Study on the amount of hidden wealth in international financial centres and the impact of transparency measures on the fight against tax evasion
Transparency agreements like the Council Directive 2014/107/EU (DAC2) and the OECD Common Reporting Standard (CRS) contribute to the reduction of hidden wealth. Regardless, the global offshore financial wealth is still significant amounting to an estimated EUR 8.6 trillion in 2018, increasing from EUR 7.3 trillion in 2016. This is one of the main results from our study on the amount of wealth hidden by individuals in international financial centres (IFCs) and the impact of recent internationally agreed standards on tax transparency on the fight against tax evasion. We conducted this study for the European Commission’s DG TAXUD.
Domestic source income is often known to the tax authorities due to national reporting obligations. For foreign income, authorities depends on cross-border exchange of information agreements like the DAC2 for the EU and the CRS as equivalent for Member States and third countries. However, increasingly complex structures are used in order to conceal the identity of beneficial owners and ultimately thwart the effective implementation of anti-money laundering rules upon which these information agreements are dependent.
Ultra High Net Worth Individuals (UHNWI), middle- and upper-class citizens, criminals, foreigners and (returning) expats, and high-profile individuals (e.g., politicians, celebrities, prominent businesspeople and athletes) all use IFCs to hide their wealth. These IFCs can either be ‘wealth receiving’ or play an intermediary role by providing shell companies and other screening means, resulting in international deposit statistics incorrectly being assigned to residents. The main fiscal drivers for individuals to move their wealth abroad are capital incomes and inheritance taxes, rather than other personal income taxes. Individuals move their wealth abroad using a variety of instruments, such as financial assets, real estate and cash/cash equivalents. The latter is more likely to be used for proceeds of criminal activities.
In 2018, the offshore wealth held by individuals across the EU amounted to 12% of the Gross Domestic Product, up from 9.7% in 2016. Moreover, the share of total global offshore wealth attributable to residents from the EU-28 amounted to approximately 23% in 2018, also up from 2016. However, although the amount of hidden wealth is increasing in the EU, there is a general agreement between diverse stakeholders (tax authorities, Financial Investigation Unists, investigative journalists, and experts) that DAC2/CRS contributed to the reduction of wealth hidden by individuals offshore. The policy measures have provided information to Member states on cross-border wealth held by their residents that was not available before, encouraged tax authorities to cooperate with each other, and created significant obstacles for people wishing to hide wealth.
For more information, please read the full report (PDF).