Tax transparency and the changes in wealth management
The exchange of information on demand is becoming the benchmark of a globalised financial market. On 7 December 2010, the 27 EU finance ministers concluded a political agreement on strengthening administrative cooperation in the field of direct taxation. At a banking conference organised by Ernst & Young, experts discussed an issue that is crucial to the future of Luxembourg’s private banking industry.
The new EU directive on administrative cooperation in the field of direct taxation will apply from 2013. It will replace a 1977 text that is considered obsolete. The proposed directive will cover the exchange of information on request, spontaneous exchange of information and, from 2015, automatic exchange of information between Member states.
Regarding the automatic exchange of information, the (proposed) directive adopts a progressive approach. From 1 January 2015, the agreement is limited to five categories of income: income from employment, director’s fees, life insurance products, pensions and ownership of and income from immovable property. Each Member State must provide information in at least three out of the five given categories. Luxembourg intends to communicate automatically on income from employment, director’s fees and pensions.
The directive contains conditions similar to those of the OECD exchange of information model and will prevail over double tax treaties already in existence between EU Member States.
By July 2017, the EU Commission will submit a report assessing the costs and benefits of automatic exchange of information. The possibility will be considered of expanding the number of categories from five to eight: dividends, capital gains and royalties may be added.
Rüdiger Jung, Member of the Executive Committee of the Luxembourg Bankers’ Association (ABBL), remarked that banks which receive a request from their national tax authority must inform the clients concerned. If not, they may face civil law pursuits.
There is no time to waste for financial institutions. A bank that holds relevant information is obliged to transfer it within a deadline of one month. The Luxembourg tax authority has confirmed that it would apply a tolerance of a few days in order to allow the bank to verify whether the client has not taken his case to Court at the last minute.
Under the spotlight
International pressure for more tax transparency has led to changes in the global wealth management industry. According to Etienne Hirsch, Executive Director of Ernst & Young Luxembourg, three trends can be observed. The first one is increasing competition between financial centres.
Times have changed and it is no longercompetition between banks in Luxembourg which is predominant but competition with financial institutions in other jurisdictions. It is not only financial performance that matters: regulation and reliability are at the forefront of client concerns. “All the banks and financial centres try to differentiate themselves, with expertise as the differentiator” Etienne Hirsch says.
Shifting client expectations is the second trend linked to more transparency. “The wealthiest clients are under the spotlight; they are the first people the tax man has in mind.” These clients, who are very demanding, chose a financial centre according to the criteria of confidentiality, transparency and sustainability.
Banks have to meet these expectations and their approach to tax advisory services, for instance, has had to change. Financial engineering solutions are now the cornerstone for attracting and retaining high net worth individuals.
Etienne Hirsch is optimistic about the future. He sees more opportunities for Luxembourg than risks. It is a fact that there is shared concern about asset repatriation, but a large proportion of the assets held in Luxembourg are already structured. Luxembourg is also well positioned to attract wealth management business from the growing EU entrepreneurial sector. CW