The US and Luxembourg have signed a treaty enabling exchange of tax information between two countries, which should assure Swiss banks that their famed secrecy will remain largely intact if the agreement is adopted as a model for further US treaties with other jurisdictions.

The US ambassador to Luxembourg, Ann Wagner and the Luxembourg minister for Treasury and Budget, Luc Frieden, held a signing ceremony on 20 May that amends article 28 of the 1996 Convention between the countries. It modifies the terms for provision of information in respect of avoidance of double taxation and tax evasion “upon request and in specific cases” in line with the Organisation for Economic Co-operation and Development’s model tax convention.

The Luxembourg Finance Ministry has confirmed that the agreement takes effect from the start of the 2009 fiscal year and that it prohibits enquiries of a general nature or “fishing expeditions”. It also does not provide for automatic exchange of information.

The conclusion of this agreement should be good news for Switzerland, which has been buffeted as the Zurich-listed wealth management giant UBS has suffered the ignominy of having to provide information to the US authorities under extreme pressure.

If this Luxembourg-US agreement is a model for other agreements between the US and other countries – especially those with offshore status, or those deemed to be tax havens – then Swiss banks can rest assured that their famed banking secrecy is mostly intact, although tax evasion will now be sufficient reason for divulging information to other countries.

The agreement also suggests that the German diplomatic offensive against offshore jurisdictions will not produce significant change as the Swiss can hide behind an agreed OECD model convention.

Milan Patel, who is based at international law firm Withers in Geneva and previously with the US Inland Revenue Service, has told WealthBriefing he believes the Luxembourg-USA protocol sets a good precedent to what the US will hope to achieve with Switzerland with regard to Article 26 of the model which refers to exchange of information.

“As the language from the Luxembourg-US treaty is based on the OECD Article 26 model, the prohibition against a 'fishing exhibition' is already there, so this is no surprise,” Mr Patel said.

“In fact, the typical US style discovery process is generally considered overbroad and vague by most other Western nations with a developed legal system.  Accordingly, a 'John Doe' type summons, as was issued in the UBS case, would on the surface appear to be antithetical to the standard of discovery or information exchange under a treaty for most European countries, not just Switzerland,” he says.

“Accordingly, a 'John Doe' summons would probably not be enforceable even under a revised exchange of information treaty incorporating the OECD Article 26 language.  It lacks specificity, is over-broad, and does not provide any taxpayer identification (only names a broad class of unidentified individuals),” Mr Patel says.

He believes that this is an indication that the USA’s “John Doe” summons against UBS in which they request details of 52,000 accounts will eventually fail.

Mr Patel also suggested that the Swiss will conclude an agreement with a non-contentious country “such as Japan” and put this one to a referendum. When this passes, the text can then be used as a template to avoid referenda and the possibility of anti-US sentiment de-railing a Switzerland-US protocol.

As if to confirm this, Swiss Federal Tax authorities have announced conclusion of an OECD-compliant agreement with Denmark and another unspecified country with the standard clause 26 prohibiting fishing expeditions, although no other specific details are being made public at this point.

This agreement will be subject to a referendum and the normal Swiss process. After that the submission of further similar treaties to national referenda will be a “decision for Parliament” according to the Federal Tax Office.

So the double taxation route for exchange of information by individual treaties has started and the Swiss voters will have their say on the agreement with Denmark – but quite possibly not the US, France or Germany who have been the most vocal critics of Switzerland’s banks lately. This would appear to be a very elegant solution.