Rich Bankers Have Ways to Escape U.K. Tax Bite

Bloomberg, April 28th 2009, Commentary by Matthew Lynn.

London’s status as a global financial hub has taken a beating in the past year. The British have nationalized half the country’s banking system. The non- domicile tax system that allowed foreigners to shelter much of their wealth from the authorities has been hit by hefty charges. And tough new rules on pay are being proposed. And now? The top rate of income tax has just been increased to 50 percent from 40 percent. The phrase “last straw” doesn’t even begin to capture how many of London’s bankers, private-equity partners and hedge-fund managers will be feeling. They may have put up with drizzly weather, creaky transport systems and a national mood that makes financiers about as popular as Bernard Madoff at a retirees’ wealth-management convention. Yet it is hard to see how a city can remain as a finance center when it has the fourth-highest tax rate in the developed world. Only Denmark, Sweden and the Netherlands have a higher top rate, according to accounting firm KPMG LLP. Bear in mind that London draws in talent from around the world. It is inconceivable that lots of clever young people primarily interested in making money are going to move to one of the highest tax regimes in the world. Bankers will be checking their atlases more than ever. As it happens, they won’t be short of choices. Europe has lots of places that could host a financial hub: some old, some new. Geneva, Monaco, Bulgaria or Macedonia, to name just a few. All of them have a better shot than London in the next 20 years of building a friendly environment for Europe’s bankers. They don’t even need to be established. Forty years ago, Hong Kong was little more than an island in the South China Sea. Twenty years ago, Dubai was just a strip of sand with a port attached. If the demand is there, the infrastructure will follow. Here’s a rough guide, based on the following criteria: — Low taxes; — Decent infrastructure; — Reasonable divorce laws (no point in sheltering your bonus from the taxman only to see it clobbered by your spouse); — Lots of good-looking women, or men; — An airport, schools and a good golf club; — Low risk of anti-banker backlash next time the financial system implodes. Monaco: Always a safe choice. You can’t beat the principality for taxes — there aren’t any on personal income. The place is crowded and expensive, though. The women are too busy tanning themselves to pay any attention to you, and anyway, if you aren’t a Russian billionaire, you can forget it. Yachts are mandatory. As for the backlash risk, you are dangerously close to France, and the people there keep railing against tax havens. They might one day choose to do something about the small one carved out of their own country. Geneva: There’s a reason that banks have been setting themselves up on the shores of Lake Geneva for hundreds of years: There is nowhere safer for the wealthy. The taxes can be low, but they are also complicated: The Swiss top rate is actually 40 percent, but can be a lot less if you aren’t Swiss. The quality of life is good, but expensive: The “recessionista” look hasn’t made it to Geneva yet and probably never will. And there is zero chance of a backlash against bankers: The Swiss won’t rely on the chocolate industry to keep their economy afloat. Bulgaria: Things have changed a bit since Todor Zhivkov led the People’s Republic of Bulgaria as one of the most loyal of the Soviet satellite states. Now with a top tax rate of just 10 percent, the country has one of the most pro-business fiscal regimes anywhere in the world. Since 2007, it has been a member of the European Union, so you shouldn’t need to worry too much about political stability. There is plenty of Black Sea coastline to work on your tan, even if it can’t quite match the Hamptons for sophistication. There are 127 airports with paved runways, according to the CIA World Factbook, so you should be able to park your jet. Yet it’s only two decades since Bulgaria was a hard-line Marxist state, so don’t count on surviving if there’s another revolution. Macedonia: A small landlocked country that was once part of communist Yugoslavia, Macedonia is probably not the first place you would think of relocating your hedge fund. It’s not a member of the EU yet, it has a slight tendency toward civil war, and it gets involved in lengthy disputes with the Greeks, so you might be at risk during a financial meltdown. There are only 10 airports with paved runways, according to the CIA Factbook, so maybe trade in the jet for a chopper. Gross domestic product per capita is only $9,000, so your support staff will be cheap, and the top tax rate is just 10 percent. Plus you can always slip away to a Greek island for the weekend. Then there are always old-style havens such as Andorra, Jersey or the Isle of Man for those wishing to relocate. Who knows, maybe in a few years, all London’s finance moguls will be sunning themselves by the Black Sea or Lake Geneva and reading about yet another attack from the U.K. prime minister or the French president on tax refugees. Once all the banks have moved away, perhaps it will become clear to governments that taxes are causing new businesses and talent to go elsewhere.