Last week, while away skiing with leading Simmons & Simmons partners, I read Zucman’s book the ‘Hidden Wealth of Nations – the Scourge of Tax Havens’.
Zucman is a young French economist. His thesis is that the world would be a better place if tax havens were abolished. He supports his propositions with calculations.
Wealth hidden in tax havens he says is equivalent to eight percent of global financial assets, totalling $7.6 trillion. Eighty per cent of it is not reported and therefore taxes are not paid on this money, he says. Zucman estimates that $125billion is lost in income tax, $55billion in inheritance taxes and $10 billion in wealth taxes.
Zucman’s mentor Thomas Picketty, is also French. Picketty is a strong advocate of taxing the wealthy more heavily. Anyone with income in excess of $500,000 should be taxed at 80% and those with income above $200,000 should be taxed at rates of between 50 and 60%.
Zucman admits that most of this money may be ‘hidden’ in trust. If he is correct then his assumptions as to ‘lost’ taxes, is a nonsense. Income arising in a discretionary trust is taxable in the country in which the trust is resident. If that country does not impose a tax, then tax is not ‘lost’ it is simply not payable to a high tax jurisdiction!
In France wealthy families emigrated from their beloved France, because of their dislike of the harsh tax imposed under the Hollande regime, and in particular its wealth tax. The payment of these taxes were not lost to the French Government, it is simply that fewer people lived in France on whom the Government could levy their punitive taxes.
Tax havens, Zucman says, are a danger to the world economy and growing. In the five years from 2010 to 2015, wealth in tax havens, he says, grew by twenty-five percent. However, what Zucman fails to understand is that as governments tighten the net around the ultra-high net worth community, the incentive to look for other ways to avoid the pressure increases.
Governments of the world are now united in their endeavour to stamp out tax evasion through the erosion of privacy. However, what they fail to recognise is that the more ferocious they become the greater is the incentive for the rich to create sophisticated trust structures to avoid it - legally.
Zucman takes the view that the new rules on the automatic exchange of information will not work, because the penalties for the tax payer and financial institutions is not high enough. The fine paid by Credit Suisse for encouraging their American clients to set up structures to avoid paying US tax, may have hurt – but, he says, was not enough to make these financial institutions stop doing what their clients want. Possibly true. Financial institutions – like their clients will learn where the new line is drawn – and not step over it.
The automatic exchange of information has undoubtedly stamped out tax evasion, but this does not stop wealthy families from finding other ways to do what they want, which are legal. Until a country’s sovereignty can be curbed and all governments set the same taxes in the same way and at the same rate, people will always choose one tax system over another for their own benefit.
Take the Argentinian tax amnesty. It is widely known that Argentines have not been declaring tax on monies held offshore. They have however now been frightened into declaring what they own offshore through the threat of transparency. $120 billion out of an estimated $400billion offshore has been declared and tax paid. But, imposing an amnesty under threat of criminal prosecution, will not make the Argentines change, it will only serve to increase their desire to use more sophisticated structures to achieve what formerly they were doing illegally.
And what is the good news about Trump? The US is the only country which is keen to stamp out tax evasion but only for US tax payers. For non US taxpayers, it is a privacy haven. For our clients we can maintain privacy, maximise Investment flexibility and minimise tax consequences. Billions of dollars are tumbling into the US coffers which makes it the new Switzerland.
As a business man Trump welcomes this gravy train and as a rich man he understands why. He won’t do anything to stop it – if he did his slogan ‘make America great again’ may not come true – much to the annoyance of the likes of Zucman and Picketty.
If you would like to find out more about how to protect your assets and privacy, or other offshore planning issues please contact Svetlana on 020 3740 7423 or svetlana@garnhamfos.com. Caroline has been a thought leader in regards to privacy for UHNW clients for the past year and at GFOS we have the culture of care embedded in our DNA.
If you would like to purchase Caroline's book 'When you are Super rich who can you trust' please do so from the website our contact Svetlana direct.
Garnham FOS only works with clients who are tax compliant.