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More tax and privacy troubles are brewing right now. The U.S. and Switzerland have had an Income Tax Convention since 1996 but on January 27, 2003 dramatically upgraded this as you can see in the article below sent to us by eClub advisor, Leslie Share. Read this long missive carefully and look at Leslie's hypothetical examples. If you have or plan to have an overseas account this may affect you immediately or be the forerunner of what will affect the privacy of your account!

Mutual Agreement of January 23, 2003, Regarding the Administration of Article 26 (Exchange of Information) of the Swiss–U.S. Income Tax Convention of October 2, 1996

January 27, 2003



Tax treaties: Switzerland: Tax information exchange.



Mutual Agreement of January 23, 2003, Regarding the Administration of

Article 26 (Exchange of Information) of the Swiss-U.S. Income Tax

Convention of October 2, 1996



Whereas Article 26 (Exchange of Information) of the Convention between the

United States of America and the Swiss Confederation for the Avoidance of

Double Taxation with Respect to Taxes on Income, signed at Washington on

October 2, 1996, ("the Convention"), provides that the competent

authorities of the Contracting States shall exchange such information as is

necessary "for the prevention of tax fraud or the like in relation to the

taxes which are the subject of" the Convention;



Whereas paragraph 10 of the Protocol accompanying and forming an integral

part of the Convention ("the Protocol") provides that "tax fraud" means

"fraudulent conduct that causes or is intended to cause an illegal and

substantial reduction in the amount of tax paid to a Contracting State,"

and provides illustrative descriptions of situations in which fraudulent

conduct is assumed;



Whereas the Contracting States have memorialized certain understandings

with respect to Article 26 of the Convention;



Whereas the competent authorities of the Contracting States have had

several years of experience in implementing and administering the

Convention, including the information exchange provisions thereof;



Whereas the exchange of information for the prevention of tax fraud or the

like under Article 26 of the Convention is very important to the adequate

administration and enforcement of the tax laws of each Contracting State;



Now, therefore, the competent authorities of the Contracting States wish to

memorialize the following additional understandings in reference to Article

26 of the Convention and paragraph 10 of the Protocol:



1. It is understood that Article 26 of the Convention and paragraph 10 of

the Protocol will be interpreted to support the tax administration and

enforcement efforts of each Contracting State to the greatest extent possible.



2. It is understood that, in determining whether information may be

provided in response to a request, the requested State shall apply the

statute of limitations applicable under the laws of the requesting State

instead of the statute of limitations of the requested State.



3. It is understood that, in response to a request, the requested State

shall exchange information with respect to matters that the requesting

State is pursuing, or may pursue, on a civil or criminal basis.



4. It is understood that the following conduct constitutes "tax fraud or

the like" under paragraph 1 of Article 26 of the Convention, which is also

illustrated in paragraph 10 of the Protocol:



a) Conduct that is established to defraud individuals or companies, even

though the aim of the behavior may not be to commit tax fraud;



b) Conduct that involves the destruction or non-production of records, or

the failure to prepare or maintain correct and complete records, that a

person is under a legal duty (tax or otherwise) to prepare and keep as

sufficient to establish the amount of gross income, deductions, credits, or

other matters required to be shown by such person in any tax return, if the

person has not properly reported such amounts in any such tax return; or



c) Conduct by a person subject to tax in the requesting State that involves

the failure to file a tax return that such person is under a legal duty to

file and an affirmative act that has the effect of deceiving the tax

authorities making it difficult to uncover or pursue the failure to file,

including the concealment of assets or covering up of sources of income or

the handling of one's affairs to avoid making the records that are usual in

transactions of the kind.



It is understood that these examples are by way of illustration, and not by

way of limitation.



5. It is understood that, in response to a request, the requested State

shall exchange information where the requesting State has a reasonable

suspicion that the conduct would constitute tax fraud or the like. The

requesting State's suspicion of tax fraud or the like may be based on:



a) Documents, whether authenticated or not, and including but not limited

to business records, books of account, or bank account information;



b) Testimonial information from the taxpayer;



c) Information obtained from an informant or other third person that has

been independently corroborated or otherwise is likely to be credible; or



d) Circumstantial evidence.



It is understood that these examples are by way of illustration, and not by

way of limitation.



6. It is understood that each of the hypothetical examples in the Appendix

below involves conduct constituting "tax fraud or the like" under paragraph

1 of Article 26 of the Convention and paragraph 10 of the Protocol. It is

understood that these examples are by way of illustration, and not by way

of limitation.



