Standardised global tax for the super-wealthy mooted

Rumblings about a global minimum tax on ultra-wealthy individuals are getting louder, with a recent proposal from Brazil to introduce an international standard to tax billionaires.

This follows on the heels of a call for a minimum global tax of 2% on untaxed global wealth, which it is estimated would generate tax revenue north of $250 billion (more than R4.4 trillion) per annum if introduced.

The International Fiscal Association (IFA) looked at the latest tax developments around high-net-worth individuals during its first-ever congress on African soil. Rising inequality and the moral imperative behind these discussions formed part of the congress discussions.

The Brazilian proposal of an international standard follows the same principle as the current move in corporate tax to have a minimum global tax of 15% on large multinational companies, the so-called Pillar Two initiative.

The proposal comes from French economist Gabrial Zucman, who was commissioned by the Brazilian government, and was presented by Brazil during the G20 meeting in July this year.

Shreya Rao, owner of a boutique Indian law firm that specialises in complex tax and private client matters, said at the IFA congress in Cape Town the idea behind the tax on individuals is to capture what goes “untaxed” in the current system.

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Conventional wealth tax

Zucman suggests a global standard that can be implemented through various domestic mechanisms. However, if these mechanisms fail, he proposes a conventional wealth tax on the value of global assets.

Rao says the moral imperative behind calls for a wealth tax on the super-rich is clearly documented.

Wealth inequality has been on the rise for a while. The top 1% of the world population owns 47% of global wealth while the bottom half owns literally nothing.

She says 2017 data from India shows that 73% of the wealth generated in that year went to the top 1% of the population.

“Inequality is increasing and snowballing,” Rao adds.

Although there is broad understanding of corporate taxes and what the minimum global tax should look like, there are huge variances in individual taxes – countries have wealth taxes, inheritance taxes, capital gains tax, and exit taxes.

Only four of the more than 30 member countries of the Organisation for Economic Cooperation and Development (OECD) have a wealth tax on capital ownership and transfer of ownership. A few years ago, 12 OECD countries had a wealth tax.

India abolished its wealth tax in 2015 and its inheritance tax in 1985. “The cost of the collection of the taxes was not making sense and was replaced with other taxes that were targeting the same base,” she said.

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Legal and other challenges

The Brazilian proposal is still thin on details, but there are already some legal challenges and practical implications.

Rao identified five critical issues:

1. Subjective interpretation

She tells of the 2007 case in the US when an art dealer died and left a massive estate, including artworks.

One of the pieces depicted a stuffed bald eagle. According to US law, the presence of the bird made it illegal to sell the work.

The taxpayer’s family got three separate valuations from credited valuers saying that the value was $0 because it could not be sold.

The Inland Revenue Service disagreed and said the value was $65 million. In the end the family had to settle on a value of $29 million. Valuations are subjective and one is bound to get different views, even in one country. The proposal now wants a coordinated standard for valuation of untraded assets worldwide, says Rao.

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2. Beneficial ownership

The very wealthy rarely own assets in their own names. They hold their assets through intermediaries such as trusts and foundations.

If you have challenges in identifying who the beneficial owners of these entities are, there is a “particular demographic where that problem will be even harder”.

3. Pressure to sell assets to pay tax

When countries talk about introducing inheritance or wealth taxes there is always talk about whether to exclude the primary residence and other untraded assets. There is hesitancy around compelling individuals to sell assets merely to pay tax. That cannot be a part of the design feature of the tax.

4. Constitutional challenges

Where countries have introduced wealth taxes, there have been legal and constitutional challenges. If there is a common standard, policymakers will have to accommodate domestic constitutional and legal constraints. This could result in inconsistencies in applications and potential for arbitrage.

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6. Adoption

The biggest challenge will be to encourage countries to adopt a wealth tax.

There will be a flight of capital and individuals if the application is selective.

“There will always be countries who want to attract the wealthy and the ones who will be losing the wealthy …, ” says Rao.

Coordination on such a large scale is going to be difficult. “Although it all sounds good in theory it is going to be quite challenging to get enough countries on board.”

Rao mentions the fact that only 32 countries have “signed up” for the Pillar 2 minimum global tax for large multinationals.

“Getting countries to coordinate on a similar concept for individuals will be hard.”

This article was republished from Moneyweb. Read the original here.