Family networks have become increasingly geographically dispersed and the next generation's priorities have shifted towards a more global outlook. As a result, in recent years, many high-net-worth families have established their family offices in global hubs or offshore locations. These politically stable countries with sound operational infrastructure, abundant human resources, as well as favorable regulatory frameworks and local tax regimes, have made them attractive destinations.
With increasing political pressure being placed on these jurisdictions, heightened demands for transparency, societal expectations playing a more significant role than ever before and the current global shifts taking place due to the COVID-19 pandemic and the resultant economic fallout, should affluent families be re-evaluating their family office locations?
If the response to Sir Richard Branson's recent unsuccessful bailout request is anything to go by, the answer may be yes.
Tax havens under fire
The world's millionaires and billionaires are more mobile than ever before, with many moving countries to escape political or economic tensions. At other times, moves are effected for tax purposes. According to The Times, a third of British Billionaires have moved to tax havens over the past decade, controlling over 12,000 UK based companies from these lower tax rate jurisdictions. New research suggests that 40% of multinational profits are shifted to tax havens.
For the better part of the last decade, financial havens have come under heightened scrutiny. More recently, however, political pressure for greater transparency and cooperation on exchange control information, fair tax competition and the implementation of the OECD's Base Erosion and Profit Shifting (BEPS) minimum standards has increased.
Substantial efforts to clamp down on tax avoidance and tax havens, as well as the individuals and organizations that leverage their benefits, necessitate future considerations. To participate in certain international deals, family offices require the right structures and a base that enables global investment practices. With the threat of defensive measures being taken against blacklisted tax havens being proposed by the European Union, many family offices now question whether such jurisdictions will allow them to position for such investments in the future.
Recent events, and particularly Sir Richard Branson's case, have also shown that in times of crisis, governments and the taxpayers may be far less inclined to offer the required assistance to those they perceive to have taken unfair advantage of the system by setting up offshore. This is something that bears consideration.
Growing societal pressure
According to the OECD, BEPS practices cost countries between US$100- 240 billion in lost revenue annually, an equivalent of 4-10% of global income tax revenue. When global corporations and ultra-high-net-worth individuals use tax havens to avoid paying their share of tax, the poorest countries and their residents suffer as a result.
In 2019, the world's billionaire population, a mere 2,153 individuals' wealth, amounted to more than the combined wealth of the world's poorest 4.6 billion people. As the global inequality crisis remains in the spotlight, not only private individuals are being scrutinized. The fact that multinational digital giants like Apple, Facebook and Amazon can circumvent corporate taxes in the countries in which their economic activity originates has sparked growing outrage. The kind of scandal that can damage seemingly untouchable brands as society's expectations of these organizations reach previously unexpected levels.
What's more, public movements and pressure are mounting and shifting towards governments, with calls being made to change the international corporate taxation systems to address these issues. These calls are being heeded. For the first time, the OECD is putting forward proposals that discuss taxing multinationals as global companies and distributing the profits between countries.
Family office considerations
The family office space is not immune to both governmental and societal pressures when it comes to calls for transparency and accountability. It is thus vital to consider whether families will realistically be able to sustain making money in one country while paying minimal taxes by holding it in another.
Societal expectations and the magnitude of pressure they can apply to governments also cannot be underestimated. Organizational reputation is often synonymous with that of its owners and vice versa. When a business and its owners are perceived as having "played ball" and contributed to society in a particular country, rather than finding ways to circumvent their perceived responsibilities in any way, this generates goodwill and willingness to support them in good times and bad. When perceptions are negative, they can adversely affect societal responses to both the business and its owners.
This begs the question - should family offices not consider reverting to the practices of old, establishing their offices in their home jurisdictions? In the digital age, doing so is possible without losing a global focus. In this way, families can pay their taxes in the countries of residence and operation while also investing back into these areas to ensure societal upliftment. Could doing so be considered a part of the family office's greater social responsibility initiatives while also building trust and goodwill not only in their companies but the families who own them?
While profitability and wealth preservation will remain significant factors when it comes to choosing a family office jurisdiction, in 2020 and beyond, there are far more things to consider than these alone. Family offices who realize this and position themselves accordingly will find themselves in a stronger standing when facing the unknowns of the future.
This post originally appeared here.
