Globalization is making the world a much smaller place. Here are some insights on the ramifications on tax planning and how this affects where individuals choose to reside and do business.
Globalization is, as the saying goes, making the world a much smaller place, with families becoming increasingly international - particularly wealthy ones.
They will often have spouses, children or other contacts in multiple countries due to their resources enabling more travel, international home ownership and access to sophisticated global investments.
A positive trend in many respects - for all regardless of net worth - but what are the ramifications on tax planning and how this affects where individuals choose to reside and do business?
Family Wealth Report spoke to two attorneys from McDermott Will & Emery: Carol Harrington, chair of the international law firm’s private client department, and Astrid Owen, a London-based US qualified attorney.
“With the economic downturn you have governments increasing taxes at the same time that technology has made where you physically are less and less important,” Harrington said.
“In addition, wealthy individuals have often seen advantages in investing on a global basis to take advantage of opportunities for returns that might not be available in any one country and to provide a hedge due to changing political and economic systems.”
From a tax planning perspective, Owen emphasized that international tax systems have become very sophisticated and therefore advising an international family with respect to one set of laws is likely to cause not only grave inefficiencies but also result in poor advice.
There are “many traps for the unwary,” she said. “The key when you’re in the wealth space is to understand all the facts – all the resident and citizenship statuses of all your beneficiaries – as well as where all the assets are.”
She added: “End-families have become more international, especially the wealthy ones, which means you need to become more sophisticated in your product delivery and be well aware of the constraints that you have when you’re doing your planning.”
For example, the US taxes its citizens as well as its residents, so whether a US citizen is living in London or Michigan, they will be subject to the same federal rules.
“It is a tag that binds you wherever you are in the world,” Owen said.
“Many countries’ laws have become much more complex in this field because they’re trying to focus more on the tax avoidance mechanisms and trying to clamp down,” she added.
The Foreign Account Tax Compliance Act, for example - effective July 1 - requires all financial institutions outside of the US to regularly submit information on financial accounts held by US persons to the IRS. When the act comes into force, those who are not compliant will suffer a 30 per cent withholding tax on income and gross proceeds.
A “big picture trend”
In parallel with the above, Harrington highlighted that not only do many non-US families have investments in the US but also US families increasingly have connections overseas.
In a recent interview with Family Wealth Report, Erich Smith, who is responsible for BNY Mellon’s Family Office and Charitable Solutions Group, said a big opportunity he is picking up on relates to multi-jurisdictional families – those whose wealth was created outside the country but who have a business interest in the US. During a time of increased globalization of wealth and geographic dispersion of high net worth individuals themselves, this is a big theme in wealth management at present.
One notable trend over the past 20 years, Harrington said, relates to study abroad programs, resulting in many participants simply not returning to their country of origin due to work or social opportunities. And, even when the student returns, he or she may bring with them a spouse or significant other who is foreign.
Meanwhile, according to a study last year, how the rich accumulate their wealth has changed dramatically over the past 25 years. Rather than inheritance, wealth is far more likely to be self-made - a pattern common across the globe. The growth of so-called entrepreneurial wealth has significant consequences for how wealthy individuals plan for the future.
For example, for those individuals and companies that are able to do business from almost anywhere in the world – in cases where physical presence is less crucial - it might be more appealing to set up shop in jurisdictions where taxes are lower.
“It's becoming increasingly difficult for traditional models of taxation to raise revenue when people are so much more mobile,” Harrington said.
In the US, for example, many corporations are opting to headquarter outside the country in more tax-friendly jurisdictions, she said.
“The country that taxes you the lowest is going to attract all the people. What does it mean for our traditional model of the way countries and states, and local municipalities, raise revenue?”
The issues within the much broader topic of taxation are many and of course don't just affect the wealthy. For wealth managers serving high and ultra high net worth individuals and families, keeping up with the changing landscape in - crucially - the context of their clients' needs is top of mind.
Established in 1934 as a tax practice in Chicago, IL, McDermott Will & Emery has over 1,100 lawyers and offices in Boston, Brussels, Düsseldorf, Frankfurt, Houston, London, Los Angeles, Miami, Milan, Munich, New York, Orange County, Paris, Rome, Seoul, Silicon Valley and Washington, DC. The firm also has a considerable presence in Asia through a strategic alliance with MWE China Law Offices in Shanghai.