Department of Treasury



United States of America



By: --



Carol A. Dunahoo



Federal Tax Administration



Director, International



Swiss Confederation



Large and Mid-Size Business Division



Internal Revenue Service



By: --



Robert Waldburger



Vice-Director



Delegate for International



Date: --



Tax Agreements



By: --



Barbara M. Angus



International Tax Counsel



Department of the Treasury



Date: --



Appendix



HYPOTHETICAL 1



An individual subject to the requesting State's income tax operates a

business with substantial cash sales. He keeps one set of books and records

in which he records all business expenses; however, he causes a substantial

portion of the cash sales of the business to be omitted from this set of

books. The individual keeps a second set of books and records that includes

the total amount of cash sales, including the cash sales not recorded on

the first set of books and records. Because the first set of business books

and records are used to prepare the individual's income tax return, a

substantial portion of his taxable income is not reported on the tax

return. Specifically, the individual's income tax return, and the component

to that return on which the individual reports business receipts, expenses,

and other items related to the business, understates the gross business

receipts and other income related entries.



The individual maintains a bank account in the requested State in his own

name into which he deposits the portion of his business income that is not

reported on his tax return. Based on information provided by an informant,

including a copy of the second set of books and records that the informant

secretively took from the business premises, tax officials of the

requesting State commence an investigation of the individual for possible

tax violations under the laws of the requesting State. The taxpayer

provides the first set of books and records to these officials to support

the false information on his tax return.



The requested State would obtain and provide information relating to the

bank account in the requested State of the individual in response to a

specific request by the requesting State under Article 26 of the Convention.



HYPOTHETICAL 2



An individual subject to the requesting State's income tax operates a

business with substantial cash sales. He keeps one set of books and records

in which he records all business expenses; however, he causes a substantial

portion of the cash sales of the business to be omitted from this set of

books. The individual keeps a second set of books and records that includes

the total amount of cash sales, including the cash sales not recorded on

the first set of books and records. Because the first set of business books

and records are used to prepare the individual's income tax return, a

substantial portion of his taxable income is not reported on the tax

return. Specifically, the individual's income tax return, and the component

to that return on which the individual reports business receipts, expenses,

and other items related to the business, understates the gross business

receipts and other income related entries.



The individual maintains a bank account in the requested State in his own

name into which he deposits the portion of his business income that is not

reported on his tax return. Based on information provided by an informant,

authorities of the requesting State conduct a search of the business

premises and seize both sets of books and records.



The requested State would obtain and provide information relating to the

bank account in the requested State of the individual in response to a

specific request by the requesting State under Article 26 of the Convention.



HYPOTHETICAL 3



An individual subject to the requesting State's income tax operates a

business which provides a service on a "cash only" basis. He regularly

skims a substantial portion of these cash receipts and deposits these

skimmed receipts in a bank account in the requested State maintained in his

own name. He deposits the remainder of his cash receipts in a bank account

in the requesting State maintained in his business name. He pays his

business expenses by drafting checks against the bank account in the

requesting State.



He files an income tax return, understating his gross income, taxable

income, and tax due, to the extent that he skimmed from his business

receipts. Specifically, the individual's income tax return, and the

component to that return on which the individual reports business receipts,

expenses, and other items related to the business, understates the gross

business receipts and other income related entries.



An informant tells the tax officials of the requesting State about the

business, including the skimming activities, and the bank account in the

requested State, specifically stating that the individual told him that he

skimmed no less than 30 per cent of his gross receipts every week and

deposited these skimmed receipts in an account under his name in the X Bank

located in the requested State. Based on this information tax officials of

the requesting State commence an investigation of the individual for

possible tax violations under the laws of the requesting State. In response

to a request by the tax officials of the requesting State for

substantiation of the tax return, the individual provides incomplete books

and records that omit the skimmed receipts and therefore support the tax

return.



The requested State would obtain and provide information relating to the

bank account in the requested State of the individual in response to a

specific request by the requesting State under Article 26 of the Convention.



HYPOTHETICAL 4



An individual subject to the requesting State's income tax operates a

business which provides a service on a "cash only" basis. He regularly

skims a substantial portion of these cash receipts and deposits these

skimmed receipts in a bank account in the requested State maintained in his

own name. He deposits the remainder of his cash receipts in a bank account

in the requesting State maintained in his business name. He pays his

business expenses by drafting checks against the bank account in the

requesting State.



He files an income tax return, understating his gross income, taxable

income, and tax due, to the extent that he skimmed from his business

receipts. Specifically, the individual's income tax return, and the

component to that return on which the individual reports business receipts,

expenses, and other items related to the business, understates the gross

business receipts and other income related entries.



