Cabinet to examine tax deductible bank fines

UBS was the first Swiss bank to receive a hefty fine from the US Keystone

The government will consider new laws to stop banks from claiming tax rebates on criminal fines. Parliament voted for government action on Wednesday after a debate on whether the public purse should be expected to foot part of the bill for corporate misdeeds.

The same issue was dismissed by parliament a year ago, but has come back on the agenda following an admission by Credit Suisse that it might claim a tax rebate on $800 million of the $2.8 billion (CHF2.5 billion) financial penalty it received from the United States in May.

At present, each canton is free to give its own interpretation of how much tax relief companies can claim on criminal fines. But the cabinet could recommend a new federal law to parliament that sets new standards across the board.

During the House of Representatives debate, parliamentarians from the centre-left Social Democratic Party, the Green Party, the centre-right Christian Democrats blasted Swiss banks’ behaviour abroad.

Swiss taxpayers should not pay the bill for illegal behaviour, declared Christian Democrat Dominique de Buman. In a liberal economy it is up to the owners to take responsibility for their own errors.

For years financial institutions have repeatedly behaved irresponsibly, threatening the economies in many countries. At the same time their directors continued to pay themselves bonuses, said Social Democrat Ada Marra.

Recommendations

In the end, parliamentarians voted in favour of obliging the government to produce a report and recommendations on how to deal with the issue. It will also consider whether the surrender of illicitly earned profits and compensation to other parties for losses incurred by criminal activities should also qualify for tax relief.

Switzerland’s second largest bank, Credit Suisse, was fined some $2.8 billion earlier this year after pleading guilty to criminal charges of helping United States clients to evade taxes.

The bank admitted to a US court that it set up sham companies to enable clients to unlawfully funnel assets away from the Internal Revenue Service (IRS).

Speaking at a press conference just after receiving the fine in May, Credit Suisse chief financial officer David Mathers said: “The normal approach is that fines and penalties are not tax deductible. Disgorgement of profits and certain other settlements are tax deductible.”

“In this circumstance, around $2 billion of the $2.8 billion in total relate to a fine and a penalty, and therefore we are assuming they are not tax deductible. Around $800 million do have some tax offset against it.”

This $800 million figure relates to illegally obtained profits that the bank has been compelled to surrender and the compensation it must pay to the US Internal Revenue Service to cover lost tax revenues as a result of its behaviour.

As part of the criminal settlement, Credit Suisse agreed not to seek tax rebates on any part of the financial penalty in the US. But the implication that it may seek some tax relief in Switzerland has sparked a fierce public debate on the ethics of such a move.

Some 13 other Swiss banks are currently awaiting possible financial penalties for the part they played in the vast US tax evasion scam.

Costly business

The US Department of Justice’s appetite for imposing ever-larger punitive financial penalties has recently increased, as evidenced by Credit Suisse have to pay three times more than UBS had to shell out for similar offences in 2009.

However, parliamentarians threw out a motion to compel banks to repay all administrative costs associated with defusing Switzerland’s long-running tax evasion dispute with the US.

Finance Minister Eveline Widmer-Schlumpf said that the diplomatic costs of sorting out the mess were already covered by current legislation and that bills had been sent to banks to the tune of the “middle multi-digit million range”.

Switzerland’s largest bank UBS was forced to pay a $780 million fine to the US in 2009 while the country’s oldest bank Wegelin collapsed under the weight of a criminal case last year.