FAC confirms Data Protection Commissioner's recommendation

A recent decision (A-5715/2018) by the Swiss Federal Administrative Court (FAC) strengthens the right of third parties in proceedings concerning administrative assistance in tax matters. The FAC held that the Swiss Federal Tax Administration (SFTA) is obligated to inform individuals or corporations – even if the request for assistance does not directly target them – if the SFTA intends to transfer information about such third party to the requesting foreign tax authority. The decision confirms a recommendation issued by the Swiss Federal Data Protection and Information Commissioner (FDPIC) in 2017, which the SFTA had refused to accept.

Redaction of unlikely relevant third-party data required

According to the FAC, the SFTA must not submit information about third parties unless the information is likely relevant for the assessment of the tax situation of the persons targeted by the request, and the interests of the requesting authority override the interests of the affected third party. This follows from data protection obligations of the SFTA under the Swiss Federal Act on International Administrative Assistance in Tax Matters, which (according to the FAC) take precedence over provisions of the Swiss Federal Data Protection Act.

If the FAC’s decision stands, the SFTA will henceforth have to inform third parties actively if a data production includes information that identifies them directly or indirectly. This will allow third parties to decide on whether or not to object to data transfers including indirect or direct references to them. In practice, the SFTA will have to decide early on in the administrative assistance proceeding whether or not to redact (efface) direct or indirect references to a third party.

In order to avoid information notices or objections in the interest of effective information exchange, the SFTA may have to redact more information than it used to. Yet if the requesting authority will likely require (for any reason) the disclosure of the information identifying such third party, the SFTA will have to inform the affected third party actively. In case that party objects to the data transfer, the SFTA will have to render a formal decision. The affected third party will then have a right to challenge the SFTA’s decision before the FCA and, finally, the Swiss Federal Supreme Court (FSC).

Implications for future information exchange between Swiss and U.S. tax authorities

The enhanced rights of third parties may be particularly relevant in light of the amended U.S.–Swiss Double Taxation Treaty. On July 17, 2019 the U.S. Senate approved the respective protocol. It will not only allow requests for administrative assistance by the IRS dating back to September 23, 2009, but also group requests dating back to June 30, 2014 relating to non-consenting U.S. accounts or non-consenting non-participating FFIs under the FATCA agreements.

These new treaty provisions will enter into force by exchange of the ratification documents, which is expected for 2019, and it is already known that the IRS is preparing a first tranche of requests for administrative assistance. From that perspective, the increased protection of third parties may have come just in time. Yet it is likely that the SFTA will challenge the FAC’s decision before the FSC, and will not have to implement the extended information notices pending that appeal.