A former employee of the business tells the tax officials of the requesting

State about the business, including the skimming activities, and the bank

account in the requested State, specifically stating that the individual

told him that he skimmed no less than 30 per cent of his gross receipts

every week and deposited these skimmed receipts in an account under his

name in the X Bank located in the requested State. Based on this

information tax officials of the requesting State commence an investigation

of the individual for possible tax violations under the laws of the

requesting State. In response to a request by the tax officials of the

requesting State for the required substantiation of the tax return, the

individual does not provide any books and records.



The requested State would obtain and provide information relating to the

bank account in the requested State of the individual in response to a

specific request by the requesting State under Article 26 of the Convention.



HYPOTHETICAL 5



An individual subject to the requesting State's income tax operates a

business which provides a service on a "cash only" basis. He regularly

skims a substantial portion of these cash receipts and deposits these

skimmed receipts in a bank account in the requested State maintained in his

own name. He deposits the remainder of his cash receipts in a bank account

in the requesting State maintained in his business name. He pays his

business expenses by drafting checks against the latter bank account. He

keeps no record of business receipts or expenses other than his bank

account records in the requesting and requested State.



He files an income tax return, understating his gross income, taxable

income, and tax due, to the extent that he skimmed from his business

receipts. Specifically, the individual's income tax return, and the

component to that return on which the individual reports business receipts,

expenses, and other items related to the business, understates the gross

business receipts and other income related entries.



An informant tells tax officials of the requesting State about the

business, including the skimming activities, and the bank account in the

requested State, specifically stating that the individual told him that he

skimmed no less than 30 per cent of his gross receipts every week and

deposited these skimmed receipts in an account under his name in the X Bank

located in the requested State. The informant also tells tax officials of

the requesting State that the individual has used proceeds from the bank

account in the requested State to purchase assets, formal legal ownership

of which has been placed in the names of other persons.



Based on this information tax officials of the requesting State commence an

investigation of the individual. Among other things, these officials learn

that the individual used cash to buy particular assets, and has with

documentation placed legal ownership to these assets in the name of other

persons. These officials observe that these assets are always used by the

individual.



The requested State would obtain and provide information relating to the

bank account in the requested State of the individual in response to a

specific request by the requesting State under Article 26 of the Convention.



HYPOTHETICAL 6



An individual subject to the requesting State's income tax operates a

business. Although the business functions primarily within the territory of

the requesting State, it does have some international sales. The individual

forms a bearer share corporation in a third country and confidentially

maintains possession of all the shares. The corporation maintains a bank

account in the requested State in the corporate name with the individual as

the sole authorized signature authority. The business enters into a

contract with the corporation under which the corporation agrees to perform

"market research." No market research is performed. The business pays

substantial fees for this service which are deposited into the bank account

in the requested State. The business records the fees as expenses on the

business books and records. As a result, business income is substantially

reduced. Because the business books and records are used to prepare the

individual's income tax return, his reported gross income, taxable income,

and tax due are substantially understated. Specifically, the individual's

income tax return, and the component to that return on which the individual

reports business receipts, expenses, and other items related to the

business, understates the gross business receipts and other income related

entries.



Tax officials of the requesting State randomly select the individual for a

tax audit. When these officials observe that substantial payments were made

to a foreign corporation and claimed as business expenses on the

individual's tax return, these officials ask the individual whether he or

someone else owns the foreign corporation. The individual denies any

ownership interest in the foreign corporation and claims that it is owned

by a third party who has actually conducted market research for the

business. Tax officials of the requesting State then initiate an

investigation of the individual. Subsequently, an ex-spouse tells these

officials that the individual maintains a bank account in the requested

State under the name of the foreign corporation and that the payments to

the corporation for market research were deposited in this bank account.



The requested State would obtain and provide information relating to the

bank account in the requested State of the foreign corporation in response

to a specific request by the requesting State under Article 26 of the

Convention.



HYPOTHETICAL 7



An individual controls a corporation that is subject to the requesting

State's income tax and that operates a business which provides a service on

a "cash only" basis. The individual regularly skims a substantial portion

of these cash receipts and deposits these skimmed receipts in a bank

account in the requested State maintained in his own name. The remainder of

the cash receipts are deposited in a bank account in the requesting State

maintained in the corporation's name. The corporation pays its business

expenses with checks drafted against this latter bank account. No record of

business receipts or expenses are kept other than the bank account records

in the requesting and requested State.



