Tax amnesty heralds increased demand for Offshore Funds in the LATAM region
After a highly educational trip down to Buenos Aires at the end of last year, I couldn’t help but be encapsulated by everything that was going on in Argentina. It absolutely felt like a country that was finally moving in the right direction and the Tax Amnesty was a large part of that. On that basis, I took the time out to interview the head of our Montevideo Office, Horacio Woycik to gauge his views on how 2017 is playing out:
Thanks for taking the time to speak to me Horacio. I noted that on 31 March 2017, Argentina concluded one of the world’s most successful tax amnesties, something of which you must be very proud of as a native Argentinian. Could you tell our blog readers a little more?
Thanks Phil. Although the Argentina Government was cautiously optimistic when announcing the Tax Amnesty on various assets[i]a year ago, the results exceeded all expectations, with $116.8 billion assets declared in total. This is impressive, particularly compared to the $1.7 billion declared under the former government’s Tax Amnesty programme between 2013-2015.
That’s a truly incredible result. What do you put it down to?
Some may attribute this success to investor confidence in Argentina’s new Government, led by Mauricio Macri, but in my opinion, this only partially explains the results. Another deciding factor in the Amnesty’s success was the unanimous consensus from local legal, tax and financial advisors that sooner rather than later, there would no longer be a safe place for undeclared assets and they actively encouraged all of their clients to participate. The Amnesty was seen as a “last chance” opportunity for taxpayers to regularise assets before the unprecedented flow of financial information amongst Tax Authorities following the implementation of the OECD’s Common Reporting Standard (CRS) in September 2017.
That’s interesting as clearly the CRS has been a huge topic of conversation down there for a while. Has it made that much of an impact?
Absolutely. CRS, FATCA and FATCA’s bilateral Intergovernmental Agreements (IGAs) are reshaping the international financial system, and compliance with local tax obligations will soon be monitored by financial institutions more closely than ever before. In this context, tax amnesties are just another preliminary step in a coordinated global effort.
As a matter of fact, Argentina’s Amnesty programme is only one of many Tax Amnesty programmes taking place simultaneously worldwide. Chile successfully closed its Tax Amnesty programme in December 2015 with $18.7 billion in assets declared. Meanwhile, Brazil recently extended its Amnesty programme until 31 July 2017, with $54 billion in assets declared to date. Additionally, countries like Colombia, Peru and Mexico have ongoing Tax Amnesty programmes.
So this is absolutely going to be become the norm. What can we expect after these various tax amnesties take place?
The high adherence to the different tax amnesties will likely trigger a wave of asset restructurings by high net worth individuals, with tax efficiency as the main driver. It’s likely that there won’t be a “one size fits all” solution for the structuring needs of clients from different countries, as structuring will be very dependent on local tax legislation, and solutions will vary from country to country.
Accordingly, private clients’ increased use of fund structures for tax and estate planning purposes is likely to drive growth in Latam's fund industry.
That’s very interesting and I’m our funds blog readers would like to know a little more about why that is.
I can see three obvious reasons why:
- Funds are a natural vehicle for asset repatriation. Tax residents in Latam are disclosing billions of dollars through the ongoing tax amnesty programmes, most of which are held abroad. Some of those assets are likely to return to their investors’ countries of residence once the "invisible barrier" of being undeclared is lifted. It could be expected that investment funds will channel a significant portion of this inbound flow.
- Funds provide flexibility and other benefits. Investment funds are likely to be seen as the appropriate vehicle to hold investor assets due to the flexibility in the management of investments that the structures allow and the tax benefits that these vehicles offer investors in different jurisdictions in the region.
- Funds follow wealth. All Latam jurisdictions aside from Venezuela are expected to grow during 2017. This includes the comeback of certain key Latam economies like Argentina and Brazil which suffered a contraction in 2016 (click here for a detailed growth forecast and comparison to 2016 performance).
That’s perfectly logical. Have there been any other side effects?
Another interesting secondary effect of the drive to transparency is the shift away from the previous unfair and unjustified views of offshore structures. As tax authorities notice that resident tax payers continue to legitimately hold assets through offshore vehicles for succession and tax planning purposes, the integral role offshore vehicles play to the international finance market is once again highlighted, and misinformed perceptions about illegal behaviour are fundamentally cleared up.
I certainly agree with that point and it was very interesting from my perspective to note the level of interest in offshore vehicles from the very sophisticated community in that region. Finally, I must ask you the most important question; Messi or Maradona?
Tricky question! I simply cannot choose between them. With Maradona and Messi, we get to enjoy the best of the present and the best of the past - as an Argentinean couldn't be prouder.
[i] Argentina’s Tax Amnesty programme was announced in May 2016 to establish a one-time tax payment on various assets: 10% tax on the value of disclosed financial investments (15% if disclosed after 31 December 2016); 5% tax on the value of real estate properties; 0% tax if taxpayers subscribe any of the 3 types of Argentine Public bonds available – with low return rate and lock up periods; 0% tax if invested in Argentina funds to invest in local projects (with a 5 year lock-up period).