#1 – Hello world!
I have been thinking a lot over the last couple of years about writing something like this. But I never got around to it. Life got in the way. Other priorities. Some thoughts are so fleeting anyway by the time you have the time and the paper and the pen to write them down, you’ve either forgotten what you wanted to remember, or you lose the paper. So, all the fates have aligned and I’ve finally got around to getting some thoughts in order and setting up the infrastructure (this blog). We can thank Coronavirus and the privileges of home office in part, that I actually have a notepad available at the right time, and the encouragement of my family.
The next couple of posts have been tumbling through my mind as I consider the things I have to learn for work, and consider the world we live in and the way it works.
For now, the thoughts I want to get down and out there relate to my work as a lawyer for a bank, but no doubt as I get inspired by what I see and run out of ideas on that topic, I might venture out into others.
Living in Switzerland influences the way I see the world
I have the privilege and luxury of living in Switzerland. My family and I moved here from England in 2007 for family reasons and I very much enjoy the well-ordered country we live in and the nature we are surrounded by.
It is easy to take it for granted that public officials are honest, the tax collection system is fair and predictable, police and government behaves respectfully, and a transparent and very democratic legislation system exists with popular initiatives being voted on regularly. OK, it’s not a fairy tale and you can always find something to complain about, but life is good here!
Why am I telling you this? It’s about context. Knowing someone’s background or where they’re coming from gives you a much better chance to understand why they say or believe what they do and gives access to the bigger picture. I believe context is incredibly important. Without it, you only have half the story.
Not everyone lives in Switzerland...
Do I mean this literally? No, of course not. There’s no way everyone would fit here. I mean this figuratively. Just because I am settled in Switzerland and see the world through that lens, it doesn’t mean that everyone in the world will share that view, those biases and expectations. I live in an environment where I know, generally, what I can expect from my neighbours, from Government, and society in general, based on what I encounter here.
However, I shouldn’t assume that people living in other countries experience life the same way. Someone who lives in, say Spain, may have different expectations based on their own experience, upbringing and observations of normal behaviour. Something that’s normal in Spain may be unusual in Switzerland and vice versa. When I lived in Spain as part of an exchange many years ago I had a lot of things to get used to. Some good, some challenging, all interesting and mostly different to what I was used to in England!
When I drive to Italy (or Bavaria in southern Germany, to visit my wife’s family), for example, I immediately notice that the local driving style differs to what I am used to seeing on Swiss roads. I need to change my expectations accordingly. Each country will have its own traffic laws, and enforcement traditions best known to locals. When I go abroad I know it is futile to assume that everyone will act in the same way as if we were in Switzerland. I adapt to my environment. Or at least I try.
Should the same rules apply everywhere?
Through my work I meet people from different countries and cultures, and encounter governments and legal systems that behave differently to the ones I am most familiar with.
I have met some fascinating people from many countries, and also become familiar with the relevant aspects of their tax and succession laws. My focus is trusts so I’m always interested to see whether these are recognised (or if they’re a bit uncertain) and what other ways clients can put money to one side for themselves or for their children or grandchildren without triggering an unexpectedly harsh tax consequence, but I guess the same principle applies to a number of areas of life where government regulates how people should behave.
I’ve also started to get an indication based on peoples’ stories and the legal research I’ve done, to see how things work in the country.
I have seen that some rules work really well in their own original environment but are perhaps a lesser fit when applied in, or to, other countries with different traditions or histories. I also start to understand why some people might be hesitant to trust their own government.
Why shouldn't you trust your government?
OK, this is the uncomfortable bit. It’s not an anarchist manifesto (God forbid!), and I’m not slinging mud here, or trying non-compliance with the laws applicable to you or me. In fact, your government might be perfectly fine. This is partly about perception. I’m just mentioning reasons why some people might not trust their government. You don’t have to agree. It just makes sense if we sit back and think about what others might be thinking and why. It might help later. Let’s start with something easy and relatable.
Corruption
Transparency International maintains a Corruption Perception Index. It would be nice if there wasn’t a need for a list like that. Not everyone can afford to trust their government to act fairly or in the interests of the population. Many people are lucky to live in a country where this isn’t a big issue, but others aren’t so lucky. If the government is looking for bribes to do their job, do you want them to know everything about you, and how much you own and where it is?
Political uncertainty
Maybe your government is great right now, but who knows who’s going to be calling shots in 3 or 4 years’ time. Some countries are heavily split on political lines and swing from left to right at each change of regime. In such environments the winning party’s policies can be directed in subtle (or not so subtle) ways to attack people considered offensive to the new regime. Some South American regimes have jumped from left to right to left so quickly it’s enough to make you dizzy!
Imagine the scenario: today the government is putting in place policies that help your business thrive, and tomorrow you will be resented by the masses for having been successful, and that left-wing government you’ve always fears will take everything away from you and give your farm or factory to the workers. Who may not know how to run it properly.
Or imagine the president established a healthcare for all policy, which is attacked by the next president, wanting to scrap it at any cost for political gain.
Even absent the above extremism, some governments do not behave predictably, and introduce laws with little or no notice, or indeed retrospectively, leaving citizens little opportunity to decide how to organise themselves based on the new laws.
Data security
Other governments may not be as careful with data as they could be. Some have been hacked, for example Bulgaria’s tax revenue office was hacked in 2019 and millions of tax records were made available online. Just this year, in January 2020, the Bahamas companies registry was hacked. The Bahamas is a frequently used jurisdiction for holding companies, usually used for convenience in tax neutral structures (by that I mean, no extra tax in that country because there are usually already taxes levied in other countries on the same money).
Others have an environment where corruption by individual government officials is seen as a normal way of supplementing a measly government income, meaning private data is stolen and sold to criminal organisations.
