First posted on Commercial Law International on July 13, 2009.

UBS, the world´s largest wealth manager, has found itself embroiled in a diplomatic row between Washington and Bern. At issue is the interpretation of the current US-Swiss double taxation treaty and at stake is the newly inked, yet to be ratified, revised US-Swiss double taxation treaty.

Does the future of the revised US-Swiss double taxation treaty depend on the outcome of the UBS case?

As much was indicated by Doris Leuthard, the Swiss Economy Minister, as she called for a speedy resolution of the case. What the Minister is expressing in her pronouncements is simply the reality of the situation. Swiss maintain that the issues in the case are diplomatic and ought to be resolved in forum more appropriate to friendly relations between nations – face-to-face closed door negotiations – rather an the public spectacle of a courtroom. Secondly, while the treaty has been finalized it has yet to be ratified by the Swiss Parliament, a parliament that will be slow to give its blessing if it is dissatisfied with the outcome of the case.

So what exactly is going on in this case? This is a very good question for I myself was a bit confused for two reasons. The first is that UBS already plead guilty to assisting thousands of Americans to evade US taxes in a case brought by the Department of Justice (DOJ) in February of this year. In the same case it also paid fines of $750 million and disclosed 250 names of its US clients. So the case ought to be over, right? Well, yes and no. This was the criminal leg of the – and I am going to substitute strategy here for case to avoid any legal confusion – US authorities strategy to gain the names of as many as 52,000 believed to be evading US taxes.

The current case before the courts is the civil leg of the strategy brought by the Internal Revenue Service (IRS). They have served on UBS a John Doe subpoena in an effort to force UBS to reveal the names, so those people can in turn answer to the authorities.

While I know that criminal and civil matters are wholly different creatures, this smacks of double prosecution – persecution if you will. Or is it?

The second thing that was puzzling me was this IRS case seems to have stepped outside the four corners of the existing double taxation treaty. The treaty only requires UBS, through Swiss authorities, to co-operate with US tax evasion investigations if the IRS can provide the specific names of the holders of secret offshore accounts. It is clear from the IRS´s actions, issuing a John Doe subpoena, that it clearly does not know the names of the suspected tax evaders. So that should be the end of it, right. Well, clearly not.

Now, what the IRS is doing is clearly is not only not double prosecution/persecution, it is well within, I believe, the scope of the treaty. In fact I would go as far as saying that it is share genius. This was revealed to me in a brief filed by the IRS in response to one filed by UBS. To see what I mean just take a look at section 2 of the brief, the head tells it all: ¨Nothing in the Tax Treaty Limits the IRS´s Authority to Enforce a Duly Authorized Summons Issued to a Third-Third Party Witness within the United States, or Requires the IRS to Exhaust its Treaty Rights With a Foreign Government Before Seeking to that Summons.¨

Unfortunate for UBS, and as rightly pointed out by the IRS ¨the existence of a treaty….does not limit the rights granted to the United States under the laws of this country¨ (the bold being original). Well, that is in part, it should read doesn’t limit those laws so limited by treaty obligation.

What the IRS has done is not too circumvent the treaty but simply not to bring it into the equation at all. It has kept the issue entirely domestic. As I said, share genius.

In any event the prospects are dim for UBS if a negotiated settlement is not reach soon. If UBS loses, which it looks increasingly probable, it will be faced with either defying US law by refusing to reveal the names or reveal the names and be in violation of Swiss banking law which carries with criminal sanction.

Now that a Floridia judge has agreed to postone the case the excutives at UBS will surely be working over time to reach an amecible resolution of the case.