03/02/17

EM countries target offshore wealth with tax

Governments are implementing tax amnesties to encourage this money to be declared. This helps to widen the tax base and increase tax revenues permanently going forward, despite the upfront amnesty, reports International Adviser.

Most EM economies, including most Latin American countries, now have deep domestic bond markets and equity markets, while macroeconomic conditions are far more stable.

Many EM economies are now fully integrated into major fixed income and equity benchmark indices.

This is why the time has come to get the rump of high net worth assets to go home. The amnesty schemes are generally good news from a bond holder’s perspective.

The government’s tax base widens, so public finances become healthier. Also, the inflows associated with the amnesty tend to support currencies. Finally, some of the declared wealth will go into local bond and equity markets.

Governance quality improvement

In Latin America, Argentina and Brazil have both implemented successful tax amnesties and, on 18 January, Mexico became the latest country to introduce such a scheme.

Indonesia has also successfully implemented a tax amnesty for overseas wealth.

The fact that such amnesties are proving successful fundamentally reflects that the quality of governance in EM is improving, because otherwise no one would agree to declare their overseas wealth.

The big stashes of overseas wealth are a legacy of much worse times in EM’s distant past, when truly no one trusted local banking institutions and where there were no decent investment opportunities and no credible financial assets to invest in within EM countries.

These conditions were particularly pronounced during the Cold War period, but things have changed sharply in the last couple of decades.