EM offshore assets set to move onshore

Tighter cross-border rules, less arbitrary national government policy and improving returns at home are likely to prompt rich investors from emerging markets to move assets back onshore.

Offshore assets are likely to move increasingly onshore as cross-border rules tighten and grow more aligned and wealthy individuals feel domestic tax authorities in developing countries are becoming less arbitrary in their treatment of assets.

Despite significant wealth growth across the world, many of the developing world’s wealthy continue to use offshore jurisdictions to protect their assets, found Boston Consulting Group’s recent annual Global Wealth report.

Investors in the Middle East and Africa tend to keep their assets in Switzerland, while those in Asia Pacific prefer Hong Kong and Singapore, and those in Latin American favour the Caribbean and Central America, the report said.

Despite competition from Hong Kong and Singapore, which together account for some 16% of global offshore assets, Switzerland remains the world’s leading offshore centre with 26%.

However, respondents to PricewaterhouseCoopers’ Global Private Banking and Wealth Management Survey 2013 tipped Singapore to overtake Switzerland as the world’s most attractive financial centre within the next two years.

Perhaps more important than where clients are keeping their assets offshore is how much they are channelling abroad.

Recent Scorpio Partnership data suggests wealthy clients in Latin America (45% of whose wealth is kept offshore) and the Middle East and Africa (65%) rank highest in terms of the proportion of their assets they hold offshore (see figure 1).

This could translate to assets of some $5.7 trillion for companies operating in offshore wealth centres.

But the total estimated offshore wealth of Asia Pacific ($2.8 trillion) exceeds that of the Middle East and Africa (see figure 2 below).

In many senses, though, the most interesting aspect of the trend to hold assets offshore relates to the chosen destinations of assets thought to be in need of protection. This suggests that, despite strong wealth growth in emerging markets, particularly when compared to Europe and North America, there is much insecurity about the safety of this wealth.

The list of countries where assets are held for safekeeping includes the Bahamas, the Cayman Islands, Cyprus, Dubai, Jersey, Luxembourg, Mauritius, Panama, the Seychelles, Singapore and Switzerland.

But because of regulatory changes, we think onshore wealth distribution will take precedence over offshore holdings in emerging markets.

Tighter disclosure requirements in light of the recent drive to combat tax evasion is forcing many jurisdictions – such as the UK’s overseas territories, Luxembourg, Singapore and Switzerland – to cooperate with foreign tax authorities.

The US’s Foreign Account Tax Compliance Act (Fatca) requires financial institutions abroad to disclose information on clients who are US nationals. And in May, a meeting of the Organisation for Economic Co-operation and Development adopted the Declaration on Automatic Exchange of Information in Tax Matters, which will see information shared between member countries.

However, the key difference between the two reporting systems is that the latter is based on residency, not citizenship like Fatca.

As the world’s regulatory bodies align further, we believe wealth will increasingly be kept onshore. This is because tax authorities in developing countries are becoming less arbitrary in their dealings with the wealthy, so the need for the protection of assets will decrease.

Low interest rates across the developed world mean returns on offshore assets are often worse than on many onshore investments in developing economies. Keeping wealth offshore thus often does not enhance investment returns. Rather, asset protection or diversification look to be the main reasons for keeping assets offshore.

The process for returning assets onshore could be expedited if countries, particularly in developing markets, implemented common law recognition of certain legal structures, such as trusts and foundations, and by creating not only the right environment to create wealth, but stronger legal systems to allow wealth creators to keep their wealth safe and secure.