Wealthy shun tax havens as crackdown bites, research reveals

News - Tax

Written by Ray Clancy

Thursday, 18 February 2010 09:18

Tax amnesties, hostile governments and tougher economic conditions are encouraging Europe’s wealthy to remove their money from tax havens and some are spending it on luxury holidays rather than declare it, it is claimed.

They are increasingly moving their wealth back onshore, to the detriment of offshore centres including Liechtenstein, Luxembourg and the Channel Islands, which have all lost large volumes of funds.

An estimated 25% of offshore funds, or €383 billion, has left offshore centres in Europe since the beginning of 2008, according to research compiled by the Wealth Bulletin. Most of these outflows are down to Europeans and Americans moving their money in the face of growing pressure to declare assets to tax authorities.

But it is by no means all undeclared money that is moving onshore. Even declared offshore money is moving back home as business owners repatriate funds to meet capital needs for cash strapped companies.

Wealth managers report that those with smaller offshore accounts are simply spending the money on luxury holidays and closing down the account to avoid reporting the money to tax authorities.

‘Offshore centres have to wake up to a new reality where more and more of the wealthy decide to bank onshore,’ explained Graham Harvey, a director of London based consultancy Scorpio Partnership.

Harvey reckons that within five to 10 years the whole landscape of offshore centres will have changed. ‘The world will move completely away from the image of tax havens today, to one of offshore centres of excellence. But each region will only be able to support two, maximum three of these centres,’ he said.

Particularly affected by the trend is Liechtenstein, with around a third of offshore assets leaving the country in the last two years. Realising the days of banking secrecy are numbered, the Liechtenstein Government has gone on the offensive, signing numerous bilateral tax information exchange agreements and implementing innovative initiatives like the Liechtenstein Disclosure Facility with the UK. This allows UK citizens to be let off with lighter sanctions if they declare their offshore accounts in the principality.

Switzerland, the world’s largest offshore centre by assets, has lost about a fifth of its offshore assets in the last two years, according to the research. But Swiss banks are recapturing some of this money in onshore accounts and inflows from the wealthy in emerging markets, but not enough to offset money that is leaving. Switzerland is also facing greater competition from emerging market money from regional offshore centres such as Singapore and Dubai.

The Channel Islands and the Isle of Man have lost around 16% of their offshore assets since 2008, according to the research. The crown dependencies have gone on the offensive and looked at new ways of attracting money. Jersey has been at the forefront of this with its foundations law, a new initiative in structuring trusts. It has also signed 15 tax information exchange agreements, with another nine in the pipeline.

Monaco is estimated to have lost about 10% of its offshore assets since 2008. The principality was quick to sign the critical number of tax information exchange agreements to get it off the Organisation for Economic Co-operation and Development grey list of tax havens. But critics say most of these have been signed with small, insignificant countries making little difference to its offshore account holders.

The smallest of Europe’s offshore centres, Andorra, Gibraltar and San Marino have around $50 billion of offshore assets between them. The worst affected, San Marino, has lost about a third of its assets due to the Italian tax amnesty.