A corporate income tax return is filed, understating gross income, taxable

income, and tax due, to the extent of the skimmed business receipts.

Specifically, the corporation's income tax return, on which the corporation

reports gross receipts, cost of goods sold, dividends, compensation of

officers, balance sheet information, and other items related to the

corporation, understates gross receipts and other items mentioned above.



An informant tells the tax officials of the requesting State about the

corporate business, including the skimming activities, and the bank account

in the requested State, specifically stating that the individual told him

that he skimmed no less than 30 per cent of the gross receipts every week

and deposited these skimmed receipts in an account under his name in the X

Bank located in the requested State. Based on this information tax

officials of the requesting State commence an investigation of the

corporation and the individual for possible tax violations under the

requesting State's law.



The requested State would obtain and provide information relating to the

bank account in the requested State of the individual in response to a

specific request by the requesting State under Article 26 of the Convention.



HYPOTHETICAL 8



An individual subject to the requesting State's income tax is employed as

the chief executive officer of a publicly held corporation of the

requesting State that does subcontract work for other corporations of the

requesting State. To ensure that the corporation keeps certain existing

contracts and secures new ones, it pays bribes to employees of a major

contractor. The funds from which the bribes are paid come from random

diverted corporate gross receipts. The chief executive officer instructs

the corporate accountant (1) not to report diverted receipts on the

corporate books and records and (2) to destroy all documentation of those

receipts held by the corporation. The books and records understating gross

receipts are used to prepare the corporate income tax return, and, thus,

the corporate income tax return understates the gross receipts and other

income related entries. (The same books and records are used to prepare

inaccurate income statements upon which shareholders and potential

investors rely.)



The chief executive officer deposits the diverted funds into a bank account

in the requested State over which he has sole signature authority. He

periodically authorizes payments from that account to other accounts at the

same bank over which the respective bribe recipients have signature

authority. Based on information, which includes all the details stated

above, provided by a staff accountant that works for the corporate

accountant, tax officials of the requesting State initiate an investigation

of the chief executive officer and the corporate accountant for their role

in assisting in the preparation of a false corporate income tax return, and

the bribe recipients for omitting the bribe payments from their individual

income tax returns.



The requested State would obtain and provide information relating to the

bank account in the requested State over which the chief executive officer

has signature authority and the bank accounts in the requested State over

which the respective bribe recipients have signature authority in response

to a specific request by the requesting State under Article 26 of the

Convention.



HYPOTHETICAL 9



An individual subject to the requesting State's income tax is a tax shelter

promoter. Several tax shelter partnerships in which he sells limited

partnership interests involve research and development companies

incorporated and ostensibly operating in the requested State. The

prospectus issued to investors for each shelter offers "investment

opportunities by providing highly leveraged tax deductions." The investment

per limited partnership share required for each shelter is $50,000, which

includes a cash payment of $10,000 and a promissory note for $40,000 due in

30 years with interest accrued and payable at the end of that period.



Tax officials of the requesting State initiate an investigation of the

promoter to determine whether he aided and assisted in the preparation of

false individual income tax returns filed by the investors, as well as

whether the promoter failed to report the income he made from the promotion

of the tax shelter on his individual income tax return. During the course

of the investigation, these officials interview numerous investors in each

shelter who claim the promoter stated that (1) the only payment ever

required from an investor was the $10,000 and (2) the note was only for tax

purposes and would never be collected. During audits of several investors,

tax officials of the requesting State discover that all $10,000 payment

checks were deposited to an identifiable bank account in the requested State.



The requested State would obtain and provide information relating to the

bank account in the requested State into which the payment checks were

deposited in response to a specific request by the requesting State under

Article 26 of the Convention.



HYPOTHETICAL 10



An individual subject to the requesting State's income tax is a tax shelter

promoter. He promotes and sells a movie tax shelter in which a corporation

of the requested State ostensibly intends to produce feature films for

profit. Limited partnership shares in movies to be produced are sold to

investors in the requesting State for $25,000 per share with assurances

that deductions can be taken against income in the amounts of $100,000 per

share (a leverage of 4 to 1). In fact, the corporation in the requested

State is a shell and the movie shelter scheme is a fraud. All monies

received in the scheme inure to the personal benefit of the promoter. Upon

receipt of investors' $25,000 payments, the promoter deposits the funds

into a bank account in the requested State over which he has sole signature

authority. The promoter then prepares documentation based upon complete

fabrication which he submits to the investors.



