UBS Could Suffer Further As Swiss Banks Choose Safety Over Secrecy

On Wednesday, the US and the Swiss governments officially signed the new dual tax treaty which represents an important development for the Obama administration’s endeavor to fight international tax evasion.

The Swiss government has agreed to the international standard on exchange of data. The treaty calls for compulsory arbitration in some tax cases. It also demands changes in the dividend treatments when a pension or retirement fund holds shares.

The US government pursued a tax evasion case against UBS AG (NYSE:UBS), which was settled last month with the Swiss bank agreeing to provide account details of its 4,450 American clients who allegedly evaded taxes.

Over the years, Swiss banks have enjoyed large foreign deposit inflows as its domestic tax system emphasizes extreme confidentiality. However, adoption of the Organization for Economic Co-operation and Development’s standards for tax co-operation coupled with the lawsuit between the US Internal Revenue Service and UBS led to a dilution of secrecy.

Recently, Switzerland signed an agreement for sharing banking information upon request from France’s tax authorities from January 2010. There have been huge outflows of funds as anxious investors eye a safe refuge.

Formed through merger of Union Bank of Switzerland and Swiss Bank Corp. in 1998, UBS is one of the largest banks in the world. The ongoing global economic turmoil has severely hurt its balance sheet since the subprime crisis led to record losses. The investment banking arm of UBS particularly recorded large trading losses after significant decreases in commissions and fee income. Its asset quality is beginning to turn negative and is expected to worsen further in the coming quarters.

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