Wealth Tax In LATAM: Are We Headed For Disaster?

And, since all taxes generally restrict the property rights of the individuals which make up the State, tax collection should be designed and carried out to cause the least possible damage. Hence our cultural battle in LATAM, not just against fiscal voracity but also against “fiscal harassment”.

This was the norm for centuries, as raising funds through taxes was the exception and was only used as a last resource to deal with extraordinary circumstances such as wars. The country would revert back to normal when these circumstantial needs disappeared. However, for some time we have not seen that situation happening.

In fact, the last few decades have witnessed the appearance of two extremely negative phenomena as far as property rights are concerned, one of them much more damaging than the other:

• the use of taxes to encourage or inhibit certain behaviours, such as smoking, polluting the environment, eating junk food, using cash, etc.; and
• the use of taxes to “redistribute wealth” in the name of “social justice”.

So, the tax internationally known as “wealth tax”, also known in some countries as “equity tax” or “tax on personal property”, does not conform to any to the norms with regards to tax collection. It does not create the appropriate incentives for behaviour change and it does not encourage distribution of wealth; in fact, it creates the opposite. This is my rationale for the elimination of wealth tax, or, if overwhelmingly necessary, turning that particular tax into a tax that affects only real estate property in the relevant country (becoming, simply, the existing property tax we see in many developed countries).

In this context, it is not surprising that the number of high-tax countries belonging to the self-serving OECD imposing this type of tax has decreased from 14 in 1996 to just four in 2017.

Reasons Behind The Trend To Eliminate The Wealth Tax

There are several reasons that explain this phenomenon on a global scale including:

• The rationale that wealth tax reduces the global savings of the population (as saving is penalised), limiting investment and therefore the economy’s growth, productivity, and salaries. I am not alone in making this connection as the same insights can be found, among other sources, in Asa Hansson’s 2010 research, which compared information about taxes and the growth of 20 countries in the OECD between 1980 and 1999 with fiscal simulations carried out by the Tax Foundation and the Institute For Economic Research (IFO).  When France gave up this tax in 2017, the French Economy Minister stated that it had cost the country lost investments worth twice as much as the corresponding collections. So, although it is true that this tax “attacks the rich” in the short term, in the medium and long term it affects much more negatively the middle and lower classes than their upper counterparts due to their higher dependence on the growth of the economy.

• The comment that wealth tax is also a tax that is difficult to manage for obligated subjects (basically because it requires assessing assets difficult to value), often affecting different types of property in different ways. Historically, compliance levels for this tax are low. These were the reasons put forward by Austria (1994), Finland (2006), Sweden (2007) and the Netherlands (2001) on eliminating it. The unequal treatment of assets was the basis for German courts to declare this tax unconstitutional in 1997. As for low compliance rates, in the overwhelming majority of countries it is perfectly legitimate to transfer assets to irrevocable fiduciary structures such as trusts and foundations, among others, and consequently to stop paying this tax.

• The argument is that this tax is the one most affected by so-called “tax competition” among countries, a phenomenon we have often referred to in columns and presentations. There are many examples of countries where it was enough to change one’s fiscal domicile to stop being an obligated subject.

• The insights that during times of globally low taxes, the wealth tax actually becomes a type of confiscation.

The only country where this tax seems to function properly is Switzerland, but the reason is that real estate property and corporate earnings are taxed moderately there, while there is no tax to personal income. On the other hand, as we note, almost everything manages to function well in Switzerland.

The Situation In LATAM

Although some of the world has long left this tax behind, mainly for the reasons above, in some Latin American countries it seems to be gaining momentum due to the losses caused by the ongoing pandemic and the appearance of new populist governments.

So far, out of the 35 countries in the region, there is an equity tax, a personal property tax or a wealth tax only in three of them.  These countries are Argentina (with the highest rates and the lowest minimum taxable amounts), Colombia and Uruguay.

Additionally, there are ongoing discussions surrounding these matters in three countries. In Peru, a minority opposition party has proposed a draft for a “regular” equity tax; in Argentina and Chile proposals have been presented of “extraordinary” taxes for great fortunes.

It is interesting to note that it would appear that the Peruvian initiative does not have the necessary votes for passing.

In Argentina and Chile, on the other hand, we can compare and contrast how these two proposed wealth tax recommendations are remarkably different to each other:

• In the first instance, in Argentina there is already a tax on personal property, which makes this additional tax unconstitutional as it affects the same assets…twice.
• Secondly, the Chilean non-taxable minimum is US$22 million (similar to the US minimum for the inheritance tax, in line with the banking world’s standards for great fortunes).
• Finally, in Chile there is juridical security, which makes it highly likely that this “extraordinary”, “one-time-only” tax will actually be so.
• In Argentina, there have been numerous examples of taxes passed for a certain amount of time, then prorogated for decades (such as the earnings tax, the personal property tax, the check tax, the increase in the VAT rates, and so on).

In summation, my position remains the same: there really are only four types of taxes: taxes on earnings, on consumption, transactions, and equity; and the latter is by far the most dangerous and debilitating for any country.

I would propose that a tax on current wealth is nothing but a tax on future poverty.

Martín A. Litwak
Lawyer specialised in wealth structuring and investment funds. Martín has focused on providing advice to high net worth (HNW), ultra-high net worth (UHNW) and institutional families domiciled in Latin America. His expertise in setting up and/or managing fiduciary structures designed to tackle issues related to the lack of rule of law, the lack of privacy and the fiscal voracity of the countries in which they reside and/or conduct their business activities, as well as his experience in resolving succession issues and/or to ensure that the family assets are well protected makes him one of the foremost lawyers in this field. He has also assisted several Latin American based fund managers with the establishment and licensing of hundreds of investment funds, the majority of them in the British Virgin Islands and the Cayman Islands. Finally, Martín has been very active in multi-jurisdictional mergers and acquisitions, international financial transactions of several types (i.e. private equity/venture capital deals, project financing, structured finance, IPOs, etc.), tax amnesties and the provision of advice in transactions involving crypto-assets and Blockchain (ICOs, STOs, etc.)