Urs Brutsch of Hoffmann & Partners Wealth Management talks about the inevitable changes in the style of offshore private banking, but reveals why there is still so much potential for hubs such as Hong Kong and Singapore to flourish.
Date: Feb 2010
Tags: Tax, Secrecy, Offshore banking
Shifting the focus of offshore private banking
A significant consequence of the fall-out from the financial crisis is that growth in offshore banking is expected to slow.
In an interview with Urs Brutsch, he said jurisdictions which bank only on undeclared funds will become a thing of the past.
However, he predicted that offshore banking using declared funds will become more and more important, because wealthy individuals will want to continue to keep money in certain jurisdictions to tap the local expertise, for example Hong Kong, Singapore and Switzerland.
This expertise is not easily or quickly built up, said Brutsch, because it takes time to develop a generation of people who understand the private banking business.
While a country like Indonesia, for instance, now has mutual funds and is learning about the industry, it will take a long time for market participants to develop an international view on a relationship, which is essential in private banking.
Clients will therefore still go to established private banking centres to access the required expertise – not to hide from their tax authorities at home.
For example, he said one of his European clients keeps money in Asia because the client wants geographical diversification of booking assets, as well as wanting to invest in Asian equities – for which the client thinks the expertise is in Asia rather than in London or Zurich.
Security risks
Another key reason why some private banking clients want to keep declared money in offshore hubs like Hong Kong and Singapore is personal security, said Brutsch.
This applies to certain countries in Asia, for example The Philippines and Indonesia, where wealthy people are generally concerned about their security.
He explained that they prefer not to keep their money in local banks because this means a lot of people in the bank will know how much money that individual has, in turn creating a personal security risk.
Why European clients flock to Singapore
There are various reasons why wealthy individuals in Europe look to Singapore for a lot of their private banking needs, said Brutsch. However, some of these reasons are misguided.
For example, both Switzerland and Singapore have accepted Article 26 of the OECD Model Tax Convention on Income and Capital, which relates to exchange of information. As a result, it would be pointless for any client to come to Singapore from Switzerland in search of banking secrecy.
Yet it is still acceptable for Swiss clients to come to Singapore to avoid EU Savings Tax, given that Singaporean banks do not have to deduct EU Savings Tax. Equally, added Brutsch, it is acceptable for Swiss clients to come to Singapore to avoid Swiss stamp duty as this doesn’t exist in Singapore.
However, he added, Singapore doesn’t want to be seen as accommodating people looking to avoid tax in their home countries.
Global pressure on secrecy and taxation
With so much pressure on Switzerland from countries like Germany, France and the US, for example, Switzerland has declared that it will no long make a distinction between tax fraud and tax evasion.
This is a big change for Switzerland, said Brutsch, and some wealthy clients think this is an important reason to move money away from Switzerland to other hubs, such as Hong Kong and Singapore.
In general, however, the industry is moving towards a situation of more transparency, where wealthy individuals need to pay more tax.
One thing which Brutsch said would reduce the incentive to avoid tax, especially in Europe, is by having lower tax rates overall.
People understand they need to pay some tax, he explained, so the 15% to 17% required in countries like Hong Kong and Singapore is generally considered acceptable. It is when people have to pay 60% tax, as they do in certain European countries, which drives some people to try to find ways to avoid it.
