While the concepts of transparency and data protection appear to be diametrically opposed, both are crucial for high net worth individuals (HNW). BDO’s Private Client Services Practice recently released its first World of Private Clients survey, which focused on disruption and decision-making in the face of a global pandemic.
Over 350 HNW private customers and professional consultants from 16 different countries around the world were interviewed for the survey. These results were further complemented by 25 in-depth interviews with HNW individuals, including the so-called “next generation” and their advisors from Hong Kong, Singapore, Switzerland, the US and the UK.
Although respondents differed in terms of nationality, occupation, age and other aspects, they clearly share the same concerns: almost 71% say high net worth individuals are moderately or very concerned about the risks of tax transparency and reporting requirements. You have two concerns: discourse and privacy concerns.
Disclosure requirements are increasing
Transparency through disclosure has been a focus for many years and is expected to remain one for years to come. As both businesses and individuals become more global, disclosure requirements are expected to become increasingly robust and comprehensive. Collaboration and collaboration between domestic and international jurisdictions is becoming more common, which is made possible in part by technology. And as the web of regulation becomes more tangled, the burden on taxpayers of managing and complying with each jurisdiction’s disclosure requirements remains.
There are only two countries that tax their citizens on worldwide income: Eritrea and the United States. In the United States, foreign income reporting and disclosure requirements are becoming increasingly stringent and complex to prevent non-reporting of foreign assets and income. Compliance with existing and new disclosure obligations is an important concern for HNW persons, especially since non-compliance can lead to considerable penalties.
The United States is not alone in its pursuit of transparency – increased global disclosure and reporting requirements give cause for serious concern that new regulations are becoming unduly burdensome and counterproductive. One respondent noted that “the grain in the system needs to be removed and endless box-testing needs to be overcome”. Another compared the regulations to traffic: “You are introducing all of these regulations, but the result is that traffic is slower.”
Tax authorities need to expand their resources and staff to meet the increased disclosure and reporting requirements for individuals and companies. However, there is optimism that technological advances can avoid the turning point.
Privacy concerns abound
Aside from the growing compliance burden, the current trend towards increased disclosure and reporting requirements has also exacerbated concerns about data protection. If the information disclosed falls into the wrong hands, it can create concerns about personal safety, public scrutiny, reputational risk, and unwanted negative press. Of these concerns, the majority of respondents placed reputational risk at the top of the list, with some even suggesting that it is a major factor in HNW individuals’ decision making. When respondents were asked to what extent concerns about protecting personal and family reputations had become a determining factor in decisions about tax structuring and compliance, just over 59% of respondents said that this “affects their decision-making to a moderate or great extent “. Only 8% are “not at all” affected.
One way this is reflected is through public beneficial ownership registers, which recently made headlines in the US in late 2020 due to the Corporate Transparency Act. One mediator suggested that these types of mechanisms are “fundamentally wrong” and could cause a “violation of human rights”. Unsurprisingly, our survey found that only 2% of respondents believe that HNW individuals are completely unaware of the potential privacy and security risks that arise from tax transparency and international reporting requirements.
Our research shows that HNW individuals and their intermediaries believe that transparency requirements should be strengthened, expanded and deepened. The challenges related to ongoing transparency trends are not only to meet the applicable registration and disclosure requirements, but also to protect the privacy and security of HNW individuals as much as possible. With the globalization of the lives of HNW individuals and their investment portfolios, there is likely to be an increased focus on transparency for the foreseeable future. Now is the time for HNW employees and their advisors to work together on longer term action plans to address these trends in a sustainable way.
Jeffrey Kane is National Managing Partner; The chairman of the Global Private Client Services Center of Excellence at BDO and Jacquelyn Herrman is the manager of the National Tax Office for Private Client Services at BDO