(i) tax homogenisation or cartelisation (which implies a global rise in taxes and the undoing of any traces of tax competition); and
(ii) the encroachment on individuals’ privacy (necessary to reach the objective above).
Both trends gained momentum after the 2001 World Trade Centre attack right up until Donald Trump’s leadership push and they seem to be acquiring even more relevance as we speak.
To illustrate this, it is important to remember that, between the attack and Trump’s rise to power, the following changes happened (among others), all of them leading towards the trends mentioned above:
(a) the “Patriot Act” was passed;
(b) low or null taxing jurisdictions were forced to abolish bearer shares and, in many cases, to require companies established there to register directors’ names before authorities (unlike several states of the US);
(c) the Foreign Account Tax Compliance Act (FATCA) was passed and enacted; and
(d) the Common Reporting Standard (CRS) was passed and enacted.
Just like Trump’s Presidency stopped the advance of invasion to privacy (for example, Inter-Governmental Agreement (IGA) signing for FACTA implementation with third-country parties was halted). It implied, in fact, not just a halt but also a step back regarding wide agreements between high tax jurisdictions, leading to a revival of tax competition once championed by Ronald Reagan. Biden’s victory, and, above all, the pandemic, have caused a fast return to the trends discussed above.
In between Trump losing the 2020 elections and his stepping down from office, Congress ignored his veto over the National Defense Act and forced its passing. This Act included the “Corporate Transparency Act,” which, in a nutshell, established the obligation to communicate to the Financial Crimes Enforcement Network (FinCEN) the final beneficiaries of any company incorporated in the US.
It is uncertain how FinCEN will process such a huge amount of information – but what is not uncertain is that this provision will lead to an incredible erosion of an individual’s privacy, with or without justification.
With regard to taxes, the US Secretary of the Treasury Janet Yellen’s words are still very fresh. “The US should not have an issue with increasing its corporate taxes as it will not lose investments because this action forces the world’s countries to cooperate”. It is impossible to provide a better definition of tax cartelisation.
In Latin America, both trends are the order of the day.
Three countries have already approved taxes on extraordinary wealth (or on great fortunes), using the pandemic as an excuse. These countries are Argentina (made worse by the fact that Argentina, together with Uruguay and Colombia, already had a wealth tax before the arrival of COVID-19), Bolivia, and Chile.
Although part of the world has long left this kind of tax behind, essentially because it is counterproductive for countries’ growth, difficult to manage, and a violation of the principle of equality as well as being one of the most evaded taxes, 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.
Until recently, out of the 35 countries in the region, there was an equity tax, a personal property tax, or a wealth tax only in three of them. These countries were Argentina (besides the highest rates and the lowest minimum taxable amounts), Colombia, and Uruguay.
Towards the end of last year, Bolivia became the fourth country in the region to have this tax type. On December 28 of that year, the Bolivian parliament passed a tax on fortunes of 30 million Bolivianos reaching 152 people in Bolivia, and a second wealth tax (in theory, for the only time) in Argentina. According to the information shared by the President of Bolivia over social media, the government authorities on economic matters estimated that with the new provision, around 100 million Bolivianos would be collected (approximately US$14.3 million).
Argentina and Bolivia are remarkably different from each other, in particular:
Besides the provisions passed in Argentina and Bolivia, there is a bill heavily underway in Chile and more or less incipient rumours or projects, sometimes with less backing, in Mexico, Peru, Uruguay, and other countries.
In Chile’s bill, the two main differences with the cases above are the following:
Our position on this tax, whatever the specifics in each country, remains the same as always: there really are only four types of taxes: taxes on earnings, 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.
Another unfortunate trend in Latin America is the passing of a variety of provisions making taxpayers notify tax authorities of their wealth planning, which violates not only the privacy of persons but also principles as basic as they are important, such as attorney-client and accountant-client privilege.
In this case, Mexico took the first step through a law passed by Congress on October 30, 2019, which entered into force on January 1, 2020. One of the effects of this law was to include the Tax Code of the Federation, the obligation, not just for taxpayers but also their tax advisors, to reveal fiduciary structures leading to a fiscal benefit.
Not unusually, after Mexico, Argentina followed suit, with the revenue service AFIP’s General Resolution 4838, currently under study by several Nation’s Judges.
The revival and strengthening of both trends, not just in Latin America but the entire world, compels us to investigate current wealth structures in order to get ahead of greater changes and speed up the creation of innovative fiduciary structures for clients who have not yet done so. The growing fiscal voracity of countries will likely lead to completely legal structures now, but this could not be the case in the not-so-distant future.
All in all, there are storm clouds ahead in the wealth structuring and wealth preservation space.
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.)