Jun. 05, 2009
The Swiss government has just announced that it has completed the revision of the first double taxation agreement with Denmark to comply with OECD standards on information exchange. The revised agreement permits “an exchange of information on tax matters in individual cases where a specific and justified request has been made”. Further details of the data exchange have not yet transpired. The agreement still requires approval by the Federal Council and by the parliament. It should be also subject of a referendum by the people of Switzerland.
Whatever the outcome of this specific agreement, over the course of the coming months and years, offshore banking centres like Switzerland, Luxembourg, Liechtenstein, Caribbean countries and many others will face the revision of their double taxation agreements to get in line with those OECD standards on information exchange. All these negotiations will broadly show the same three major results, in some cases may be with some delays or a few minor variations:
The first result: Banking secrecy would become largely obsolete. The global power balance has now perceptibly shifted towards the big, tax hungry governments of the EU and the US. Governments and judges would therefore force banks to hand over client data across borders. But please beware that it not only clients of Swiss banks who could get hurt. Banks in many countries, in turn, are hiding assets of citizens belonging to other countries. Retaliatory actions by the banks in these countries would provoke a “show down” of sorts in disclosing confidential client data all around.
And the second result: Offshore banking model, as we know it would have no future. Banking secrecy, financial privacy and numbered bank accounts would – to a large degree – be a thing of the past. These pillars of the offshore model will fall and consequently wealthy clients will begin shift their focus. With the benefit of tax evasion gone neither fat wealth management fees nor bad investment strategies will be tolerated anymore. Of course, there will always remain some offshore activities in some parts of the world. Investors may shift their assets from country to country but the costs and risk in doing so will become quite substantial.
The third result: Money would re-locate, but people would re-locate as well. Many wealthy people would reconsider their offshore investments and consequently repatriate their money, making voluntary deals with tax authorities to avoid prosecutions and sentencing. Other people would choose a new legal residence in countries with friendly tax regimes, just as corporations have been doing for decades. In fact, many wealthy people already view themselves economically as a corporation, employing their own consulting staff and easily shifting their business to other countries and continents as the 21st century world gets flatter by the day.
In consequence, the wealth management industry will undergo deep, structural changes. Private banks will re-invent themselves with better onshore and service models. The fee structures will get much more attractive and provide clients with good, independent advice. In the end, this may be a not a better world for those clients with former offshore assets but a lot less bad than imaginable today.