Is it worth hiding money abroad?

A study published by the „experts”/journalists of the Tax Justice Network (TJN) in 2011 claimed that between 21 000 and 32 000 billion dollars is either hidden, deposited or invested in the various Offshore Financial Centers (OFC). This is the amount which the „experts” at TJN estimate has been accumulated in jurisidictions from Switzerland to the Cayman Islands over the last 50 years.
Since then, nobody has supported this figure with concrete proof, but we really are talking about several thousand billion dollars. In the last half century, this fortune has migrated to those places offering the holders of the assets discretion and an advantageous tax climate. Because there was, is and will be demand for such services. Nothing new there. So, the process is not a new one, and the economic and political leaders are only too aware of the rules governing the mechanism. Which is why the Panama Papers scandal was so ridiculous, as a hack of the server of any major service provider would have resulted in similar findings. We are talking about an enormous mechanism, as from the early 60s onwards the world’s biggest banks, investment funds, insurance companies and multinational companies all moved their operations to these OFCs. Just think about the 245 billion or so dollars which Apple holds in bank accounts in Bermuda. If they repatriated these funds to the USA, they would have to pay about 35% in tax.
And here once again, everything is about money. A bank account opened in Monaco with the minimum 3 million euro deposit – because that’s the minimum required there – will bring in approximately 50 000 euros a year to the bank through the 1.5% asset handling fee, while there is no guarantee that the amount of capital in the account will increase because of the negative interest paid by the bank. The service provider, on the other hand, is very happy, thank you very much, because with one contract he has earned 50 000 euros. Multiply that by the thousands of billions, or even just a fraction of it. The commission of the financial institutes is gigantic, and in reality it is the client who is paying from his own capital, whether it makes a profit or not.
There is also another factor which is typical of the process: a significant part of the capital deposited in this way is not moved between active investments, but rather is placed in passive vehicles, such as bonds, shares and other such investments. In many cases, the clients are not even interested in the return, but just want their money to be secure, even if this involves high expenses, as is the case with expensive to maintain private banking accounts.
The question is whether worldwide demand will change in the era of the automatic exchange of information. My answer to that is hardly at all. The wealth and assets accruing in the world are growing. This no longer applies only to North America and Europe, but, as a result of the economic growth in Asia, also to China, India and even Vietnam. The world’s rich will continue to seek those jurisdictions, whether we call them Offshore Financial Centers, safe havens or any other name, which have been operating for decades, providing security and stability for the handling of assets.
But, I wonder, what about the more modest client, who doesn’t have billions? Is it worth it for them to consider offshore companies, structures and financial solutions, bearing in mind that with the automatic exchange of information the local tax authority will have information on where they have bank accounts, even if it is an account opened for a company in a foreign bank.
In my opinion, there are still numerous advantages to operating such a bank account for a foreign company. Here are just 5 of the benefits, though I could list many more.
This solution is totally legal, and will remain so when the exchange of information begins. Holding money in a foreign company bank account is not a crime, but a possibility which anyone can take advantage of, naturally while adhering to the tax laws, whether that be the laws on personal income tax or the regulation of controlled foreign companies.
A foreign bank account provides the possibility for portfolio diversification. Having a bank account in a country outside the one we live in and keeping a part of our assets abroad is one of the best ways of avoiding risks in our own country. The second world war in Europe provides an interesting historical example. If we think about it, the war affected just about the entire continent, but for some reason Hitler didn’t invade Switzerland, which even then didn’t have significant armed forces.
The company’s assets can be separated from personal assets. From the point of view of asset protection, it can make a difference if a part of a person’s assets does not appear on personal accounts, but is invested and administered through the accounts of a foreign company. Personal assets are always more vulnerable and more easily accessible to others, whether that is a creditor or the victim of a traffic accident, who tries to get more damages from a wealthy person. It may even take years for the accounts of a foreign company to be accessed via the courts.
An offshore company, particularly one where the tax is 0%, can spend freely. This is an interesting point, which few people think about. In these countries a company can spend its post-tax money on all sorts of things. Naturally, it can pay a dividend to its owners, which has to be the most common goal of the economic activity. Of course, then the private individual is required to pay tax on the received dividend in accordance with the laws of the country in which he or she is resident for tax purposes. This means further taxes. However, a company from, say Dubai or Hong Kong is free to spend that post-tax money, and may, for example, purchase a yacht, or pay for its staff or general maintenance. Similarly, there are no strict regulations on how many air tickets can be purchased, and in which class, for those working with the company, or on which hotels they can stay in when travelling on business, or on how many times they dine out in restaurants at the company’s expense. In the case of an offshore company, it is also very difficult to define exactly what is meant by a business trip. And a significant number of business trips may end in failure or without achieving concrete business goals. Which is just what happens in reality.
Discretion, to ward off local „well-wishers”. Wealth continues to favour discretion. Although many people like to show off their wealth, the majority tend to avoid the spotlight. And the reason is precisely to avoid the attention of the „well-wishers.” Who wants to be inundated with visits from friends, acquaintances or neighbours asking to borrow money just because someone has more than them? Often it is not even possible to tell our closest relatives how much we earn, because on top of envy, they also start making demands. And I could continue the list with the self-appointed friends, girlfriends who also make financial demands on those who have enjoyed financial success. And all this without even mentioning taxes. Even if someone pays 0% tax in their own country, this point is still valid, and it is not even necessary to to go into detailed tax-planning.
There is always a purpose to the articles published in the LAVECO Newsletter. The purpose is to make those who read them that little bit „richer” in knowledge and information, and to help them make better decisions. We would like you, the reader, to be on the winning side. The early years of the 21st century are all about dynamic change. What I wrote about earlier are cases, situations and human characteristics which have existed for hundreds of years. Ever since people started accumulating wealth, its handling and security have been sources of worry and headaches. But it is also important to be able to create a happy balance between spending and accumulating. What is money worth if it is just rotting in a bank, and we don’t invest it or use it sensibly? And this is not only a question for local businessmen, but is also characteristic of businessmen all over the world.
With warm regards,
László Váradi
Managing Director