For more than two decades now, the wealth planning industry has been heavily impacted by two damaging macro trends: (i) tax cartelisation; and (ii) a growing invasion of individuals’ privacy.
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The first trend implied constant attacks against tax competition which is the sovereign right of each State, country, or territory to structure its tax system without the intromission of third parties, something widespread and, of course, accepted in all other areas of government but somehow catalogued as “dangerous” or “harmful” when it comes to taxes.
The second one was responsible for all the attacks against countries that understood privacy was a basic individual right worth protecting.
The relationship between these two trends is evident: the second one was key for the first one to achieve its real objective: that highly inefficient States with high taxation do not lose tax revenues to more efficient States governed by pro-market politicians.
Both trends gained momentum in 2001 after the World Trade Centre attack and continued to intensify until Donald Trump took office as president of the United States. After four years of minimal changes, they have become stronger than ever, with Biden in the White House and a pandemic that increased the resentment towards the rich and corporations and shifted the axis of political discussions to the left worldwide.
Of course, these are the main reasons this new initiative for a global minimum corporate tax has been adopted so quickly. In fact, for the first time, the US is leading the G-7, G-20, and OECD attacks against tax competition. As a side note, this new minimum tax will not impact offshore centres or corporations but individual taxpayers. Corporations do not pay income tax; they are simply intermediaries between consumers and the tax authorities. As we always note, governments can decide who will be paying taxes but not who will be bearing their real weight.
Janet Yellen’s words are still very fresh: “The U.S. 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”. There cannot be a better definition of tax cartelisation.
Unfortunately, and much different from what President Obama did in practice (he did criticise offshore centres during his presidential campaigns to gain some votes, but never attacked tax competition while in power), Yellen and Biden are now walking the talk. This means that we need to deal with an even more aggressive OECD when advising families as to how they should structure their assets.
In summary, the strengthening of these extremely harmful trends increasingly throughout the world compels us to re-examine all current wealth structures to get ahead of greater changes. We are also compelled to ramp up the creation of innovative fiduciary structures for clients who have not yet done so.
In my opinion, the growing fiscal voracity of countries and the virtual lack of privacy will likely lead to vastly changed legal wealth structuring and wealth preservation structures.
As a result, we have been urging clients to move ahead with establishing their fiduciary structures before things change radically. It is important to note that not long ago, it was routine for a person to incorporate a bearer shares entity to hold a numbered bank account in a country that will never share any of the information of said account with any country under any circumstance.
In other words, structures that are 100 per cent common and valid now might be complicated to put together in a few years.
Whilst it is tough to anticipate the future in an area that changes so rapidly, I do expect the following:
HNW and UHNW families will continue to invest in assets that can provide the privacy that legal structures cannot (i.e., art, non-fungible tokens (NFTs), crypto assets, real economy businesses, real estate, etc.); and
the use of a certain type of insurance, the issuance of debt instruments, and/or the incorporation of companies where ownership can be atomised without said entity qualifying as a financial entity will grow.
At the same time, I also anticipate that data theft and the leaking of client information will be even more common and therefore clients will be increasingly more concerned about IT.
That is, of course, unless one day the supporters of tax competition, property rights and privacy do prevail in the cultural battle against the fetishising of poverty and envy.
I guess that it is okay to daydream about a level playing field as long as you continue to plan for the worst (which is the most likely outcome).
About the Author
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.)