The quiet revolution?

Thursday, 01 October 2009
The findings of a major new STEP report on the evolution of offshore - in particular, looking at the industry's views on the future of bank secrecy.

‘A quiet revolution is under way in international governance. Building on more than a decade of work at the OECD, governments are finally getting to grips with one of the biggest threats to fair and effective public financing. It seems almost unbelievable, but the era of banking secrecy for tax purposes will soon be over. In tomorrow’s world, there will be no more havens in which to hide funds from the taxman.’- Angel Gurria, OECD Secretary-General, September 2009.

So much for the political rhetoric; but what does the international wealth structuring industry itself think about the future of ‘bank secrecy’?

To find out the answers to this and many other questions, STEP and Spence Johnson produced a major new report, Offshore Evolution: Transparency and Solutions in Cross Border Wealth Structuring. Thirty-two leading trust and estate practitioners, including lawyers, accountants, trustees and bankers, were interviewed between March and June 2009 about their predictions for the industry over the next 12 to 18 months. These are their views, not the views of STEP or Spence Johnson.

The study found that industry views matched the political rhetoric and members felt the OECD are right to say banking secrecy is in its death throes. Indeed, more than 75 tax information exchange agreements based on the OECD’s Global Forum’s model have been signed since the beginning of 2008.

As a result, practitioners are decisively preparing for a new professional future where they are actively engaged in global, not just local, tax compliant cross-border wealth structuring.

But there will be losers as well as winners from this ‘quiet revolution’. The winners will benefit from a ‘transparency dividend’ whereby the end of secrecy will generate an economic windfall for practitioners delivering tax advice in line with multi-jurisdictional exposure.

There are costs required to make the transition to the new regime, and some firms will need to spend more than others. But our respondents argued that the benefits will outweigh the costs in the long run. They also believe that they don’t have much choice in the matter anyway.

There are several ways the transparency dividend will reveal itself. The most important is how it changes relationships with clients. Advisors will now have to engage with clients in a more meaningful way. Some clients may resist this, but for those that ‘come into the light’, the outcome is likely to be more profitable for advisors.

The evidence to support this theme is abundant. Not just from the TEP world but from other sectors, which have made the same transition. We need look no further than the UK to see the renaissance that is taking place among ‘new model’ independent financial advisors as an example. Several TEP contributors to this study also gave evidence of how their practice or business has become more rewarding, both professionally and economically, when they moved to a transparent, global tax advice model.

Transparency has positive implications for the pricing of trust services. Again, once the distorting effects of secrecy are removed, trusts are more likely to be priced on their true cost and less likely to be commoditised through cross-selling.

We all know that tax advice to high-net-worth families is now global rather than local. Much more sophisticated advice is needed to manage the complexity of tax issues wherever a client may have assets or connections.

Clients want home country compliance and international tax neutrality to avoid additional layers of tax. Some have claimed that this will mean the end for some international finance centres, and this may be true. But the main priority for wealthy families is that assets are well-managed in financial centres with a strong regulatory environment, confidentiality, political and economic stability and access to a wide-range of top-flight professional expertise. A strong currency will also help. This may be good news for bankers like Christian Hafner, whose article on page 25 dwells on the challenges facing Switzerland in the new world order.

What will also be good news is that members expect global tax competition to intensify. Here there is mixed news. The bad news is the pressure on the budgets of smaller finance centres, who may be tempted to raise taxes to fill the black holes in their finances. The ‘good news’ is that the taxes of OECD member states will rise. For example Spain is already considering a rise in capital gains tax and the UK can expect hefty tax rises even under a future Conservative government once the election is out of the way.

Offshore Evolution covers much more than just the discussion of transparency, and in the coming months we will examine some of the predictions in more detail.

The executive summary of Offshore Evolution: Transparency and Solutions in Cross Border Wealth Structuring is available on www.step.org

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Keith Johnston

Keith Johnston is Director of Policy and Communications at STEP.

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