The investors, in reliance on such documentation, prepare and file false

individual income tax returns claiming tax benefits derived from the movie

shelter. Upon audit by the tax officials of the requesting State, these

benefits are denied. A tax official of the requesting State initiates an

investigation to determine whether the promoter aided and assisted in the

preparation of the investors' false tax returns, as well as whether the

promoter failed to report income made from the tax shelter promotion on his

individual income tax return.



The requested State would obtain and provide information relating to the

bank account in the requested State over which the promoter has signature

authority in response to a specific request by the requesting State under

Article 26 of the Convention.



HYPOTHETICAL 11



An individual has income as a salaried employee and earns income by

conducting promotional events in which he encourages taxpayers to violate

the requesting State's tax laws. Although the individual is subject to the

requesting State's income tax, he does not file a tax return. The

individual earns income at the promotional events by selling pamphlets in

which he illustrates methods of evading income tax that he knows to be

unlawful but that he represents to attendees of his promotional events to

be lawful. He sells numerous pamphlets, each for a significant price.



Tax officials of the requesting State initiate an investigation of the

individual to determine whether he aided and assisted in the preparation of

the false individual income tax returns of those attending the promotional

events, as well as willfully evaded his individual income taxes. These

officials interview several promotional event attendees and purchasers of

the pamphlets and discover that numerous checks in payment for the

pamphlets were deposited into a bank account in the requested State.



The requested State would obtain and provide information relating to the

bank account in the requested State into which the checks for payment were

deposited in response to a specific request by the requesting State under

Article 26 of the Convention.



HYPOTHETICAL 12



An individual maintains a bank account in the requested State into which he

deposits income that is subject to the income tax in the requesting State.

He makes substantial withdrawals from this bank account, through the use of

a credit card tied to such account and issued in the name of a corporation,

to pay for his living expenses for the year. The individual does not file

an income tax return.



Tax officials of the requesting State commence an investigation of the

individual based on information received from a credit card company related

to credit cards tied to bank accounts in the requested State, and from

various merchants. The tax officials determine that a credit card tied to a

bank account in the requested State and issued in the name of a corporation

was used throughout the year to purchase numerous personal items that were

delivered to the individual. When these officials ask the individual

whether he owns or controls the bank account, the individual does not

acknowledge any interest in the corporation or the bank account, and

provides no explanation regarding the source of the funds in the bank account.



The requested State would obtain and provide information relating to the

bank account in the requested State in response to a specific request by

the requesting State under Article 26 of the Convention.



HYPOTHETICAL 13



An individual operates a business which provides a service on a "cash only"

basis. He regularly deposits a substantial portion of these cash receipts

in a bank account in the requested State maintained in his own name. He

deposits the remainder of his cash receipts in a bank account in the

requesting State maintained in his business name. He pays his business

expenses by drafting checks against the latter bank account. He keeps no

record of business receipts or expenses other than his bank account records

in the requesting and requested State. Although the individual is subject

to the requesting State's income tax, he does not file a return.



An informant tells tax officials of the requesting State about the

business, specifically stating that the individual told him that he

deposited no less than 30 per cent of his gross receipts in an account

under his name in the X Bank located in the requested State. The informant

also tells tax officials of the requesting State that the individual has

used proceeds from the bank account in the requested State to purchase

assets, formal legal ownership of which has been placed in the names of

other persons.



Based on this information tax officials of the requesting State commence an

investigation of the individual. Among other things, these officials learn

that the individual used cash to buy particular assets, and has with

documentation placed legal ownership to these assets in the name of other

persons. These officials observe that these assets are always used by the

individual.



The requested State would obtain and provide information relating to the

bank account in the requested State of the individual in response to a

specific request by the requesting State under Article 26 of the Convention.



HYPOTHETICAL 14



An individual instructs his employer to make his salary checks payable to a

corporation purporting to provide services as an independent contractor.

The employer does not provide the documentation as required under the

requesting State's tax law in the case of compensation provided to an

employee. The individual opens a bank account in the X Bank located in the

requested State in the name of that corporation, and deposits checks from

his employer in that account. Although the individual is subject to the

requesting State's income tax, he does not file a tax return.



Based on information provided by an informant, tax officials of the

requesting State initiate an investigation of the individual. The tax

officials contact the individual's employer, and obtain cancelled salary

checks payable to the corporation and deposited in the bank account in the

X Bank located in the requested State.



The requested State would obtain and provide information relating to the

bank account in the requested State in the name of the corporation in

response to a specific request by the requesting State under Article 26 of

the Convention.

For more information you can reach Leslie at E-mail: las@pnrlaw.com

Until next message may all your investments be inspired!

Gary


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