I look at two broad moves on the global trade, data and tax front that ought to be of interest to the wealth management and private client advisor industry.
Any notion that globalization – a catch-all term covering world trade and human interaction – is in retreat to a more protectionist position appears to have been confounded by moves on tax, data and information privacy this week. But time will tell whether developments, some of which are driven by governments’ desperate desire for revenues, are wise or dangerous.
In one story this week, we reported that the European Union agreed a new deal governing transatlantic data transfers after it said that the US has accepted an “adequate” level of protection over citizens’ information. That agreement coincided with US President Joe Biden’s visit to Europe. This is a busy time for international diplomacy.
The EU-US pact on data is designed, so its framers say, to ease worries about information transfers and concerns that the US takes a more hands-off view on privacy than its European counterparts tend to do. (While it has access to the EU Single Market, Switzerland is not covered by this agreement, which is notable given how data privacy has traditionally been a big deal for that nation.)
There’s a wealth management dimension to this: protection of client privacy in a globalized world is implicit in how the sector operates. But, as controversies have shown, there can be conflict between governments’ demands to foil offshore tax evasion, and other offences, and the need to protect legitimate client privacy.
A second story, about international trade and tax, concerned how tax officials from 143 jurisdictions had hoped to agree on a new way to divide the taxes levied on the profits of about 100 of the world’s biggest companies – many of them large tech firms such as Amazon, Meta and Alphabet that don’t necessarily have to be physically present in a big way in countries where they do business. Such a deal – part of a series of changes to how, where and how much multinational companies are taxed around the world – would reallocate the taxation of some $200 billion in corporate profits.
The wealth angle here is that many HNW and ultra-HNW individuals have operating businesses, and this tax affects them directly. And they’re also investors – changes to corporate tax, like any other tax, affect the cost of capital, returns, and the final shape of a portfolio.
Let’s deal with the data agreement first. With the EU’s GDPR regulations in force now for about five years, it was clearly going to be a problem if data sent over the Atlantic would be subject to much looser controls than in the EU. Such regulatory differences hurt trade, not great when the world needs faster growth.
Whatever you think of GDPR, it certainly – perhaps unintentionally in the eyes of some transparency campaigners maybe – put privacy right up the agenda. For years, the focus of G20 countries’ leaders had been on transparency, disclosure of as much information as possible in the hunt against tax evaders. While strictly a financial privacy issue, GDPR does complicate how much data can be shuffled between nations. At Mishcon de Reya, the law firm, it has argued that GDPR, for example, clashes with the US Foreign Account Taxation Compliance Act (FATCA), which has been in force since late 2010. It makes sense, therefore, for the US and the EU to try and harmonize matters, although a level of flexibility, given how individual states of the US may have their own approaches, is wise. So, it appears that if this deal – with safeguards about what happens to data – is as advertised, that’s a plus for privacy and trade.
Tax cartel or necessary measure?
The second issue – a possible agreement on international tax behavior – is in my view less desirable. In the autumn of 2021, a group of 20 major industrialized nations agreed a minimum corporate tax rate of 15 per cent, designed – so its framers hoped – to stop a “race to the bottom” over such tax. The move was prompted by President Biden. Until the 2017 tax package of his predecessor, Donald Trump, the US had one of the highest corporate tax rates in the G20, far above those of countries such as Ireland or Luxembourg. Biden wanted higher taxes to help pay for his domestic agenda, so being undercut is a problem. So, the argument goes, creating a “floor” for corporate tax stops revenues leaking out.
Corporate tax is politically sensitive. The UK government has hiked the corporate rate from 19 to 25 per cent, prompting anger from even Conservative MPs. A decision reported in February this year by AstraZeneca, the UK pharma firm, to build a $400 million API facility in Dublin rather than the UK was a sign that taxes, contrary to some claims about their limited effect (see my review of a book challenging ideas about the importance of marginal tax rates), do matter. Ireland, Luxembourg, Malta and Singapore, for example, have lower corporate tax rates (Singapore’s is 17 per cent). While other factors can also play a part, in a world where margins are getting squeezed, does it make sense to lose a competitive edge? UK Chancellor Jeremy Hunt was reportedly “disappointed” at the AstraZeneca decision. Seriously?
Spoiler alert: taxes influence conduct. After all, it is sometimes said – usually by those on the Republican side in the US but exclusively – that a factor behind the exodus of businesses from California, Illinois, New York and other, “bluer” states to Florida, Texas, Tennessee and others is tax. Texas, for instance, may have brutal summers but it has no state income tax. Internationally, tax sometimes comes up in conversations when I hear of Europeans heading to Dubai, to give another example. (Of course, before air conditioning was invented over a century ago, some of this tax-driven migration might have been far lower.)
One argument in defense of an international agreement is that, if we want people to accept some of the inevitable inequalities of wealth involved with global capitalism, there is a “price” to pay for the greater dynamism than under centrally planned economies, protectionism and very high taxes; consequently, people need to think that companies pay their “fair” share. But the problem here is that taxes are ultimately all paid by people. There’s no separate, alien class of beings that foots the bill. In fact, it may make more sense for G20 countries and those in other nations to think about taxing the beneficial owners of firms, such as taxing dividend and bond income instead of at the corporate level. This might also reduce this constant “whack-a-mole” game of chasing down tax loopholes, “tax havens” and the like. And it might also remove some of the deadweight costs of complying with an ever-more Byzantine set of tax rules.
I fully understand why it appears wrong that a firm creates a financial reporting hub in a place with very low tax, even though it earns the bulk of its income in a neighbor country with higher rates. After all, the country in which most of the revenue is earned has to fund roads, airports and other infrastructure, so at the very least, there should be some recognition by a firm that if it does X amount of business in country A, then A is entitled to charge a “price” for it. But in my view, it still is a lot easier overall to tax the beneficial owners of these firms, since they are the ones who are receiving the income for which they risked their capital. At the national level, firms are most likely to pay taxes anyway on services such as business rates, sales taxes, certain fees, and the like. These are also a lot harder to avoid in the first place. Given modern tracking technology, it ought also to be easier to do this in a way that doesn't become a reporting nightmare.
These are complex issues and it is possible to see how these two stories – on data transfers and tax – feed into a sense that policymakers around the world are trying to make global trade, commerce and relations as harmonious as possible even if, as I say, the possibility of a "cartel" approach to minimum taxes is unwieldy (and also arguably undemocratic). It also suggests that the death of globalization has, to coin a term, been “much exaggerated.”