Nowhere to run, nowhere to hide
Parking your money in a tax haven today is becoming more difficult and problematic for high-net-worth individuals and families, as tax authorities in Europe and around the world close in on taxable earnings on offshore investments.
Previously, these overseas investment structures were hidden from domestic tax authorities by bank secrecy rules. Now many governments are increasingly implementing new measures to lift the curtain on tax offenders, and tap into the estimated US$6 trillion worth of undeclared money located in onshore and offshore centres.
The most high-profile example of this was in February, when German authorities launched an investigation into some of the country's richest citizens who were suspected of using anonymous trust structures in Liechtenstein to hide their wealth from marginal income and inheritance taxes.
And, while sensational in nature, the move was far from unilateral.
In 2005 the Organisation for Economic Co-operation and Development issued the European Union Savings Directive, which enabled member countries to automatically share information on offshore bank accounts.
Similarly the British tax authority, HM Revenue & Customs, recently forced several major banks in England to disclose which of their clients had undeclared offshore bank accounts.
The banks included Lloyds, Barclays, Natwest, RBS, HSBC and Heritage Financial Group. The information was then used to track down offenders and demand payment from them.
These recent moves have been mirrored by similar developments in Brazil, Australia and the United States among others, which have pushed through aggressive transparency measures targeted at high-net-worth individuals and families suspected of hiding their wealth in tax havens.
What was not clear was how high-net-worth individuals and families should structure their investments, given that the blanket of bank secrecy was increasingly being lifted by tax authorities, said Philip Marcovici, partner at Baker & McKenzie Zurich, who also chaired the firm's private banking practice.
'What families require are wealth planners who can identify the real needs of the family involved, and not just advise on how to set up structures to avoid tax,' said Mr Marcovici.
He said the lifting of bank secrecy was likely to result in a movement of private capital to other non-European tax havens, such as Singapore. This investment strategy was untenable in the long-term, given the drive towards greater transparency in financial markets.
'I tell families that in today's world you have two choices: either play by the rules, or get out of your country. Ultimately if you break the law you will be punished,' said Mr Marcovici.
Already there are some indications that this shift in mindset is starting to take place, with far-reaching implications for private banks and offshore tax centres. A report by management consulting firm Oliver Wyman, titled 'The Future of Private Banking - A Wealth of Opportunities?', predicts that the share of tax-driven offshore banking is set to decline in coming years, and will instead steer towards onshore investments and tax-transparent structures as a result of the tighter banking rules.
The good news for high-net-worth individuals and families in Asia is that they largely fall outside of the scope of this problem, particularly as most tax regimes in the region only focus on terrestrial income and not offshore income.
However, tax experts warn that compliance is not always that simple, given the international nature of the investment environment.
'If you are worried about taxes, it is prudent to obtain advice from an adviser with professional privilege as to whether you are compliant or not,' said Nisha Chadha, a lawyer with Withers Hong Kong who specialises in cross-border tax, trust and estate planning matters. It should be noted that the tax authorities are likely to be far more lenient towards someone who has come forward of their own accord.'
This sentiment is shared by Michael Troth, managing director and head of global wealth structuring for Citi Global Wealth Management Asia-Pacific.
'We are coming from an environment where tax laws are incredibly complex, and you have to have the right advice for the right structure. I think that today if you are doing a legitimate transaction, and your planning remains legitimate, you don't have too much to worry about. Regardless, we advise our private wealth clients to seek external counsel to make sure what has been suggested is able to stand up to scrutiny,' said Mr Troth.
