How Private is Wealth?
A significantly increased emphasis on transparency, publicly available information of ownership and reporting of financial information to government authorities worldwide has seen privacy emerge as a key consideration for wealthy families when deciding where and how to structure their wealth.
Understanding current obligations and also what is on the horizon is key for private wealth advisers in this complex and fast-changing global tax and regulatory environment.
Our experts discussed the international initiatives relevant to this dynamic environment - including the EU tax blacklist project, DAC6 and UBO and other registers – and how these initiatives are likely to further develop in the future.
This webinar is provided by the Charles Russell Speechlys’ Latin America team with speakers from key European jurisdictions.
This event took place as part of the IBA Global Influencer Forum.
The last decade has seen significant changes to the availability of information, public or otherwise, relating to both individuals and private wealth structures.
Clients regularly ask questions about the privacy of their information – ranging from the application of “UBO registers” to private wealth structures, right through to how to manage risk once information is in the public sphere.
During the webinar, we asked: Has the introduction of UBO registers seen your clients avoiding investment into particular jurisdictions?
40% said yes, 60% said no.
Have privacy concerns shifted wealth from one jurisdiction to another?
Although clients understand the implications of a UBO register (a register of the ultimate beneficial owner of a company or legal entity) most of them would not avoid a jurisdiction purely because of it.
The introduction of FATCA and CRS has had an impact globally, however these regimes have not reduced the demand for structures in certain jurisdictions. A case in point is Luxembourg, which has a public UBO register, but continues to be used to structure wealth due to the country’s economic and legal framework, as well as the advantages of being a regulated jurisdiction for funds and corporate vehicles within the EU. These advantages, for both clients and service providers, outweigh increased administrative requirements and costs.
The direction of travel for wealth in Latin America was usually to structure through the US, whether that be due to genuine US tax reasons, family connections in the US or simply to sidestep FATCA and CRS.
A big difference in the past five to six years is that client objectives are changing, and clients are realising that information on structures held outside of their home country is now really going to flow back to their home country and that their home countries are, in many cases starting to establish the means to assimilate and use that information.
For clients from Latin America for instance, we now see structures that are largely tax transparent and that pay tax annually rather than achieving deferral. However, they still aim to achieve other objectives with regards to desired jurisdictions to hold wealth outside of the client’s home country: a good legal and political system as well as privacy other than that linked to tax information exchange.
With the various tax blacklists having been introduced by the FATF, OECD and the EU, clients typically don’t ask the same questions anymore with regards to arbitraging jurisdictions: the number of jurisdictions that can offer ‘off the grid structures’ is dwindling and those that exist are not typically palatable in terms of reputational and economic risks.
This has led to a process of educating clients on the new world of private wealth holding structures. Planning around trying to choose the right jurisdiction to reduce information flows is more difficult to do now: one should focus more on information flows that are accurate and that identify a single or few UBOs rather than draw in a wide range of family members who have no real and current beneficial interest in the wealth in question.
What information is publicly available, and how and when can third parties access information about wealth?
We have seen the introduction of policies and registers that will potentially make information on private wealth holding structures publicly available. Regimes such as MDRs and DAC6 funnel information to tax authorities on cross border transactions that provide a tax advantage, or which mask reporting under CRS. It is therefore much easier now to see what a family owns in terms of assets, even if held through a structure.
In the US, the Corporate Transparency Act is a big change. The act is very broad in scope, as it provides for UBO registers for US companies (including US territories such as Puerto Rico and the US Virgin Islands). Although the UBO registers are private at the moment – i.e. not publicly available to other countries, FinCEN can share the UBO register information with other competent authorities for tax reporting reasons. US congress are examining where other types of vehicles should have UBO registers too, including non-US companies resident in the US. The timeline on a decision is said to be around two years.
Economic substance legislation also comes in to play here. In the cases of non-compliance in the Caribbean countries which have introduced economic substance reporting, the local Caribbean authorities can report the non-compliance information to the country of the UBO’s tax residence.
And we shouldn’t forget Country-by-Country reporting (a political agreement targeted at increasing transparency on multinational corporations and how much tax they pay worldwide). Although this information is currently only available domestically, the model in the EU proposes to make the information publicly available.
We asked the attendees: Which of these jurisdictions do your clients view as the most private?
- Bahamas: 15.00%
- Singapore: 15.00%
- Switzerland: 15.00%
- USA: 55.00%
- Luxembourg: 0%
What mobility patterns are we seeing from our clients?
We have seen significant changes in Luxembourg with regards to family offices and corporate operations shifting into the jurisdiction. We have recent experience with families from Latin America sending family members to Luxembourg to lead the family office, in order to fulfil the requirements of significant economic substance.
The spectre of the introduction (or re-introduction) of wealth taxes, such the recent introduction of a significant wealth tax in Argentina (for which the cut-off date had already passed), is sharpening client sensitivities in relation to privacy. Planning is becoming difficult for families who are not comfortable with their home governments having so much data on their net worth, as they take the view that this may well lead to pursuit of wealth with wealth taxes.
Relocation to most seems extreme. We have seen in practice that there has to be a cultural fit with the relocation jurisdiction. For business owners, if their crown jewel assets are in the home country, changing tax residence and setting up a well-organised structure with good governance is not going to achieve the required objectives if they are frequently going back ‘home’.
Changing tax residency by relocating also does not guarantee protection under investment protection treaties regarding local business and assets. Even if families can move, some of the fundamental business assets from which they derive their wealth are fixed in the home country. As such, a re-examination of asset protection and use of bilateral investment treaties is a trend.
Data leaks: what should you do to try to limit damage?
Privacy planning should now be part of the conversation with clients. It is important for clients to understand exactly who holds their data and where that data is held. Clients also need to expect the worst, and have a crisis management plan in place if that eventuates.
The external communication must be very strong following a data leak, in essence diluting any bad press with positive press. Families have to learn how to manage this from a technology standpoint. The next generation may be digital natives, but they still need to be coached about how digital privacy should be managed.
Jurisdictions also have their own cultures of privacy. As a service provider it is useful to understand expectations of clients with regards to their specific culture of privacy. For instance, in Switzerland privacy is hard-wired into the professional culture, whereas other jurisdictions such as the UK may be perceived as being more relaxed regarding this topic.
We have seen that data leak scandals in the past have been incredibly damaging to the institution. For law firms, trustees, and other intermediaries, this risk and crisis management of that risk is a challenge for us all.
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