banking, which looked so rosy only a few short months ago, is now
beset by new and troubling uncertainties. The flight to quality
from banks perceived as destabilised by the credit crisis,
regulatory action against perceived tax havens like Liechtenstein
and the US investigations into UBS, plus the new bear market which
threatens to erode fee and commission profitability are among the
new challenges for the wealth industry.
For private banking in general, and Swiss private banking in
particular, the attitude of the US towards the wealth business is
shaping up to be the greatest imponderable of all.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
For the US seems to be rushing headlong towards the dubious prize
of becoming the world’s highest-tax country, policed by draconian
regulations and legal assaults at home and abroad.
A hint of the American attitudes of tomorrow towards both domestic
and foreign private banks may be provided by the way UBS is being
pilloried by the Federal authorities.
Few private banks with US clients looking at the latest Washington
action – a successful request to a federal judge in Miami to issue
a summons forcing UBS to turn over information about US taxpayers
who may be using Swiss bank accounts to evade income taxes – will
feel comfortable, even with a whiter-than-white client list.
This unprecedented summons would be the first of its type by the US
against a foreign bank.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataClient disclosure by UBS of potentially as many as 20,000 American
clients will be a severe blow to the image of the bank, and the
much-vaunted secrecy of Swiss private banking.
The summons follows the guilty plea last month by a former UBS
banker Bradley Birkenfeld to conspiring to defraud the Internal
Revenue Service by assisting UBS clients in avoiding US reporting
requirements on income in Swiss bank accounts, amid lurid tales of
smuggling diamonds in a toothpaste tube.
After the action against UBS, there would be little surprise if
other wealth players came onto the US regulatory radar. Indeed, the
IRS is now to ask the major global accountancy groups for help in
its drive against suspected tax evasion.
As IRS Commissioner Doug Shulman said, immediately after the
summons was granted: “The order clears the way for the IRS to take
the next step against wealthy clients who don’t pay their taxes.
People with hidden foreign accounts can no longer rest easy.”
No wonder UBS took the decision late last year to wind down its US
offshore private operation in Switzerland; others may now have to
consider doing the same.
The problem for private banking – and regulators – is that many US
residents may well be looking to shelter their investments abroad
in growing numbers ahead of the strengthening possibility that
their new president will be Democrat candidate Barack Obama this
November.
Senator Obama has made no secret of his desire to tax the rich and
act against offshore tax abuses, signing Senate legislation last
year to do just that.
As Dr Andreas Missbach of the Berne Declaration, a Swiss
non-governmental organisation, said: “Does the future of the Swiss
banking system rest on the outcome of the US presidential race?
Yes, definitely.”
America is already distinguished by being the only major country
that taxes its citizens even though they live overseas. Now, an
Obama presidency would make even the punitive French wealth tax
system look generous by comparison.
His proposals would effectively make the top marginal tax rate on
income – including federal, state and local income and payroll
levies – approach 60 percent for many in high-tax states like New
York and California.
The consequences of this surely would be a return to mass tax
avoidance, with taxpayers disguising personal income as business
income or capital gains amid the flight of capital overseas.
The Obama proposals would terminate the Bush tax cuts and allow the
top two tax rates to return to 36 and 39.6 percent. He also would
allow personal exemptions and deductions to be phased out for those
with income over $250,000. The Social Security payroll tax cap for
those over $250,000 in earnings would also be abolished.
These unfortunate well-to-do individuals will then face a tax rate
of 15.65 percent from payroll taxes and the top income tax rate of
39.6 percent for a combined top rate of over 56 percent on each
additional dollar earned.
Even in the event of a McCain presidency, over the next 10 years
the US is facing a $2.4 trillion tax increase as the Bush tax cuts
expire.
Some US money would of course stay at home – heading for favourable
domestic tax jurisdictions like Delaware. The US investigations and
court action in Miami involving UBS would no doubt cause large
amounts of American money to return onshore immediately, as
taxpayers weigh the chances of being caught if their banking
records are to be disclosed.
As James Nason of the Swiss Bankers Association tellingly says: “Do
a Google search for ‘Delaware’ or ‘Nevada’ plus ‘offshore’ and
you’ll find more tax avoidance schemes designed for Americans than
you can poke a stick at – and they are certainly not made in
Switzerland.”
But American flight money will surely become a fact of life with
tax increases on this swingeing scale. Realistically, can private
banking now accommodate US flight capital in view of the growing
regulatory investigations? Threading a way through the labyrinth of
US regulation and tax laws for American residents is going to be
tortuous, especially for those wealth players who have a presence
in the US and so can be subject to extra pressure from the Federal
authorities.
Some could well decide like UBS, that an American offshore
clientele is not worth the candle any more. What bank is going to
brave enough to service those US clients determined, in the face of
a high-tax presidency of Barack Obama, to hold offshore accounts,
whatever the risk?
We must all be grateful that Singapore, a stable centre with
laudable high standards, continues steadfastly to reject pressure
from the European Union, among others, to join its savings tax
regime and so starting eroding the city-state’s own strict banking
secrecy code – the lynchpin of its success as the premier wealth
hub in Asia.
