With nearly half of Russian HNW wealth held offshore in 2016, the country’s residents still prefer to invest outside of Russia. This highlights the failure of the tax amnesty launched by the government in June 2015.
The tax amnesty law was music to the ears of the Russian economy. By offering residents the opportunity to disclose details of offshore assets without legal repercussions, Russia hoped to increase its tax revenue and improve compliance among Russian taxpayers – similarly to other jurisdictions that have launched tax amnesties, such as Brazil. By curbing the outflow of capital from Russia, the added revenue would be used for the country’s development. While there was a noticeable inflow of assets returned to Russia from some countries in 2015 ($5.2bn from the Bahamas and $1.9bn from Bermuda), the tax amnesty law did not entirely go according to plan.
The amnesty did not require the repatriation of all assets to Russia, and indeed our 2016 Global Wealth Managers Survey shows that still 45% of an average Russian HNW portfolio is held overseas. More importantly, this is attributed to reasons of investors wanting a better range of investments and geographic diversification. Together, these drivers account for 66.1% of HNW offshore investments. Tax efficiency is not a key driver among Russian HNW investors, being cited by less than 8% of individuals, as the tax rates in the country are relatively low. By assuming that Russian HNW individuals use offshore booking centers to lower their tax bills, the Russian authorities destined the amnesty law for failure.
The amnesty law also provided reassurance that information provided to the tax authorities is protected by the tax secrecy code. However, anonymity is a concern for Russian millionaires: our conversations with wealth managers reveal that many HNW investors do not trust the Russian government to handle confidential information. With personal information disclosed to tax authorities, privacy is compromised with no guarantee that the information will not be used to open a criminal (or any other) investigation in the future.
Looking ahead the investment preferences of Russian HNW investors are not likely to change. Individuals will continue to work with advisors who can cater to their needs and offer the best options for continued growth of their investment portfolios. This includes identifying the best opportunities for geographic diversification, as well as striking the right balance between onshore and offshore allocation.
By failing to understand the key drivers for offshore asset allocation and investment preferences, the tax amnesty has met with little success. And lack of trust between the state and HNW individuals further deterred the reporting and repatriation of wealth. Governments that encourage residents to report their wealth can learn from Russia’s mistakes. The most valuable lesson is the importance of understanding the target audience, in order to design a disclosure program that encourages participation. Governments should explore ways to work with wealth managers to properly understand HNW investors’ attitudes and preferences.
By Nicole Douglas, Wealth Management Analyst