Possibly a reason why governments shouldn’t hold more information than they actually need for their purposes, but certainly a reason for people to be concerned.
Personal safety
There are sadly countries in the world where kidnapping is common and a wealthy kidnap victim looks more attractive to criminals than a victim of modest or unknown means.
In those environments, would you want a list of your name and address, how old your kids are and where they live, and the value and location of your assets to be available to the government, knowing this information has been leaked in the past?
There are people who live in countries where they do not trust their government, and not without good reason. Here it’s difficult to expect people to behave the same way as we do in Europe.
The contrary view...
Incidentally, on the other end of the scale, Norway is so transparent that people accepted as normal that their tax information would be available to the public as a whole without any restrictions for a great many years. Scary. This transparency and honest was normal and there was no reason to worry, although safeguards were introduced in 2014 so that now people are sent a notification if you’re snooping in their tax records. Apparently since then the volume of requests have gone down significantly. Incidentally, Norway took 7th place in the 2019 Transparency International survey, behind Switzerland, which thankfully does not have a radical tax transparency policy. We’re too private for that.
One could believe based on the Norwegian example that this could be replicated in other countries. It works in Norway. Why not elsewhere? However, this works in an appropriate environment and culture where this level of equality has been in place since the 1800s. It is supported by the culture and environment there. However, in other environments this level of transparency wouldn’t work, and could be dangerous.
Let's talk about the OECD
I’ll probably talk in more detail about this in later posts, but the general principle above applies, in my view, to some of the legislation propagated by the OECD (the Organisation for Economic Cooperation and Development, founded in 1961). The Economist regularly describes the OECD as “a club of rich countries”. They’re probably right, although there are some countries in the group which have a more mixed economic background (Chile and Colombia, for example, Turkey perhaps).
Today there are 37 countries which can be seen on the OECD website. It’s pretty heavy on European members, with some former British colonies and others in the mix as well. Why do I mention this? Culturally this must be like doing the splits. The legal and tax infrastructures of the country are quite different from each other.
Some European concepts work great in Europe (although sometimes they don’t even work in Europe…) but when you try to make them work elsewhere they don’t work as anticipated. It must be difficult, with such a Euro-heavy composition, for European mentality not to prevail.
The OECD has a huge mandate, and does some interesting work generally. It also leads the way in making policy changes on anti-money laundering and (tax) transparency work such as the Common Reporting Standard (I’ll talk about this a lot in the next few posts), the FATF (Financial Action Task Force) recommendations which eventually influenced the introduction of increasingly invasive EU transparency rules regarding control and beneficial ownership of trusts and private companies (which have found their way into many Caribbean countries which are often described as tax havens), as well as the privacy of private wealth transactions.
OECD/EU rules on trusts
Let’s take the example of trusts in Europe. Already the European Union (which, if you exclude the UK, includes 3 countries that recognise and are familiar with trusts – I’m thinking Ireland, Malta and Cyprus, but I might have overlooked one or two, and I’m ignoring Italy on purpose – , and 24 countries that don’t really understand why they’re needed, and see them as inherently suspicious). However, it doesn’t stop them making increasingly complicated and detailed laws applying to trusts, many of which are phrased in a way that makes it difficult to understand what is needed, or alternatively the rule is at odds with the way trusts work and are used. The influence of the majority civil law countries with a suspicious view of the use of trusts (which is frequent and normal in common law countries) seems to affect the rules which have been created. And not in a good way.
Civil law (i.e. people who understand law based on a “Civil Code” rather than “common law”) lawyers, politicians and functionaries should probably not be regulating areas of law they don’t understand, and for which they don’t understand the context and history. And the contrary applies too. By all means pass laws making it unattractive to use these devices in your own country. People are warned. They can make an informed decision.
But supranational organisations need to be more sensitive to other traditions, and be aware of the traditions and environments in each country in which the rules will be applied, so that the rules work (a) as intended and (b) are applied fairly and consistently to achieve their policy objective.
Closing comments
The world isn’t the same everywhere. Not everyone lives in Switzerland and not everyone perceives the world the same way. Not everyone in government tries equally hard to assure the safety of our information and not all good intentions result in a good policy or outcome.
Neither do all governments or peoples behave the same way. We are all products of our upbringing (to a greater or lesser extent) and should not be treated the same, because we are all different. We should all want a better world and I also believe that people should pay a fair level of tax and contribute to society. However, governments need to be sensitive to their environment when levying taxes and enforcing them. The risk of uniform rules coming from a geographically displaced international organisation that either struggles I fear that a “one size fits all” approach to economic policy risks being a “one size fits none” policy instead.
Equal treatment isn’t the same as fair treatment. If everyone had to pay the same amount of tax (i.e. USD 10,000 per person) instead of a percentage of their income, profits, wealth, inheritance etc it wouldn’t be a fair result. At those levels it also wouldn’t cover most treasuries’ revenue requirements. But does that mean the rich should just hand over their wealth and be the only ones paying? France tried that not long ago. It didn’t go very well. The wealthy are mobile. They can go somewhere else if they feel taken advantage of. Finding the right system is a challenge. I’m glad it’s not my job to try and find the balance.
Sorry, this first post got a lot longer than I thought it would when I set out.
Coming up next:
In my next post I will talk about the balance between economic policy and privacy, in the context of the OECD’s Common Reporting Standard, and where I feel the balance should lie. After that, in my third blog, I want to share some ideas I have about how this exchange of information could be abused by governments in ways not originally intended for tax collection.
Thanks for reading!
PhilG, 20 June 2020
Great first article Phil! Some interesting views …. most of which are similar to mine!
I am interested to read the next article, so if you have a list please push it to me!
Best.
Scott