Why Asia’s Rich Really Use Global Tax Havens
Roughly half of all clients use offshore hubs for better investment options rather than avoiding tax or anonymity.
If you are wealthy and live in Asia, chances are you have at least one offshore company with shares owned by a trust that you set up to ease estate planning for your far-flung family.
Your offshore company, which may be in the British Virgin Islands or Hong Kong or Panama, for that matter, could hold real estate in the U.S., or stocks in Europe. This is all perfectly legal.
Most likely you know that and aren’t alarmed by the unprecedented leak of records from Panama law firm Mossack Fonseca, a trove dubbed the Panama Papers. But you may rightly wonder whether global outrage toward offshore companies and the wealthy and powerful who use them – illegally, at times, according to journalists who have seen the documents – could spur more scrutiny and regulation. You have a right to worry.
“There hasn’t been an outpouring of concern, most people have proper structures,” says Todd Beutler, an international tax partner at DLA Piper in Hong Kong. But he says, yes, the massive revelation could spur governments to “throw out big nets to look for people who are doing something wrong when a lot of people are doing it right.”
There are many legal reasons to use an offshore structure. Consider a Hong Kong businessman who wants to invest in U.S. real estate. That businessman’s heirs could have to pay U.S. estate taxes of 40% on the value of the property above $60,000 when he dies (U.S. residents are exempt up to about $5.4 million). That’s a hefty tax a non-U.S. company, legally, would not have to pay.
It’s also not uncommon for an Asian family to have a private investment company established in the Cayman Islands, say, to buy U.S. stocks, again sheltering a non-U.S. resident from U.S. estate taxes. But security, rather than tax efficiency, looms as a larger concern for some of the world’s wealthy.
“Besides proper tax and succession planning,” Beutler says, “families that face ‘rule of law’ issues in their home jurisdictions may utilize structures to preserve confidentiality and privacy.” They could have legitimate worries about having their assets expropriated or seized, or even of kidnapping, blackmail and extortion from corrupt officials as well as criminals if their assets aren’t protected by a legal international structure, such as master trust or foundation, he adds.
Globally, about a quarter of high-net-worth investors hold wealth offshore, says Verdict Financial, a market research firm that does an annual survey of global wealth managers. The wealthy go offshore mainly for better investment options and better returns, Verdict found in a 2015 survey. Tax efficiency, local economic instability and anonymity are far lesser reasons.
Tax efficiency doesn’t figure as prominently as it once did because offshore vehicles simply offer less protection than they once did. This all started after the global financial crisis, says Andrew Haslip, Verdict’s head of content in Asia Pacific. FATCA, the U.S. Financial Accounting Tax Compliance Act, which took effect in July 2014, accelerated the process, requiring overseas bankers, brokers, insurers and the like to report account information on any of their U.S. clients to the U.S. government.
The concept gained traction globally thanks to the OECD’s Common Reporting Standard (CRS), now agreed to by 96 countries (with the notable exception of the U.S.). The CRS similarly obliges financial institutions to report foreign client accounts to their governments who in turn have to exchange the information with other governments. India and Korea were among the first countries to agree to exchange information globally, but most Asian countries come on board in 2018, including Australia, China, Hong Kong, Malaysia and Singapore.
The point of all this is to stop tax evasion. But the fact the CRS will expose names of beneficiaries and settlors of offshore trusts and foundations means wealthy citizens are more likely to use offshore vehicles to diversify their portfolios and provide access to more investments options than for tax efficiency or anonymity, Verdict Financial says.
That individuals from Asia use offshore companies is evident from a sample of 13,000 owners of companies incorporated with assistance by Mossack Fonseca and identified byThe Guardian , one of several news organizations given access to the Panama Papers by the International Consortium of Investigative Journalists. The largest percentage of owners in the newspaper’s sample came from China, some of whom have links to eight current and former members of China’s politburo. Hong Kong had the second most owners, followed by Russia, the U.K. and Switzerland.
As for where this is all going, global regulators appear to be moving in the direction of tougher oversight. The international Financial Action Task Force has pushed for more global exposure of beneficial owners of privately held companies, and the U.K., the U.S. and the E.U. are responding to one degree or another.
There are two take-aways from all this for Asia’s rich. First, make sure you work with reputable institutions that can detail how they comply with local, national and international laws and regulations. And second, if you use offshore companies, don’t rely on just one law firm or accounting firm to avoid a data leak exposing all of your assets to the world.
Beutler at DLA Piper says an Asian client of his whose holdings were revealed in the Mossack Fonseca leak found this out the hard way, despite complying with all laws and regulations. “This was distressing to him,” Beutler says. “His privacy and confidentiality was violated.”
- Income Tax Calculator
- PAYE Rates
- Personal Relief Table
- Quantification of Benefit Table
- Capital Allowance Table
- Withholding Tax - Resident Persons
- Withholding Tax - Non-Resident Persons
- Corporate Income Tax Rates
- Industrial Tax Concessions
- Exempt Supplies of Goods and Services
- Double Tax Treaty Rates Table
- Interest, Penalties and Offences