The lower house of Switzerland's parliament approved Tuesday a deal that would hand over the names of thousands of tax evaders to U.S. authorities.

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Swiss bank UBS, with headquarters in Kurich, has made a deal with the U.S. IRS, but it needs approval by the Swiss parliament. ((Martin Ruetschi/Associated Press))

The landmark deal between the Internal Revenue Agency and Swiss bank UBS AG has been in the works for three years, and Tuesday's 81-61 vote in favour of approval brings it one step closer to completion.

In a previous vote last week, the opposition Swiss People's Party and nationalist Social Democrats refused to sign off on the agreement, which some say would have brought the country's famous iron-clad laws of banking confidentiality crumbling down.

But both parties dropped the opposition to the law this week, allowing it to pass to the upper house — with the proviso that a national referendum on the issue will be held.

The upper house has already said it will not accept a referendum requirement, so the two sides have until Friday to hammer out a deal.

Waiting for a referendum would likely make Switzerland miss an August deadline set by U.S. regulators to hand over the names of 4,450 U.S. citizens who are suspected of having used Swiss banking loopholes to hide assets.

Some 500 names have already been handed over in the United States, and almost 100 Canadians have also come forward to Canadian tax authorities to settle their debts in advance of UBS acting to reveal names.

Tax haven

UBS first settled with the IRS in February 2009 and paid hundreds of millions in fines for helping clients hide money. It has promised to name names, but the process has been marred by delays as banking secrecy is so highly valued in the famously neutral European nation.

Under a 75-year-old law, Swiss banking secrecy can only be lifted when individuals are deemed to have defrauded tax authorities deliberately as opposed to failing to declare all assets, a distinction Switzerland and other tax havens make.

Swiss authorities crafted the UBS deal to satisfy U.S. needs while still sticking to the letter of Swiss law.

Swiss banking authorities originally made the deal to prevent the possibility that U.S. authorities could proceed with criminal and civil proceedings against their U.S. operations. The deal looked to have averted that, but as delays mount, U.S. regulators might be losing their patience.

William Sharp, a tax lawyer who represents some American UBS clients, said he would be surprised if the U.S. passively accepted a further delay.

"The deferred prosecution agreement may be revisited in a more aggressive context, the settlement agreement may be deemed in breach, or the U.S. may seek to move Switzerland to 'black list' status, among other choices," Sharp said.

Washington has signalled that unless UBS reveals the further 4,000 American names demanded in the U.S.-Swiss agreement, it may face a crippling civil investigation just at a time when the bank is recovering from the subprime crisis and seeking to rebuild its U.S. business.

Business groups have warned that failure to ratify the deal risks costing Switzerland thousands of jobs should Washington decide to retaliate.