The evolution of the structuring world following the evolution of banking transparency
24 February 2017
Having been in the financial services industry since more than 23 years, starting first with the now defunct brand name Arthur Andersen and currently heading wealth structuring in the UAE for ABN Amro, it has been exciting to see how the standards of transparency and structuring have been evolving especially throughout the last 10 years.
In the past, most families and High Net Worth Individuals (HNWI) held their assets either directly individually or through a simple offshore company. Most individuals and families strived to pay the least taxes possible and resorted to more or less complex structuring in order to achieve that goal. Some only had the goal of better coordinating their global wealth and having an organised and global streamlined process for their tax or other reporting (to individual shareholders in the case of large family conglomerates) when creating a comprehensive overall structure for their global assets. In some cases, dodging taxes had been the main guideline and this led to structures that could be sometimes inefficient for inheritance purposes or vice versa.
Many financial centers were built more on the goal of secrecy and preservation of the goal of minimising the tax bill whether in a fully compliant or partially compliant way. I remember an anecdotic exchange as comments on an article on the website wealthbriefing.com back in 2007 where an eminent tax expert was speaking of how Swiss banking secrecy could never be broken and I had commented that it would and that the US would use the foreign accounts reporting rule to dismantle it. This is eventually what they set out to do, implementing one of the most intricate legislation on tax reporting that would rock not only Swiss banking secrecy but also the world’s standards in terms of banking secrecy.
While it was first with FATCA that the “offshore” model was first attacked, there were a number of other occasions where HNWI started seeing that it was pointless to put in place a structure which main goal was minimising taxes in a hardly compliant way. Indeed, there were a number of data thefts, disclosure by hackers of professional databases such as the Panama papers which made it an uneasy time for HNWIs hiding their assets rather than really structuring for an optimised generational transfer. The final nail in the coffin of any attempt to dodge taxes was of course the worldwide application of CRS with the latecomers already having to comply this year and reporting of worldwide bankable assets a certainty rather than a grey area.
As the legislation grew tighter and especially with CRS, it became obvious that wealth structurers could no longer be simple creators of offshore company structures nor of a simple trust or a foundation without the actual coordination of the global tax and inheritance impact of HNWIs. Wealth structurers today need to be mindful that they have to change their old habits of advising as they were used to advising on a simplified and one-land approach and move into the arena of global coordination of all the aspects of the generational transfer when creating an overall structure for a HNWI family, especially when there is a large or complex family business to cater for.
While some of us already followed this trend since a few years because of our background experience in tax consulting firms, I realised from viewing the structuring put in place for certain HNWIs who have called upon my help that some wealth planners especially in the Middle East and Asia still look very much in a tunnel-like way at structuring for a HNWI. Their approach seems to be with no consideration of either global tax issues nor sometimes even of sharia restraints for muslim clients in this region. This might often be the case because the client insists that the wealth planner limit the approach in order to have a cheaper solution but personally, I think that a good wealth planner should insist even when a client insists on an incorrect structuring. The insistence of the client might be because he/she wants to maintain control or for some other reason that the wealth planners are not comfortable to delve into but I believe the matter should be addressed because if the structure could cause great financial damage to the coming generations in the future, a wealth planner should insist on understanding the client’s reservations and explaining the optimal solution because ultimately, when explained properly, clients are willing to change their mind and adopt structures that will benefit generations to come and anchor their businesses in a compliant and globally coordinated environment.
As a conclusion, I would say that HNWIs should revisit on an annual basis with their wealth planners the structures put in place because there may be reasons to amend such structures based on new developments either in structuring or in taxation. No structure should be set in stone and then left forgotten on a shelf as a thick rulebook which nobody examines anymore but each overall structure should be carefully reviewed just like one would review the accounts on a yearly basis. If change is required, it should be carried out and the structure made effective again if legislation had rendered it less effective in a given year. To end this brief analysis, I would like to cite a maxim from Publilius Syrus that I think applies very much to the world of wealth structuring: “Malum est consilium quod mutari non potest”