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EXPERT VIEW: Attacks On Wealth And The Offshore Jurisdictions

Henry Fea

Charles Russell

17 September 2012

Henry Fea, a partner in the private client team and head of the Geneva office at Charles Russell, discusses recent developments affecting offshore jurisdictions and their clients.

Earlier this year, the comedian Jimmy Carr became the public face of tax-dodging when it emerged that he used a Cayman Islands-based trust to lower his income tax bill. Attacks on wealth and tax havens is currently the biggest issue facing high net worth individuals. As the debate rolls on and reaches global levels foreign investors are looking to move their money but it is important to understand the difference between tax evasion and tax avoidance.

Over the last 25 years enormous wealth has been created with more millionaires now than ever before.  At the same time, most of the world is facing economic difficulties and austerity measures and  some are experiencing civil unrest. This has left many wealthy individuals feeling threatened.

Entrepreneurs and their families are used to dealing with creditors, divorcing spouses or other family members but there is increased concern about the challenges from governments, whether through tax or other measures.

Political instability

Changes in the Middle East over the last two years, and the Khordokovsky tax evasion case, show that nobody is safe if government changes, or law and order breaks down. Today’s multi-millionaire can have their assets confiscated overnight and, for well-known political figures in countries without a developed stable political regime, there is a very high risk.  Sharing assets amongst family members or trusted advisors may help to spread the risk of financial loss, but is not a complete answer. 

Those with a less high political profile may want to consider obtaining residency rights in a country with a more stabilised political system and a wide range of visa treaties.  There are a variety of attractive countries that fit the bill – St Kitts & Nevis being one of the cheapest, but not as robust as others, such as the UK where, for an investment of £1 million (around $1.62 million), residency and (after a period of time) citizenship can, effectively, be bought. Switzerland and other European countries offer similar programmes. 

Raising taxes is another measure used to attack private individuals (Francois Hollande, France’s new Socialist president, wants to tax wealthy individuals at a rate of 75 per cent), but the motive of the taxing authority must be considered.  Is it to increase the level of funds generated, or is it politically driven to correct a perceived injustice? 

Increasing the rate of taxation does not necessarily increase the tax take.  If income tax rates are high, investors may instead of seeking income returns look to make capital gains, especially if they are tax-free or taxed at a lower rate than income. 

It is difficult these days, when people are so mobile, and there is international competition for the wealthy, to expect taxpayers to remain in a country if taxes are increasing or the tax future is more uncertain than it is in other jurisdictions. Changes to the lump sum taxation system in parts of Switzerland, including Zurich, should be a lesson to governments that individuals will not simply remain in a place for the quality of life. Moving to a new country does run the risk of that country changing its laws. For some, moving every few years is not a problem and there is sufficient differentiation in tax rates from one country to the next to keep their tax bills low. However, for some, it is not worth the upheaval and they will pay tax to have a stable life. 

Reactive moves

Using pressure on the offshore jurisdictions to increase the tax take has been remarkably effective at changing the business and branding of these jurisdictions, although it is perhaps more questionable whether it has resulted in increased tax in the developed jurisdictions who insisted on the changes.  In June 2012, the UK tax authorities suggested that an attractive tax disclosure programme started in 2009 for UK tax payers who have under-declared funds with a Liechtenstein connection, would result in £3 billion being raised in tax by 2016. The reality is that it is more difficult now to use this facility than it was prior to August 2012 and up to June 2012 only £363 million had been raised, making £3 billion look ambitious. 

Agreements currently being negotiated between the UK and Switzerland and Germany and Switzerland, which would result in either information exchange or a withholding tax, may simply result in movements of funds away from Switzerland, with rumours that Singapore has already been a beneficiary.  For those prepared to actively manage their funds, differentiation will always be possible.

A changed industry

The money laundering and compliance rules have created a new industry and changed the business of offshore jurisdictions, as the costs of implementing these procedures mean it is not effective for those with relatively modest means to set up complex structures or use offshore bank accounts. The implementation of these procedures is perhaps now more rigorous in Cayman than in Delaware, to use the famous example.  The wealthy do not necessarily pay more tax but the squeezed middle have been encouraged to be more compliant.

The current “anti-rich, anti-tax haven” attitude is unlikely to result in fewer attempts to mitigate tax or to an increased tax take from the wealthiest 1 per cent of individuals, as there is little hard data available. The attacks on wealth and the current feeling towards the wealthy stem from the establishment rather than the millions of wealthy individuals directly affected. These individuals have yet to counter the attacks with credible arguments about their contribution to society.