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05 April 2009
Thank You, Gordon, Now Here's The Money For Your Bus Home Just in the last week, the outlines of the 'new world order' which will shape
the international fiscal landscape for the next few decades have become perceptibly
clearer, with low-tax jurisdictions rushing to sign information exchange agreements
with their high-tax tormentors in order to avoid inclusion on the OECD's new
blacklist, which most of them have indeed escaped.
Before giving up on offshore as a bad job, however, it is worth remembering
what has actually changed, and what happened last time that the OECD bullied
low-tax countries, in 2000. On that occasion the OECD wanted two things: transparency
and higher taxes. It got transparency, as dozens of offshore jurisdictions enacted
'know your customer' rules and banned bearer shares. But it didn't get higher
taxes - the offshore jurisdictions banded together and shamed the OECD into
agreeing a 'level playing field' which maintained tax competition as a respectable
concept.
This time the OECD is attacking secrecy, making sure that high-tax country
citizens cannot hide their wealth or income away from the eyes of their home
tax authorities. But the OECD is flogging a dead horse: fishing expeditions
by tax authorities in the UK, the USA, Ireland, Germany and France have made
offshore concealment a dangerous and expensive game to play. No sensible, seriously
wealthy person would any longer take the chance of evading taxes on a major
scale. And they don't have to, anyway, there are plenty of legitimate ways of
protecting your wealth without hiding it under a rock on a Caribbean island.
One of the best ways of protecting yourself from taxes is by not living in
a high-tax country, and the counterpart of the OECD's efforts to prise open
the offshore shutters will be an ever-increasing stream of tax-emigres. Something
that the tax authorities don't 'get' is that taxation is a bargain with two
parties - the taxman and the taxpayer. Taxpayers pay because the bargain is
worth it to them, and for the last fifty years wealthy people have accepted
the bargain because they were able to protect most of their wealth from taxation,
using legitimate or illegitimate means.
The behaviour of the cloth-eared British Treasury over 'non-doms' is a perfect
example of how to kill the goose that was laying such a rich harvest of golden eggs.
New rules apply an annual GBP30,000 charge to any long-term non-domiciled UK
resident (not born there, roughly speaking) in addition to local-source taxation.
One in four resident but non-domiciled taxpayers in the UK who responded to
a recent poll regarding the changes to the non-dom tax regime have already made the decision
to leave the country, and another 25% have said they will wait and see before
doing so. Now, do you suppose these are the poorer 50% of non-doms, or the richer?
No prizes for guessing that the richer people will leave, while the poorer ones
will stay.
Something else that the tax authorities don't 'get' is the Internet. There
is no longer any need for a business person, an investor or a company to have
a physical presence in a country in order to operate there. The foreign hedge
fund managers in New York who have been able to treat 'carried interest', ie
their fund management profits, as low-taxed capital gains rather than high-taxed
income will all be on the way to Dublin, Zurich or Cyprus as soon as Congress
passes the inevitable law to change the current regime. All the rich Russians
have already left Moscow as fast as their Lear Jets could carry them.
And this uncomprehending behaviour at a moment when the trillions of taxpayers' money being thrown
at the world's banking sector by short-sighted politicians hang like a toxic
cloud over the rich countries' fiscal landscape. Taxes are going up, make no mistake
about it, and big time. They will have to - but not offshore, where the banks
are mostly as solid as the rocks they stand on. In between the year 2000, when
the OECD launched its anti-offshore rockets, the banking and investment fund
assets held offshore have increased by approximately 500%, and it has become
almost impossible to find anywhere to live at a reasonable price in any offshore
territory with a halfway-decent climate and good Internet connectivity. Now
that the world's leaders are kindly insisting on the removal of the last shreds
of ill-repute from offshore, just watch it grow in the next 10 years!
You have been
reading an entry on the following blog:
UK Chancellor George Osborne has unveiled plans for a new Office of Tax Simplification.
The UK tax code - a somewhat amorphous concept since what is included depends
on what you choose to call a tax - is said to be around 30,000 pages long. Again
that begs the question of what you call a page, what size type, how many lines
etc etc. Anyway, no-one questions that there is too much tax legislation, and
every annual Finance Act adds another thousand pages or so. Even tax practitioners,
who you would think might benefit from complex tax legislation, are complaining
that it has become impossible to answer straightforward questions from their
clients. And the Inland Revenue has taken to making up the rules as it goes
along, for instance on tax residence, probably thinking to itself that since
no-one knows what the law actually says any more, it may as well use whatever
interpretation suits its purposes, which, surprise, surprise, is usually to
extract more tax.
The UK is not alone in having an overgrown tax code. In the USA, no-one even
seems to know how long the Tax Code really is. It has capital letters because
unlike in the UK, there is something called the Tax Code, and you can even buy
a printed copy of it from the government for a mere thousand dollars. President
George W Bush said: "The tax code is a complicated mess. You realize, it's
a million pages long." Most estimates though are down in the tens of thousands
of pages. One of the problems in the United States is that Congress quite frequently
tacks tax legislation on to other bills, being very often the only way of getting
it through. Then of course there is State-level tax legislation as well.
For there to be any chance of simplifying and shortening the tax code in an
advanced country like the US, the UK, France or Germany, you would first of
all have to understand why tax legislation grows like Topsy, and the answer,
inconveniently, lies in the word 'Democracy', ably assisted by public choice
theory. Getting and keeping political power nowadays means taking the part of
the innumerable groups, factions and interests that make up your constituency,
whether that be a small patch of countryside (for a local councillor) or a whole
nation (for the leader of a national political party). And the first thing that
any group wants from its politicians is to pay less tax, whether the group is
the motoring public, cyclists, commuters, train motormen (sorry, motorpersons),
car manufacturers, gas station operators or bus companies.
