Global Transparency and its Impact on Investors

Global Transparency and its Impact on Investors

Global Transparency and its Impact on Investors

Many investors hold investment assets offshore, often under investment holding companies. Such structures were seen to have benefits such as avoiding lengthy probates, as well giving an additional level of confidentiality, among other benefits

Many investors hold investment assets offshore, often under investment holding companies. Such structures were seen to have benefits such as avoiding lengthy probates, as well giving an additional level of confidentiality, among other benefits

Many investors hold investment assets offshore, often under investment holding companies. Such structures were seen to have benefits such as avoiding lengthy probates, as well giving an additional level of confidentiality, among other benefits

However in recent years significant changes in global finance regulations mean that every investor should be re-examining their personal need for such offshore structures.

In 2010 the US enacted new legislation called the Foreign Account Tax Compliance Act (FATCA), which was the US governments’ way of ensuring that all US citizens, especially the ones living overseas, pay all relevant US taxes on their investment income and capital gains.  The US is one of the few countries that taxes individuals based on citizenship, not residency. 

FATCA brought significant implementation challenges to the financial industry globally, as institutions had to put additional safeguards in place to identify whether any individuals had US dual-citizenship, or a US Green Card.  Many Asian investors were out of scope and simply had to sign an additional declaration to their financial institutions, certifying that they were not a US Person.  However other governments watched the results from this new regulation with interest, as many other countries, particularly Europe, were also struggling with identifying EU residents who held un-declared accounts offshore.  The EU levies tax based on residency, not citizenship, so for example a Singaporean living in Europe would be subject to global disclosure of all investments, which would be subject to EU income and capital gains taxes.

Voluntary disclosures, as would be expected, did not have the result that EU governments wanted.  Seven years after FATCA, the Organisation for Economic Cooperation and Development (OECD) developed the Common Reporting Standard (CRS), which is now in effect globally and impacts every investor.  In essence CRS will mean that countries will exchange reportable accounts information.  This includes personal information as well as account balances.  The exact details of the implementation of CRS are complicated and vary from country to country, but these regulations will result in significant transparency on every investor’s financial position. 

This is not purely a US/European issue, as many governments already have seized on this opportunity to get more disclosures directly, as Indonesians saw with the tax amnesty implemented earlier this year.  The world will see more such initiatives coming out in the future. 

All these regulations mean that multi-jurisdiction investment holding structures may end up with details being automatically reported to different countries.  Let’s take the example of a Singapore resident and beneficial owner, who holds their investments via a BVI company with an account booked in offshore in Hong Kong or Switzerland, itself held by a Guernsey trust with a Protector that resides in Australia.  In the past such a holding structure could have offered a higher degree of confidentiality and anonymity.  However under the current CRS regulations, the bank accounts’ information may end up being reported to every country that is involved in the holding structure.  While every country will be able to decide on a case-by-case basis which information will be exchanged, a possible interpretation is that a Protector holds considerable power over a trust, and therefore the assets would also be reportable to the Protector’s country of citizenship or residence.

All these regulations mean that multi-jurisdiction investment holding structures may end up with details being automatically reported to different countries.  Let’s take the example of a Singapore resident and beneficial owner, who holds their investments via a BVI company with an account booked in offshore in Hong Kong or Switzerland, itself held by a Guernsey trust with a Protector that resides in Australia.  In the past such a holding structure could have offered a higher degree of confidentiality and anonymity.  However under the current CRS regulations, the bank accounts’ information may end up being reported to every country that is involved in the holding structure.  While every country will be able to decide on a case-by-case basis which information will be exchanged, a possible interpretation is that a Protector holds considerable power over a trust, and therefore the assets would also be reportable to the Protector’s country of citizenship or residence.

One of the likely outcomes of CRS is for financial transactions for individuals to increasingly move from offshore to onshore, and in simplified holding structures. 

Investors should take this opportunity to consult with their financial advisors, and obtain legal advice where needed, on the current implications of older investment holding structures as the world transitions to a transparent system of financial transactions and reporting.

By LEONARDO DRAGO

Co-founder of AL Wealth Partners, an independent Singapore-based company providing investment and fund management services to endowments and family offices, and wealth-advisory services to accredited individual investors.