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Implications of Greater Tax Transparency on Investment Portfolios at Private Banks

There is no doubt that increasing fiscal pressures – especially in the developed world – has led their governments to pursue more means in ensuring that tax revenue from their citizens that have assets abroad is aggressively targeted.  This has increasingly resulted in the implementation of measures and agreements for greater tax transparency between countries.  Bodies such as the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes have become much more active.  Additionally, with the enactment of the Foreign Account Tax Compliance Act (FATCA), the United States wishes to ensure that all accounts held abroad by US taxpayers can actually be taxed.  FATCA is a unilateral set of US regulations that applies worldwide for all countries. It requires foreign financial institutions to disclose information on US accounts to the Internal Revenue Service or levy a high tax.  It is unlikely that any self-respecting financial institution will defy FATCA, thus they would be willing to “disclose all” about their clients.

It is a well known secret that Switzerland has always been considered a “safe and reliable” country for foreign individuals to park their money, out of sight of their respective tax authorities.  Swiss banks and fiduciary companies were very creative in enabling their clients to remain “invisible” through various schemes such as foundations, trusts and non-domicile corporations.  Switzerland’s strict bank secrecy laws were taken for granted and individuals who had accounts there could relax.

The first cracks started to appear following the financial crisis, when UBS agreed to pay $780M to the US authorities for allegedly “helping” US citizens in avoiding taxes on their deposits/investments.  They also agreed to give the names of thousands of US persons with accounts in Switzerland.  Since then, due to huge fines, one of Switzerland’s oldest private banks – Wegelin & Co has closed down and many more private banks are under investigation.  Even recently, Credit Suisse pleaded guilty to “conspiracy to assist US customers in presenting false income tax returns”, and paid a massive $2.8B in fines to settle, as well as giving names.

The US was the first to inflict damage on Switzerland’s reputation as a trustworthy location for tax evaders. It was only a matter of time that large countries like the UK, Germany and Italy also started negotiations with Switzerland for the exchange of information – and of course these countries now had the upper hand and Switzerland could no longer protect its banks by citing that bank secrecy was enshrined in Swiss law.

And so it seems only a matter of time that as a result of agreements, aided by much better technology, EU citizens that have undeclared money abroad will eventually be found.  This is not scaremongering but evolution.  Swiss Private Banks are now asking all the accountholders who are the Ultimate Beneficial Owners of the accounts (irrespective of whether they are “hidden” behind structures such as foundations or BVI Corporations) to prove that the money has been declared to their respective tax authorities.  If this is not provided the account will need to be closed down, and/or they will disclose the information themselves.

As a result, accountholders have two choices:

  1. Move the money/investments they have in Switzerland to jurisdictions that might not be as “safe”. These jurisdictions might include banana republics.
  2. Declare their holdings and accept any potential penalties now (after consulting with their tax advisor), but rest assured that going forward they do not have to worry about being “caught” in the future, with possibly even more dire consequences.

The crux of the matter is that while many accountholders were more concerned about discretion and “invisible accounts”, they did not pay too much attention to the way their account was managed and what fees they were paying, as the latter might have been a secondary consideration.  A number of studies have highlighted that banking secrecy is a considerable source of profits for Swiss banks.  It gives them the opportunity to charge higher fees and to pay lower deposit rates than most of their competitors. Clients with properly declared funds should not accept to pay a “premium” for Swiss banking secrecy. 

Now, it will be of primary importance for them to consider how best to optimise their investments.  That is, maximise the performance of their assets while minimising risks and fees.  To achieve this, one has several factors to consider, and questions to ask.  Some of these are:

  • Am I happy with the performance of my portfolio?
  • Is the bank that is managing my investments working in my best interest or their own?
  • What fees am I paying, and how can I limit them?
  • What kind of products/securities am I invested in, and how good are they?
  • How much risk am I actually taking?
  • Are the expected returns commensurate with risk I am exposed to?
  • How liquid is my portfolio if I need money?
  • Can I borrow against my portfolio?

These are questions we shall address in our next article.

Nicos Cotsapas is a partner of Cyprus-based Elgin AMC and Swiss-based Elgin Group LLC.

Opinions expressed in this article are those of the author and do not constitute financial advice in any way. Please visit www.elginamc.com for more information. If you would like further information on how to structure your portfolio, please send an email to info@elginamc.com or n.cotsapas@elginamc.com or call 70000065

 

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