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March 19, 2009updated 05 Jun 2017 11:40am

Singapore, HK feel heat from EU

Now, both cities are being forced to fall into line with the global opening up of banking secrecy, and look certain to have to comply with the EU savings tax directive.In the worldwide attack on offshore financial centres, Singapore and Hong Kong are coming under intense pressure to make concessions on banking secrecy and financial transparency

By John Evans

The private banking centres of Singapore and Hong Kong have long been suspected of harbouring money which has fled Europe intent on avoiding tax. Now, both cities are being forced to fall into line with the global opening up of banking secrecy, and look certain to have to comply with the EU savings tax directive.

Ofshore centres. Market share of AuM held in private bankingIn the worldwide attack on offshore financial centres, Singapore and Hong Kong are coming under intense pressure to make concessions on banking secrecy and financial transparency.

Senior bankers in Singapore say it is likely the two Asian global wealth centres will in future be forced to comply with the European Savings Tax Directive – something they have so far resisted strongly.

While Switzerland catches the big headlines amid the US and European campaign against Swiss banking secrecy, and alleged widespread sheltering of tax evaders, the full extent of this assault on tax havens worldwide is shown by the pressure on these Asian centres, according to PBI sources.

Financial centres that refuse to hand over information on tax evaders face an unprecedented campaign of economic sanctions by the world’s most powerful countries, which may be agreed at the Group of 20 summit in London next month.

Series of sanctions

The G20 nations plan to promote a series of sanctions which are designed to deprive offshore centres of billions of dollars of business, including refusing to allow payments to a blacklisted haven to be deducted from taxable income. This would hit big corporations and banks who channel millions of dollars out of the tax authorities’ reach by paying royalties, management fees, dividends and insurance premiums to their own offshore subsidiaries.

Funds held offshore by individuals or companies to evade taxes or avoid political instability in their home countries is “somewhere between $5 trillion and $7 trillion,” according to estimates by OECD Secretary General Angel Gurría.

The Paris-based Organisation of Economic Cooperation and Development (OECD), which currently names Andorra, Monaco and Liechtenstein as uncooperative tax havens, is preparing a new ‘black list’ which will almost certainly include Switzerland if it fails to make concessions.

In the face of this pressure, Switzerland is already showing signs of bowing to the inevitable. The country may have to make some concessions if it does not want to be put on a black list of tax havens, Swiss president and finance minister Hans-Rudolf Merz said in early March.

The government is working on how to develop banking secrecy and is looking into the difference between tax evasion and tax fraud in Swiss law, he added.

This follows the US case against UBS for helping US clients evade tax, for which it fined the Swiss bank $780 million and forced it to hand account details of around 300 clients to settle tax-fraud charges.

But the US Internal Revenue Service, the day after this settlement was announced between UBS and the US Department of Justice, sent new shock waves through the Swiss banking world by filing a lawsuit demanding that UBS also give up the names of 47,000 account holders as part of a probe into individual tax evasion.

This was greeted in Switzerland as a “capitulation” over Swiss banking secrecy, along with warnings that future earnings from classic Swiss offshore private banking would be decimated.

Singapore has in recent years led the resistance in Asia to the EU Savings Tax Directive, which Brussels wants to extend to Asian centres to catch European tax evaders who have shifted their funds to the region.

But the sudden shift of British prime minister Gordon Brown to favour action against tax havens issue is believed to be helping to fragment resistance to the industrial nations’ assault on offshore centres.

Brown had been backpedaling in recent years on this issue, concerned to protect the role of the City of London’s global markets as well as offshore British centres like the Channel Islands and Isle of Man.

In an about-turn, the British leader has placed himself firmly in the van of the global crackdown, declaring that loopholes are costing hundreds of billions in lost revenues.

“We want the whole of the world to take action,” Brown said. “That will mean action against tax havens in parts of the world which have escaped regulatory attention.

“The changes we make will have to apply to all jurisdictions around the world.”

If Singapore and Hong Kong falls into line with the EU directive, it is expected to be on the same basis as Switzerland which has also signed up to the EU legislation.

Under its deal, Switzerland preserves the confidentiality of clients but does withhold savings tax on interest and dividends for EU nationals and remits them to the appropriate EU state.

In 2007, Swiss payments to Germany alone amounted to €88 million ($112 million).

‘Flight money’

Suggestions that huge sums of European ‘flight money’ headed for Singapore and Hong Kong to avoid tax after the EU directive was rolled out in Europe four years ago are well wide of the mark, according to confidential briefings given to Private Banker International in Asia.

Both centres hold an estimated total of about $650 billion of offshore funds, of which only some 10 percent is believed to be of ‘European’ origin, according to data made exclusively available to PBI by Calamander Group, a Singapore-based wealth research and investment firm.

Of that $65 billion, about half is believed to have originated in Russia, implying that only five percent of the total actually comes from EU investors.

In the case of Singapore, as a consequence, little more than 3 percent of the offshore money in the city-state can be considered of EU origin, PBI understands.

Banking secrecy not just for rich

“Banking secrecy is not only something for rich people. It is also for the German middle class and they do not like to go to Singapore,” said Konrad Hummler, head of the Swiss Private Bankers’ Association.

Still, there is no denying the determination of the OECD countries to eliminate what they see as evasion, both by individuals and corporations.

Philip Marcovici, a tax specialist at lawyers Baker & McKenzie, saw an unfolding of “unprecedented coordination” among governments to pursue tax revenues from assets held offshore.

Roman Scott, managing director of Calamander, believes the momentum is building rapidly to have Asian centres subjected to increased regulatory scrutiny and transparency, including the extension of the EU savings directive to the region.

At a time when governments globally are spending enormous sums of money to bail out and support their national banking systems, it is “very difficult to resist the demands to open up banking centres even though much of the talk about billions upon billions of tax evasion is exaggerated,” said Scott, a former principal of the Boston Consulting Group’s wealth management practice in Asia.

Increase in transparency

Singapore itself is moving to increase transparency of the wealth business in the city-state.

Lim Hwee Hua, senior minister of state for finance has said Singapore is now looking at adopting the OECD standard for transparency and effective exchange of tax information, which was supported by a United Nations committee of tax experts last October.

“We will be engaging the OECD and the industry to study this OECD standard with a view to endorsing it,” said Lim.

Meanwhile, the scale of concerns among wealthy Asian investors that their assets will be increasingly be subjected to official scrutiny is shown by the number holding American citizenship who are now surrendering their US passports.

A number of law firms in Asia are advising their wealthy clients that to remain US citizens could open up themselves, and their families, to huge tax liabilities. The US maintains a tax regime obliging US citizens to pay taxes on their earnings worldwide, wherever it is generated.

Many Asians, particularly Chinese in Hong Kong, have historically held US passports – a safety device during the turbulence of the 20th century which saw upheaval in China under Mao Tse-tung, the Vietnam war and other regional conflicts.

“We are advising these Asians, particularly the elderly generations who are starting to die off and whose fortunes are passed onto their children, that there could be US tax liabilities involved as estates change hands,” one partner at a major law firm in Hong Kong told PBI, requesting anonymity.

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