QI: Observations on the
Reach of the U.S.-Swiss Convention of 1850
Anton Keller, SIPA Geneva (7400362, 079-6047707) firstname.lastname@example.org
Geneva, 31 October 2000 - In
their memo of 23 Oct on the potential usefulness of the U.S.-Swiss Convention
on Friendship, Reciprocal Establishment, Commerce and Extradition of
1850 (hereinafter the “Convention”) for obtaining a U.S. court injunction
against the Qualified Intermediary (QI) regulations which the U.S.
Internal Revenue Service (IRS) has promulgated and which are expected
to be enforced world-wide beginning 1 Jan 2001, Tim Corcoran (TC)
and Bruce Zagaris (BZ) draw attention to related precedents, conclude
the Convention to be self-executing and to provide a private right of action
also to foreign nationals in U.S. courts, point to conceivably practical
legal pathways, and preliminarily discuss yet-to-be-addressed “four
1. show clear inconsistency between the Convention and the QI regulations;
2. show the QI regulations to alter the underlying statute;
3. have adequately injured plaintiff(s);
4. choose the most appropriate procedural vehicle.
If in current U.S. court practice the original intent and purpose of a duly ratified international treaty still has a significant bearing, it may be indicated to take a look at the circumstances here and there which lead up to this Convention some 150 years ago. Switzerland was an emigration country, its economy was agriculturally-based, barely feeding its population (e.g. in 1817, the Russian Zsar Alexander I contributed 100000 gold rubels to alleviate the effects of a famine in the eastern part of Switzerland). Barely established, the new Confoederatio Helvetica, in 1850, concluded its first settlement treaty with the United States as the country of choice of most of its emigrants.
This Convention - as all others that followed in relation with third countries - was mainly intended to secure reciprocal national treatment and non-discrimination of either country’s citizens going to, doing business in, or established in the other country. Income and other modern taxes did not exist then in the U.S., and it wasn’t until after the First World War that the U.S. Administration started to tax its citizens abroad - then and since blatantly violating fundamental fiscal and other sovereignty principles. Background and wording of the Convention’s key art.2. al.2 - ”No higher impost, under whatever name, shall be exacted from the citizens of one of the two countries, residing or established in the other, than shall be levied upon citizens of the country in which they reside, nor any contribution whatsoever to which the latter shall not be liable.” - thus suggest a comprehensive prohibition of every and all administrative and legal discriminations, rather than a dominant or even exclusive focus on taxes.
Accordingly, it is not necessary to demonstrate that “QI regulations amount to a tax”. Discrimination on account of nationality is seen to be incompatible with this Convention, regardless of whether it comes in the form of higher or special administrative burdens, duties or taxes or whether it concerns investment, other business or administrative matters. Thereby, the fact of discrimination itself is convention-triggering, and it is irrelevant which administration discriminates where against citizens of the other state or even against its own citizens.
Admittedly, protection for one's own citizens
abroad, originally, was mutually sought and granted mainly against the
host country's administration. Indeed, nobody in his right mind lent
one's own administration the intention to additionally burden or even discriminate
against one's own citizens abroad who, by venturing to foreign shores,
regularly took enough risks, disadvantages and hardship on themselves.
Nevertheless, the Convention wording is unmistakably citizen-oriented,
leaving open which the injuring party might be. Thus, the benefits
of the Convention are not limited to Swiss financial institutes who wish
to stay out of or have found it necessary to enter into QI agreements with
the IRS. Instead, these benefits are seen to accrue first and above
all to U.S. citizens residing or established in Switzerland or doing business
through Swiss banks. And, of course, to correspondingly discriminated-against
branches of U.S. banks whose U.S. person clients will thus be required
to report all foreign investments anywhere - contrary to U.S. persons
banking through other Swiss banks where they will have to declare only
their U.S. investments.