The United States has officially started the process of gathering account details on 4,450 American clients of UBS AG (UBS) who have allegedly evaded paying taxes. This formal request has been made after Switzerland agreed to provide the relevant client details.
Over the years, Swiss banks have enjoyed large foreign deposits inflows as a result of its domestic tax system, which comprised extreme secrecy. However, the adoption of the Organization for Economic Co-operation and Development (OECD) standards for tax co-operation coupled with the lawsuit between the U.S. Internal Revenue Service (IRS) and the Swiss bank UBS led to a dilution of secrecy.
Recently, Switzerland signed an agreement to share banking information upon request from France’s tax authorities from January 2010. As a result, there have been huge outflows of funds as the anxious investors are eyeing a safe refuge.
UBS, formed after the 1998 merger of Union Bank of Switzerland and Swiss Bank Corporation, is one of the largest banks in the world. However, we expect this news to weigh heavily on UBS whose balance sheet has already been severely impacted by the subprime crisis and has reported record losses.
Moreover, recent global market turmoil has taken a toll on UBS, particularly at the investment bank, resulting in significantly declining commission and fee income and large trading losses. In addition, asset quality has begun to turn negative and will deteriorate further as the business cycle progresses.
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