Attacks on the wealthy by greedy, broke governments are increasing. What can the wealthy do Catriona Syed of Charles Russell wants to know
WE ARE LIVING in paradoxical times. On the one hand, in the last 25 years, enormous wealth has been created, and there are more millionaires than ever before. On the other hand, almost every country in the world is going through a difficult economic time, with austerity being the buzz word. There is also civil unrest in some countries. The result is that many wealthy individuals are feeling threatened, and this is a global trend.
What are the potential sources of attack on wealthy people? Entrepreneurs and their families are used to challenges by creditors, divorcing spouses or other family members, but there is increased concern about governmental challenges, whether through tax or otherwise.
Changes in the Middle East over the last two years, and the Khordokovsky case, have demonstrated that nobody is safe if government changes, or law and order breaks down. Today’s multi-millionaire, seemingly impregnable, with wealth that sought after all over the world for investment purposes, is tomorrow’s prisoner. His assets will have been confiscated and, for high profile political figures in countries without a developed stable political regime there is a very high risk. Spreading assets through the family and giving them to trusted advisors may help to spread the risk of complete financial loss, but is not a complete answer.
For those with a less high political profile, it is worth considering whether to obtain residency rights in a country with a more secure political system and with a wide range of visa treaties. There are a number of attractive countries in this category – St Kitts & Nevis being one of the cheapest, but perhaps not quite as robust as others, such as the UK where, for a relatively modest investment of £1 million, residency and (after a period of time) citizenship can, effectively, be bought. Other European countries (including Switzerland) offer similar programmes. This may not give full protection – it is questionable how welcome President Assad’s wife, a British citizen, would be in her home country.
Raising tax is another way governments can attack private individuals. In this case, the motive of the taxing authority has to be considered. Is it to increase the level of funds generated or is it politically driven to correct a perceived injustice? There is some evidence that increasing the rate of taxation does not necessarily increase the tax take. For example, if income tax rates are high, investors may instead of seeking income returns, look to make capital gains, especially if they are either tax free or taxed at a lower rate than income.
In either case, 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 (especially if it is not their “home 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 (eg Zurich) should be a wake up call to governments which consider that individuals will remain in a particular place simply because of quality of life.
It is also true, however, that moving to a different country involves risks that the country will change its laws, but for those willing to move every few years, there is sufficient differentiation in tax rates from one country to the next to keep their tax bills low. Of course, for some, it is not worth it and they will pay tax to have a stable life.
HOW ABOUT USING pressure on the offshore jurisdictions to increase the tax take? This has proved to be 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.
For example, although the UK tax authorities suggested in June 2012 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 facts that it is more difficult now to use this facility than it was prior to August 2012 and that to June 2012 only £363 million had been raised, do make £3 billion look aspirational.
The agreements between the UK and Switzerland and Germany and Switzerland, which will result in either information exchange or a withholding tax, may simply result in movements of funds away from Switzerland, with rumours that Singapore has been a beneficiary. For those prepared to actively manage their funds, differentiation will always be possible.
The money laundering and compliance rules have spawned a new industry over the last fifteen years or so and have also been effective at changing the business of the offshore jurisdictions, as the costs of implementing these procedures mean that it is not effective for those with relatively modest means to set up complex structures or use offshore bank accounts. In fact, the implementation of these procedures is perhaps now more rigorous in Cayman than in Delaware, to use the famous example. The result is not necessarily that the wealthy pay more tax but may have encouraged the squeezed middle to be more compliant.
So, is it likely that the present “anti-rich, anti-tax haven” approach will result in fewer attempts to mitigate tax and an increased tax take from the wealthiest 1 per cent of individuals? Unlikely in my view, but there is little hard data available. The propaganda war is being conducted by the most organised party – the establishment – rather than the millions of individuals who are directly affected by it but who are not yet sufficiently organised to counter it with credible arguments about their contribution to society.
Catriona Syed is a Partner in the Private Client team at Charles Russell LLP