He notes “two waves” of investors who are new to tax planning. “The first wave comprises the new generations of wealthy families, who will most likely live in a much more global world than their parents and thus be potentially subject to taxation in several jurisdictions. The second wave includes citizens and residents of countries that recently have joined the modern economy, with many wealth-building opportunities but also new tax obligations looming on the horizon.”
Personal observations he offers newcomers to tax planning and on which he expounds include:
- There is no more hiding. You must pay taxes somewhere.
- Given a choice of where you pay taxes, legally and politically strong countries are most favorable.
- Be neither contemptuous nor too “cute.”
- As in all money matters, the popularity of a tax scheme usually is a bad omen.
“The purpose of this paper has not been to argue against tax awareness or tax planning. On the contrary, a strong case exists to seek and implement the optimal tax packages once other, more crucial, decisions have been made. But, since tax matters often tend to create a sort of paranoia that leads us to make tax decisions before we have decided on more fundamental choices, let’s try to remember that the cart does not go before the horse, but behind it.”
Welcome To The World Of Taxes! A Philosophical Introduction For New Taxpayers
When I started in the money-management business, in 1969, I inherited a largely European clientele who, it is fair to say, were more knowledgeable and sensitive about taxes than I was.
The reason for this was partly the result of many banks’ and advisers’ preferred technique for acquiring customers, which can be summarized in the title of a popular sales seminar: “Fear Sells, So Sell Fear.” Europe’s history had made that sales approach easy: A succession of wars, invasions, and confiscations had led to a tradition of hiding one’s fortune in a safe place, preferably in another country. More recently, during World War II, many wealthy European families, especially Jewish ones, had found ways to hide some of their assets that might be confiscated by the Nazis in either neutral countries such as Switzerland or faraway ones such as Canada and the United States.
Once the war was over, the business of selling fear helped fuel paranoia over a possible Soviet invasion or other apocalyptic calamities. But then it was discovered that an equally menacing – and more certain – predator was the taxman, present in leading democratic countries eager to finance their welfare-state ambitions. The age-old French adage, “to live happy, live hidden,” thus became the motto of tax advisers everywhere. Fortunes were lured to so-called “tax havens,” countries whose constitutions imposed banking secrecy, thus allowing wealthy families to hide a portion of their riches.
It should be noted that, at the time, not all but many of the schemes offered by tax havens were either legal or tolerated in major countries. One factor that allowed the status quo to survive, even after a number of governments began to frown on tax avoidance, is that until recently there was no cooperation among countries on the subject of taxation. In fact, it might be said that there was fierce competition. All this began to change in 1989, with the creation of the Financial Action Task Force (FATF), an inter-governmental body established on the initiative of the G7 nations and housed at the headquarters of the OECD in Paris.
The FATF’s mission is to generate the necessary political will among its 36 member states to bring about national legislative and regulatory reforms for combating money laundering, terrorist financing, and other related threats to the integrity of the international financial system. Although nowhere is taxation specifically mentioned in its statement of purpose, the FATF initiative has given a tremendous boost to the global exchange of information and cooperation among states on tax matters as well. In very recent years, this has led to a proliferation of multilateral and bilateral tax treaties that have practically eliminated banking secrecy in most countries – at least, those that aim to appear “respectable.”
The Inevitable “Must” Eventually Happens
In the 1970s, French citizens who had accounts in US banks, for example, were not subject to French taxation on these accounts, although they were supposed to disclose them to the French tax authorities. Taxes on the interest earned from these accounts were withheld at the source by the American IRS; and, I was told, a copy of the form reflecting this withholding was routinely dumped into a building somewhere in Pennsylvania. Once a year, a representative of the French tax agency would come in and leave with an armful of withholding notices. Since no crime was being committed, and the statistical odds of an always-unpleasant inquiry were close to zero, no one (to my knowledge) bothered to report these American accounts to the French tax authorities.
However, as soon as IBM introduced its PC, in 1981, and I was able to get an early taste of the potential uses of computers with large databases, it occurred to me that the odds had shifted and bank secrecy was doomed – which is what I started preaching to whomever was willing to listen.
Of course, this was well before the spread of the Internet in the mid-1990s, which made the exchange of massive data easy and instantaneous. With computers’ processing ability having also been immensely increased over the same period, the means were now available for governments to share data on a global scale. At about the same time, the motivation for nations to cooperate by exchanging information was also enhanced and justified by the necessity to fight the narcotics and arms trades and their money-laundering operations.
Given these conditions and events, how could the tax collectors not take their place at the table? What had first been only a possible logical outcome has become a very palpable reality in the last few years.
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