Knocking on havens’ doors

The past few months have been unsettling for some of the world’s wealthiest people. The UK is set to become less hospitable to foreigners after tightening up its tax rules for “non-domiciled” residents.

Meanwhile, it recently emerged that stolen bank details from Liechtenstein, one of the world’s most secretive tax havens, have been acquired by tax inspectors across the industrialised world.

The two issues are apparently quite separate. Britain has attracted many talented, wealthy and philanthropic individuals by allowing them to keep their offshore income out of the UK’s tax net, in a way that has nothing to do with the illegal evasion of taxes in Liechtenstein. But, indirectly, the two issues could be linked. Both may have implications for the privacy of the wealthy and potentially for their planning opportunities.

The Liechtenstein affair, which blew the lid off the secretive world of offshore finance, has increased the political pressure for a crackdown on tax havens. Countries such as Monaco, which has always insisted on its residents’ right to privacy, are also coming under intense pressure to disclose information about suspected tax evaders to other tax authorities.

This assault on secrecy is a justifiable response to the ease with which unscrupulous individuals have hidden money out of sight of tax authorities. But it also threatens privacy – some individuals are anxious about confidential details being passed between tax authorities. Their fear is that it could fall into the wrong hands and increase their risk of extortion, kidnapping, fraud or even persecution from corrupt and oppressive governments.

Similar concerns were raised when the UK government first announced its new regime for non-doms. The draft legislation suggested that they would be required to give extensive details of their offshore holdings held in trusts. The resulting outcry underlined the anxiety about such information being misused. Last year’s embarrassing loss by HM Revenue and Customs of computer discs containing data on millions of British families illustrated the risk of security breaches.

The pressure on “unco-operative tax havens” – as the Organisation for Economic Co-operation and Development describes secretive states such as Monaco and Liechtenstein – is designed to stop people hiding their wealth from their tax authorities. There are no such strictures about wealthy individuals cutting their tax bills by going to live in a low-tax country. This would be widely seen as oppressive and an unreasonable attack on the right of sovereign countries to set their own tax policies.

But it is less clear whether a government that imposes relatively high taxes on its citizens, such as the UK, should be allowed to offer preferential treatment for foreigners. Already, the ability to offer such privileges to foreign companies has been blocked by a European Union code of conduct, forcing territories such as Jersey and Gibraltar to overhaul their tax laws.

Britain’s non-dom rules have, on occasion, irritated foreign governments that feel they offer a haven for some of their wealthiest taxpayers. Last summer, an Italian news agency reported Vincenzo Visco, Italy’s deputy economy minister, as saying that Britain’s non-dom tax rules “go beyond the norms of competition between states” during a tax investigation into Valentino Rossi, the motorcycle racer who had lived in London.

But even if foreign governments dislike other countries wooing their wealthiest citizens, there has been no effort to stamp out these practices. The UK’s decision to water down the tax advantages for non-doms did not stem from external pressure but from a desire to please the electorate. Last year, the non-doms were caught up in a union-led campaign to clamp down on the tax privileges of the super-rich, including private equity executives.

The Conservative party capitalised on this mood with its bold move to finance cuts in inheritance tax and stamp duty with a £25,000 annual levy on non-doms. Faced with a possible snap election, Alistair Darling, the UK chancellor, responded with a similar proposal, charging £30,000 a year for the privilege of shielding offshore income from tax but exempting those who had lived in the UK for seven years or less. At the same time, the Treasury took the opportunity to close a number of loopholes in a package of measures that horrified many non-dom investors.

This willingness to water down tax incentives that have brought wealth and expertise to Britain surprised jurisdictions intent on guarding incentives that attract investors. “It is akin to Switzerland giving up secrecy because it is unfair,” says a financier.

The decision to reform the non-dom rules was ultimately a political choice to increase the fairness of the British tax system. It seems unlikely to be copied in countries that are primarily concerned with increasing their competitiveness. As investors and professionals become ever more mobile, there is unlikely to be much let-up in the competition between states to attract them.

Opportunities for wealthy families and high earners to move abroad to reduce their tax bills have increased in recent years. Tax advisers stress that the choices available to the disillusioned non-dom residents of the UK have expanded beyond traditional jurisdictions, such as Switzerland, Monaco, the Channel Islands and the Caribbean.

Spain has emerged as an attractive jurisdictions for wealthy and talented foreigners, with relatively low taxes on financial assets and special exemptions for offshore assets for up to six years. Even France, famous for its high tax rates, has become more attractive after tax policy changes and a legal decision allowing trusts to be used to shelter wealth.

Meanwhile, outside Europe, new havens such as Singapore, Hong Kong and Dubai have emerged, that offer privacy as well as low tax rates.

Yet there is no doubt that Europe’s high-tax countries are increasingly concerned about the ease with which their citizens can move themselves – or their wealth – abroad. In the long run, it is possible that the crackdown on tax havens could be extended beyond secrecy to other fiscal distortions, such as preferential regimes for wealthy foreigners.

“I think it is going to come on the agenda,” says John Christensen of the Tax Justice Network, a campaign group. “There is a massive sea change in attitudes across Europe as a result of the Liechtenstein affair.”