GENEVA (Reuters) - Increasing demands from tax authorities around the world are challenging traditional private bankers while opening opportunities for niche players who can help rich clients pay less taxes in a legal way.
Managing off-shore, often undeclared funds in bank secrecy strongholds such as Switzerland and Luxembourg has been a traditional activity of many private banks.
But a global movement towards more stringent tax and transparency requirements is challenging this approach.
“It is becoming very difficult for clients of private banks and trust companies to hide their money from the tax man, which they have maybe been able to do in the past,” Stephanie Jarrett, from law firm Baker & McKenzie, told the Reuters Wealth Management Summit in Geneva.
“I don’t think banking secrecy is at an end but certainly the tax frontiers are being pushed and thinking you can carry on simply relying on banking secrecy is short term.”
The European Union’s savings directive, introduced in 2005, dealt the first blow to bank secrecy in Europe by forcing European wealth management centers such as Switzerland and Luxembourg to apply a withholding tax on savings from undeclared EU income.
U.S. tax legislation is equally stringent and experts predict new efforts in the fight against tax evasion also in relatively loosely regulated emerging countries.
Yet, this appears to be an opportunity for small players who offer ad-hoc tax solutions to allow wealthy individuals to pay as little tax as possible without breaking the law.
“In the next five to 10 years it will remain complex. That plays in favor of niche players,” said Lombard International Assurance’s CEO David Steinegger.
“It’s not a negative. It’s an opportunity,” Steinegger, whose company designs insurance-based solutions to help rich clients to legally reduce their tax burden.
Changes in tax laws can spur new business for wealth managers, who like to say they increasingly focus on what the industry now calls “fiscal optimization”.
A tax amnesty in Italy in 2001-2002 prompted UBS UBSN.VX and Credit Suisse CSGN.VX to enter the local on-shore market as billions of euros of off-shore funds returned home and a similar move in Belgium attracted foreign private bank players.
At the same time, the appointment of centre-left Italian Prime Minister Romano Prodi, who has the fight against tax evasion on his agenda, in 2006 brought new business for tax engineers such as Lombard International Assurance.
“Before the Italian elections, when people thought Prodi would take over and, as opposed to the (former prime minister Silvio) Berlusconi government, would be tough on tax, we saw a high wave in business,” said Steinegger.
With tax laws tightening up, private bankers agree that on-shore business will gain a higher and higher share of wealth management business as opposed to off-shore activities.
“Off-shore will always exist. In the long-term on-shore is growing,” said Bernard Coucke, Head of Europe and Deputy Global CEO of ING Private Banking.
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