Pots of stashed cash in tax havens ‘a myth’

The world’s high and ultrahigh net worth families are run much like businesses these days, with family governance in place as well as fund structures in favourable tax jurisdictions that allow for consolidated reporting across diversified assets.

That is the way the world is moving, with global tax authorities grouping together to shed light on the affairs of wealthy global citizens.

Thanks to legislation such as the US’s Foreign Account Tax Compliance Act and the Organisation for Economic Co-operation and Development’s Common Reporting Standard,banks and financial institutions will have to disclose assets for tax reporting purposes – data that will be shared with more than 100 tax authorities around the world.

According to Steve Georgala, CEO of Maitland, a family office and fiduciary services company servicing the world’s elite, the image of rich families using tax havens to dodge authorities is misplaced and the cowboys are being brought to book.

However, Georgala said it was only a matter of time before the tax morality zeitgeist – which has seen public criticism of companies that may have legally minimised their tax burdens through structuring – targeted the wealthy families.

The image of people flying into the Cayman Islands with briefcases of cash was a misconception. “People think there is cash stashed in offshore jurisdictions that is not finding its way into the markets somehow. It’s a ridiculous proposition because anything that is invested through a bank is going to find its way back to a clearing bank in that jurisdiction.”

Popular tax jurisdictions were creating frameworks and supporting service industries that allowed companies and families to organise their tax affairs in the easiest and most sensible way, he said.

Georgala has strong opinions about the misconceptions encouraged by the work of French economist Thomas Piketty, whose book on rising inequality, Capital in the Twenty-First Century, caused a stir last year.

“The jurisdictions labelled as dodgy are nothing more than providers of investment envelopes of different kinds.

“Jurisdictions like Guernsey managed to build a big business on the back of tax people committing exchange control fraud. We were watching other people make money off our natural client base. We could only make up that ground once amnesty was offered because we’d always been tax-compliant.”

Money was not sitting in tax havens in big pots, “which is what Piketty seems to have in his head, and the newspapers”, he said. “I think it’s been dealt with – banks don’t take cash, nobody transacts in cash and as far as money laundering is concerned, everything we do … focuses on compliance.

“When you’re dealing with a bank, laundering opportunities are very limited. All you might be able to do is use money that’s in the system to make payments outside authorised channels, avoiding visibility of the transaction. But our job is to make sure that doesn’t happen.”

Georgala said there was nothing special that traditional tax-exempt jurisdictions could offer any more. “The only thing keeping them going is momentum, force of habit. There’s new momentum building in onshore jurisdictions and emerging mid-shore jurisdictions like Luxembourg, Malta and Mauritius, which offer tax exemption on certain elements of income.”

Claims that Luxembourg was a questionable haven were based partly on the ease of obtaining a tax ruling, but Luxembourg was just applying a tax directive common and available to all European nations, he said.

“What they’ve done differently is make an art form of it. Spain has it, France has it, the UK has it – but Luxembourg has designed an industry to serve that particular directive.” Luxembourg’s participation exemption regime allows, among other things, payments from a subsidiary to a parent company without tax provided there was a large enough investment in the underlying company.

“The company laws are easy, it’s easy to get tax rulings, it’s easy to get things done. You see all this Piketty-driven fervour … but it’s all about certainty.” The world’s high and ultrahigh net worth families are run much like businesses these days, with family governance in place as well as fund structures in favourable tax jurisdictions that allow for consolidated reporting across diversified assets.

That is the way the world is moving, with global tax authorities grouping together to shed light on the affairs of wealthy global citizens.

Thanks to legislation such as the US’s Foreign Account Tax Compliance Act and the Organisation for Economic Co-operation and Development’s Common Reporting Standard,banks and financial institutions will have to disclose assets for tax reporting purposes – data that will be shared with more than 100 tax authorities around the world.

According to Steve Georgala, CEO of Maitland, a family office and fiduciary services company servicing the world’s elite, the image of rich families using tax havens to dodge authorities is misplaced and the cowboys are being brought to book.

However, Georgala said it was only a matter of time before the tax morality zeitgeist – which has seen public criticism of companies that may have legally minimised their tax burdens through structuring – targeted the wealthy families.

The image of people flying into the Cayman Islands with briefcases of cash was a misconception. “People think there is cash stashed in offshore jurisdictions that is not finding its way into the markets somehow. It’s a ridiculous proposition because anything that is invested through a bank is going to find its way back to a clearing bank in that jurisdiction.”

Popular tax jurisdictions were creating frameworks and supporting service industries that allowed companies and families to organise their tax affairs in the easiest and most sensible way, he said.

Georgala has strong opinions about the misconceptions encouraged by the work of French economist Thomas Piketty, whose book on rising inequality, Capital in the Twenty-First Century, caused a stir last year.

“The jurisdictions labelled as dodgy are nothing more than providers of investment envelopes of different kinds.

“Jurisdictions like Guernsey managed to build a big business on the back of tax people committing exchange control fraud. We were watching other people make money off our natural client base. We could only make up that ground once amnesty was offered because we’d always been tax-compliant.”

Money was not sitting in tax havens in big pots, “which is what Piketty seems to have in his head, and the newspapers”, he said. “I think it’s been dealt with – banks don’t take cash, nobody transacts in cash and as far as money laundering is concerned, everything we do … focuses on compliance.

“When you’re dealing with a bank, laundering opportunities are very limited. All you might be able to do is use money that’s in the system to make payments outside authorised channels, avoiding visibility of the transaction. But our job is to make sure that doesn’t happen.”

Georgala said there was nothing special that traditional tax-exempt jurisdictions could offer any more. “The only thing keeping them going is momentum, force of habit. There’s new momentum building in onshore jurisdictions and emerging mid-shore jurisdictions like Luxembourg, Malta and Mauritius, which offer tax exemption on certain elements of income.”

Claims that Luxembourg was a questionable haven were based partly on the ease of obtaining a tax ruling, but Luxembourg was just applying a tax directive common and available to all European nations, he said.

“What they’ve done differently is make an art form of it. Spain has it, France has it, the UK has it – but Luxembourg has designed an industry to serve that particular directive.” Luxembourg’s participation exemption regime allows, among other things, payments from a subsidiary to a parent company without tax provided there was a large enough investment in the underlying company.

“The company laws are easy, it’s easy to get tax rulings, it’s easy to get things done. You see all this Piketty-driven fervour … but it’s all about certainty.”