agreements and to ask for legal assistance again,” top Swiss negotiator Michael Ambuehl told Swiss newspaper NZZ am Sonntag on Aug. 2.

But bank secrecy is already weakening due to the UBS tax case and a global crackdown against tax evasion.

Tax lawyers say the transfer of around 250 names of UBS clients to U.S. authorities was already a blow to Switzerland’s legal system as the country waived the right to appeal of UBS clients in order to expedite a settlement of criminal charges.

Switzerland has also said it will do away with its distinction between tax fraud and tax evasion to fall in line with international transparency standards.

A new double-taxation treaty with the United States, which has been initialled but not made public, is expected to provide a framework for the settlement although it is not yet in force.

Writing by Lisa Jucca, Editing by Sitaraman Shankar

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