Tax and Wealth Management Expert Michael Olesnicky on the Continuing Waves of Regulation

Tax expert Michael Olesnicky is a senior consultant based in Baker McKenzie’s Hong Kong office and plies his trade across the region. A former Asia Pacific Chair of the Tax Practice, from 2000 to 2014, and during those years member of the firm’s Global Tax Steering Committee, he has practised for over 25 years in Hong Kong and Asia on regional tax advisory work, tax disputes and litigation, as well as wealth management and estate planning. As such, there are few lawyers with more experience in these matters, and very few working in the field of wealth management better at understanding precisely how the pieces of the global regulatory jigsaw fit together. Hubbis caught up with him by video call during lockdown recently at his home in Hong Kong, from which he offered his insights into key trends taking place in global tax and compliance, and presented his views on how the Asian wealth management community – advisors and clients – should adapt to the changes taking place and the world ahead, because yet more waves of regulation are set to break on the region’s shores in the years ahead.

“The wealth management industry clearly needs to continue evolving in the months and years ahead, as more waves of regulation roll in,” Olesnicky begins. He observes that even though we are coming off a decade of wave after wave of very far reaching new global rules and guidelines - CRS, FATCA, AEOI, AML, and KYC, to name only some of the most prominent – as well as specific local tax and other regulations in each jurisdiction, the pace of change will not likely slow down.

“It is clear to any observer that there will be more changes to come,” he says, “as we are already seeing bodies such as the OECD and the Financial Action Task Force coming up with even more proposals for implementation in the near to medium term. Perhaps this might be a bit slower than envisaged, due to the current pandemic, but we can all assume that they will come.”

Hard wiring transparency

He steps back to explain that the backdrop to all these new rules in the last decade is transparency. The notion of wealthy investors stashing cash in a tax haven and not reporting it to their home authorities is pretty much dead and buried, he observes, as FATCA and CRS allow for information to be delivered to the tax authorities in the home jurisdiction of residency on all the individual’s bank and investment accounts. “But we then need to extrapolate and think about how that might be further expanded,” he says.

In the UK, for example, there has already been a proposal for a real estate register, so that foreigners who have real estate interests in the UK are required to declare that in a register.

“I think it is only a matter of time before other countries start doing the same thing and exchanging that information under a CRS type regime,” he states. “Why? Because for people who have been trying to hide their cash abroad, investing in real estate has been one way to avoid CRS disclosure, and it seems inevitable that loophole will be plugged, sooner or later.”

Expanding the net

He also maintains that similar conventions will extend before long to purchases of bullion, art works, all types of collectables, all aimed to give tax authorities more complete information about what their residents are doing with their cash outside their country of residence.

Moreover, he also predicts there will in practice be more focus on the enforcement of tax judgments and tax collections in other countries, and across borders, driven again by the OECD and the EU. “This raises many questions, and would be complex and far-reaching,” he warns.

Take the simple example of citizens from countries such as the US who might not be resident there, or might not have been resident there for decades, but they might suddenly end up being chased by local authorities where they live for taxes payable in the US going back years, or decades, even though they might be fully tax compliant where they reside.

“Despite many concerns in all this and despite many issues arising,” he says, “I can only see this all going in one direction in the decade ahead.” Accordingly, he advises those trustees and private bankers who have clients who are not yet fully tax compliant to get their houses in order, as things will only get more stringent.

“Governments will in future be more and more financially pressured,” he cautions, “so in the hunt for extra revenues, they will be empowered to chase tax debts all over the world.”

Look out for the Pillars

Olesnicky notes that the OECD is currently somewhat fixated at the moment on the so-called Pillar I and Pillar II initiatives under the OECD’s BEPS project. Pillar I, he elucidates, involves the OECD coming up with a proposal that will result in a consensus between most countries around the world to broaden the tax jurisdiction those countries have over foreigners and foreign entities that trade with them, especially, but not exclusively digitally.