And in that microcosm of just one part of human life (getting to work) you
can immediately see the problem: these seven constituencies have conflicting
interests from a fiscal perspective. Some people belong to more than one of
those groups, as well. It's impossible to optimize a tax system to please everyone
all the time; the best you can do is to please some of the people some of the
time. But that doesn't stop politicians from trying. In the USA, where the system
is best developed (and the tax code is longest) the game is famously played
with 'pork', or 'earmarks', the little add-ons to a bill in progress that secure
the votes of enough legislators to get the bill through. Then it has to go to
the other House, and perhaps back again, each time gaining more weight. Certainly
you could never have a saying in the USA that 'a rolling bill gathers no pork'.
What is to be done, then? Abolish democracy? As Winston Churchill said: 'Democracy
is a very bad system. But all the others are worse.' No, we can't do that. So
what we do is to invent new quangos called The Office of Tax Simplification
or similar. Both Bush presidents did it; so did Bill Clinton. The only reason
that President Obama hasn't done it yet is that he has been too busy making
the Tax Code longer. Just give him time.
Reducing the number of countries would work, in terms of reducing the total
amount of tax legislation, and possibly the total number of tax lawyers. The
Romans proved that; but empire-building has become unfashionable lately. In
fact it's going in the opposite direction: in the UK, regions like Scotland,
Wales and Northern Ireland are all becoming more rather than less independent,
and along with that independence goes tax-raising and spending power, with,
yes, you guessed it, brand new regional tax codes.
Flat taxes work, too, and are even efficient at optimizing tax-gathering; but
they are a non-starter in advanced democracies. The new, Eastern European members
of the European Union got away with introducing them ten years ago because clever
Harvard-trained economists slipped them through before domestic politicians
had cottoned on to the usefulness of a bulky tax code. They are learning quickly,
now, and one by one the countries with flat taxes are undermining or abandoning
them.
So there it is: fat tax codes go along with fat people as shining achievements
of our civilization. You'll just have to learn to love them.
So here I am, in January 2011, the 25-year-old scion of an august European banking
family based in London, fresh out of Harvard Business School, and my Dad, who
is still Chairman, wants me to get some hands-on experience of actually running
a business before he steps down in a few years' time. So he's putting up USD100m
as start-up capital and he is suggesting I specialize in family offices (that's
the name given to investment management partnerships which look after the wealth
of individual families). It's an area we've never majored in, and Dad thinks
we ought to get it going. I can't disagree with that; it's probably been the
fastest-growing sector of wealth management in the last ten years, and we're
missing out big time.
Although the firm has its HQ in London, we also have substantial capital and
offices in New York and Zurich, and of course we have branches all over the
place. So Dad's first question to me (and my first
question to myself) is: "Where are you going to put the firm?"
The criteria must include:
Good communications, not just in terms of telecoms, but also good airline
connections, because clients are going to want to visit us.
Availability of qualified staff.
A good tax environment for investment purposes; we aim to have at least
several billion under management within a few years.
Now of course we could separate the sales side, the meeting and greeting, from
the investment management. But clients don't like that very much: they want
to look into the eyes of the person they are going to trust with half a billion
dollars of their wealth. So in the end, the choice of HQ cities is quite limited.
London, and New York, perfect as they are for meeting clients (and I would
have all the advantages of our existing offices and support services) can be
ruled out straightaway. The US Restoring American Financial Stability Act has put
a strait-jacket around banking operations and staff remuneration, and in Europe
the Capital Requirements Directive is even worse. No-one wants to work under
those sorts of rules, and no bank would willingly submit itself to legislation
which will double or treble the amount of capital you have to hold. Dad says
that if he wasn't already near retirement he'd move the whole operation lock,
stock and barrel to Hong Kong or possibly Zurich. And he says that there isn't
a senior banker in Europe or America who isn't asking himself the same questions.
Zurich is possible. The problem is that Switzerland is locked into a deadly
embrace with the EU, and little by little all its financial freedoms are being
whittled away. After what happened with UBS and its US clients it's a tough
sell to persuade clients into Zurich if they're not already there, and then
they're probably locked up with someone else.
So, a bit reluctantly, because of the life-style, I have to decide against
Europe. There are one or two outliers, Canada for instance, which hasn't (yet)
given in to the G20's demands. Toronto isn't a bad place to be. Then there are
the big International Financial Centres (not allowed to call them 'offshore'
any more!) like Panama, Cayman and Jersey. We'll use them, of course, for fund
management, but the skill pools are quite limited and they are ruled out on
travel grounds. They have something called fog in Jersey, and you've got the
EU breathing down your neck.
So in the end it's a no-brainer, and it's called Hong Kong. Low or no tax,
plenty of banking professionals, good connections, and right next door to the
biggest source of new wealth that there is.
"Of course," said Dad. "I knew that would be the answer, but
you had to think it through for yourself." He reflected a moment: "It's
a pity the European Parliament and the Congress didn't go through the same thought
process. As it is, they've signed a collective death warrant for their financial
sectors. Politicians!"
As he talked, I was looking for Mandarin lessons on my Blackberry.
Penelope Wise
Penny Wise but not Pound Foolish! But remember: I am not offering investment advice. My comments are just for your general information; I do not recommend investments, and you should take professional advice before entering any investment contract.
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