ZURICH, Nov 16 (Reuters) - Stricter graft guidelines that Switzerland plans to vote into law will bar companies from deducting bribes and fines from their taxes, but still let them write off illegally gained profits seized by regulators.
Switzerland's federal cabinet approved a new graft bill on Wednesday that would end the tax break for bribes, a reform it decided to pursue almost a year ago. It now goes to the parliament for a vote.
But it leaves untouched the practice of letting companies take a deduction for illegal profits seized by regulators, provided these repaid sums - known as disgorgements - do not meet the formal definition of a penalty for criminal behaviour.
That would include seizures by the Swiss Financial Market Supervisory Authority (FINMA), which can confiscate ill-gotten gains but not mete out criminal sanctions on companies it regulates, including the country's biggest banks.
"It is a disgorgement of illegally generated profits," FINMA spokesman Tobias Lux said. "We don't have the legal basis for monetary penalties."
Berne has been consulting Switzerland's 26 cantons on this bill since last December and only Freiburg canton has objected.
In their response, Freiburg officials said the bill "gives companies a kind of blank check to conduct unwanted business practices".
The rest favored preserving the practice, which is considered to be a way to correct for tax purposes the situation resulting from an infringement of the law.
Under existing guidelines that would be left untouched by the new law, the 95 million Swiss francs ($100 million) seized by FINMA from private Bank BSI this year during a probe into its ties to Malaysian fund 1MDB could help reduce its tax bill.
The same applies to the 2.5 million francs FINMA last month seized from Zurich-based Falcon Bank.
EFG International, which this year agreed to buy BSI, declined through a spokeswoman to comment on how it would reflect FINMA's cash seizure in its tax bill.
Falcon said it could not immediately respond.
UBS, Switzerland's biggest bank, said it follows Swiss law and takes advantage of disgorgement deductions.
"UBS has not deducted fines from its taxes," a UBS spokesman said in an email. "Disgorgements, however, have been deducted from tax as otherwise they would have been taxed twice."
Last year, Switzerland criminalised bribery of private individuals, a decade-and-a-half after lawmakers enacted a 2001 ban on tax deductions for bribes of government officials.
The measure the cabinet backed on Wednesday calls for "bribery payments to private individuals to no longer be allowed as expenses that are justified for business purposes".
A Swiss Federal Tax Administration spokesman in Berne said even if the new bribery prohibitions become law, it could take three years before they take effect, to give cantonal tax officials time to adapt.
The issue of taxation of questionable profits is also being debated in the United States, including a case in which former Qwest Communications CEO Joseph Nacchio is fighting the Internal Revenue Service over whether he has to pay taxes on income he was later forced to surrender.
Earlier this year, the Internal Revenue Service said the U.S. tax code in at least some cases prohibits a deduction for disgorgements to the Securities and Exchange Commission by companies that violate the U.S. Foreign Corrupt Practices Act. (Reporting by John Miller; Editing by Tom Heneghan)