With money moving around the globe in greater volume - and at a greater speed - than before, governments are working hard to keep track
Our annual analysis of global wealth and investment trends shows that the desire of wealthy individuals to move their money – and themselves – across borders shows no signs of abating.
And, if the continued development of transparency regulations is anything to go by, the same is true of the desire from governments to at least monitor, if not direct, the flow.
The scale of the challenge faced by governments is considerable, to say the least. Money is moving at a record rate. An analysis of data from the Bank for International Settlements (BIS) confirms that foreign non-bank deposits were higher by US$97 billion in the year to June 2017 in the 29 countries that provide detailed reporting.
For some, this cross-border activity is being spurred on by the prospect of tighter capital controls. As David Ji, Knight Frank’s Head of Research for Greater China notes, there is a real belief that Chinese government is planning to tighten controls further.
To take just one example, while Chinese citizens are currently allowed to buy up to US$50,00-worth of foreign currency each year, there are signs that regulators intent to lower this limit.
Indeed, it is apparent that stricter rules are already being brought in. Since July 2017, Chinese banks are required to report on any customers depositing or withdrawing more than US$10,000-worth of foreign currency in a single day, and from the beginning of this year the Chinese government capped annual overseas withdrawals from Chinese bank accounts at US$15,400.
With authorities aiming to maintain a weaker yuan to promote exports, overseas investments, including property, have become more expensive. Any prospect of a further weakening may act as an additional push factor for investors.
In India, the Liberalised Remittance Scheme (LRS) allows US$250,000 per head per year to be moved out of the country. The pace of money transfers increased by 60% in the year to September 2017, and by almost 1,800% over the past decade.The rapid growth in transfers coincides with increased scrutiny by the Reserve Bank of India of dealings under the LRS.
The growth of global wealth flows has led to the introduction or extension of taxes targeting affluent investors.
In July 2017, the government of New South Wales, Australia, increased the stamp duty surcharge from 4% to 8% for foreign property buyers, as well as increasing its annual land surcharge from 0.75% to 2%.
In the same month, Australia’s treasury released a draft paper detailing proposed legislation to remove the main residence exemption for capital gains tax for foreign residents.
The government of New Zealand has proposed tax changes that will require property investors to pay tax on capital gains if they make disposals within five years, up from the current two.
An in November last year the UK government announced plans for capital gains made by non-residents on commercial as well as residential property.
Increasingly, government action is moving beyond taxation and into attempts to map the extent and the movement of global wealth flows.
The OECD’s big idea, the Common Reporting Standard (CRS) was launched in September 2017. Almost 50 countries formed the first wave with more joining earlier this year, bringing to more than 100 the number of nations now automatically sharing data on foreign accounts.
The CRS may be an important step towards revealing where wealthy people, as well as businesses, are placing their investments – but it is only the beginning of the story. The standard may not currently cover property ownership, but recent OECD support for property ownership registers suggests future iterations may well do.
Trends at a national and intergovernmental level outside the CRS point towards a more comprehensive shift in the power of governments to understand who owns what. Both the UK and Germany have taken action aimed at providing greater clarity on the ultimate beneficial ownership of trusts and international companies. In addition, both the EU and the Financial Action Task Force have echoed the OECD’s call for a register of property owners.
As we stated in last year’s edition of The Wealth Report, full transparency and total disclosure is coming. But for now, the desire for privacy continues to be a factor influencing UHNWI behaviour. In some cases this is prompting individuals to reconsider their place of residence.
In some cases, this is prompting individuals to reconsider their place of residence: following their own money negates the need for information to be shared between governments.
This trend is reflected in the growth in demand for second passports and residencies. Data from our Attitudes Survey reveals 34% of UHNWIs already hold a second, passport 29% are planning to purchase a second passport, while 21% are thinking of emigrating permanently.
The result has been a bidding war, as more countries seeking new sources of revenues try to encourage foreign direct investment in return for citizenship. Some, including the UK, require significant levels of long-term financial commitment; but others have less onerous programmes or are relaxing their requirements.
In the Caribbean, for example, several islands have recently slashed the level of investment required by as much as 50%, or linked citizenship to one-off contributions to hurricane relief or economic development funds.
As the sector matures it will provide a major source of future revenue for countries that lack alternative exports – but reputational risks are rising too.
Less drastic than a change of residence but perhaps similarly effective, at least for now, is to place money in a country outside the CRS net. Switzerland, for example, has delayed the exchange of information with Middle East counties.
BIS data confirms that financial non-bank deposits from Saudi Arabia and UAE into Switzerland increased by 44% and 53% respectively over the past three years – bucking the trend of an overall fall in global deposits held there.
This urge for privacy is also steering flows within the CRS countries, with those offering high standards of data security emerging as favoured investment hubs. It is one thing for data to be disclosed to your home government; quite another for it be sold on to third parties with questionable motives.
In its current guise, the CRS may encourage investment into property, at least in the short term. Under the existing rules, there is no requirement to report on property assets unless they are mortgaged.
Some commentators have linked the growth in price and demand for Hong Kong property in the months leading up to September 2017 to a rush by mainland investors to prepare themselves ahead of CRS reporting.
An increase in exposure to the US may be another result. There are no reliable figures available on the amount of flight capital coming into the most notable non-CRS signatory, but portfolio managers and fiduciaries put it in the hundreds of billions of dollars.
This looks realistic in the light of data from The National Association of Realtors, which confirms that foreign buyer activity increased by over US$50 billion year-on-year in the 12 months to March 2017.
As money becomes more mobile and scrutiny of offshore wealth increases, governments are trying to encourage money back onshore. Tax amnesties have raised tens of billions of dollars for governments across the world. From Indonesia to Italy, France and Fiji, at least €55 billion has been clawed back.
The tension between the growing globalisation of wealth and the desire for governments to provide controls will not easily be resolved, in large part because governments are conflicted in their desire to protect existing tax revenues at the same time as attracting new sources of wealth.
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