Oct. 21, 2009
Yesterday the Austrian Minister of Finance Josef Pröll announced that Austria intends, along with Luxembourg, to block the EU-Liechtenstein treaty on tax fraud. Pröll argues that anonymous investment vehicles like UK trusts must also be included in any effort to regulate the banking secret. The background of Austria’s reluctance to agree to the tax treaty is that if the agreement with Liechtenstein is approved by the EU, Austria will be one step closer to losing its own banking secret.
Only Austria, Belgium and Luxembourg have a temporary exemption from the automatic data exchange of tax authorities among the EU countries. This temporary exemption will cease to exist once non-EU countries like Switzerland and Liechtenstein agree to the OECD standards on the information exchange about tax matters.
This rearguard action by Austria is another sign that the world is moving quickly closer to an automatic exchange of information across borders about the financial holdings of their citizens. Asia, Singapore and Hong Kong, the predominant private wealth centers in Asia, “prepare to grant foreign governments unprecedented access to the financial affairs of their bank account holders” as Reuters reported recently. Singapore has already re-negotiated 10 double-taxation treaties in order to be removed from the OECD grey list of non-cooperating countries. There is also talk that emerging market governments like China, Indonesia or Malaysia are taking a tougher stance on citizens who evade taxes by shuffling assets to offshore destinations.
Yet even though offshore centers like Switzerland or Singapore are in the process of co-operating more openly with the EU or USA they will not be granted any delay. The next logical step for the high-tax countries is to demand automatic data exchange on the holdings of all foreign citizens. Once the EU has established this standard among all of its 27 member states, it will not take long until neighbor countries will have to adopt the same practice.
What will be the consequence for wealth management in the offshore destinations like Singapore and Switzerland? Arguably, banking secrecy has been the strongest motivator for wealthy people to move their assets to offshore destinations. Although other factors like political stability or a strong currency might have played a role as well, the banking secret was an unmatched asset magnet. The Swiss economic research institute BAK forecasts that banks in Switzerland might lose one quarter of their income if foreign clients withdraw their assets (although the BAK thinks it is unlikely that all clients will withdraw all their assets which is estimated at around Swiss Francs 1500 to 2000 billion ).
It will be interesting to see which strategies private banks and wealth managers in offshore centers adopt to deal with a more hostile environment. So far, only a few of the biggest Swiss banks have opened on-shore subsidiaries in other countries. If this relatively expensive strategy will be successful remains open given the strong competition of on-shore incumbents. Other strategies that emphasize new and innovative ways to invest money in former offshore jurisdictions have not yet been unveiled despite an increasingly louder ticking political clock.