“For example,” he explains, “and to make this relevant here, if an uber-wealthy family office invests into other countries, they would seek tax advice to minimise taxation in that other jurisdiction, but once these new rules take shape, the target countries will have a greater ability to tax them.”

The OECD said initially that it would have a plan in place for the end of 2020, but that is now more likely to emerge in 2021, Olesnicky reports, adding that the OECD is working with as many as 150 different countries in order to get a consensus.

Invasion forces

But considerably more far-reaching and potentially invasive, he reports, is the so-called Pillar II initiative, which is effectively a minimum taxation provision. This, Olesnicky reports, has its origins in countries becoming increasingly upset that multinationals and others involved in cross-border transactions are not only not paying tax in countries with which they transact business, but are channelling their profits and funds into tax havens or into low tax jurisdictions. “The idea,” he explains, “is to allow those countries from which these payments are made to impose some type of counter payment tax, or to deny a deduction for those payments so as to ensure that there is an effective minimum tax paid. This will cover those payments that are not yet being taxed by those recipient countries.”

He explains that nobody yet knows the details, but some guess there might be a minimum 12.5% levied. “That 12.5% number is quite significant,” he comments, “and certainly anybody who uses a tax haven jurisdiction to receive inwards remittances without tax, effectively shifting profits or taxable revenues to no or low tax regimes and therefore effectively bypassing tax in the country of origin for those revenues, will be subject to these proposals.”

Hong Kong and Singapore are probably also likely to be affected by this because their effective tax rates are likely to be below whatever the OECD will prescribe. “Again, for the wealth management community,” Olesnicky says, “we can extrapolate that there would be major changes ahead and therefore vital remedial action is required. Let’s face it, lots of people use companies based in offshore jurisdictions which are zero or low tax, and clients who have companies and trusts in those jurisdictions will need to be very aware of this proposal.”

Beyond substance

He adds that the OECD consensus programme will go beyond the EU’s Economic Substance laws.

“Even if there is substance in the offshore financial jurisdictions,” he explains, “we can surmise that the effective tax rates applicable in practice would generally be below the minimum level the OECD will prescribe under Pillar II, meaning those companies will then very probably be affected by these minimum tax proposals. Adding PIMA II to economic substance rules will be tough for offshore financial jurisdictions to handle.”

The other major development taking place globally relates to registers of interests, and ultimate beneficial ownership of companies and trusts. “Actually, we have seen pushback against this, even in the EU,” he reports. “The EU Commission has now commenced action against 17 jurisdictions in the EU to force them to comply with these requirements, but the pushback relates to privacy, or rather its erosion. Even the EU itself has a right to privacy enshrined in its constitution, but the tax folk in the EU bureaucracy seem to ignore that point.”

He notes that there was a court case in France, for example, which held that it was in violation of the EU constitution to allow a register of owners of trusts to be made public, as that violated the privacy rules. “Perhaps the pendulum will swing more towards privacy,” he ruminates, “Only time will tell, but maybe the half-way house is not public disclosure, but the information only being made available to governments, law enforcement and tax officials.”

Take action

Olesnicky explains that the result of all these changes might not be to increase actual tax for UHNW and other wealthy families, but it will require them to take remedial action, which costs time and money. “These changes in the pipeline will certainly force owners or controlling parties involved in trusts and companies to start thinking seriously about how they operate outside their home country, where they are subject to CRS, FATCA, all sorts of registers and so forth. The result might simply be an inducement to bring more offshore structures back home.”

After all, he explains, for a Hong Kong resident with a Hong Kong company with a Hong Kong bank account there is no CRS issue, and there is no additional disclosure. And a trust in Hong Kong for that Hong Kong resident is not subject to a public register for that trust, but overseas they might have to reveal all to public scrutiny. “Is there any great benefit,” he questions, “in going offshore at all in the future? Especially if Pillar II evolves, as that will likely erode any tax arbitrage available in an offshore financial centre or a tax haven.”

Complexity is a red flag

The great complexity of some structures will also need to be simplified. “Some structures are so complicated that the clients themselves are confused,” he reports. “That means there is no way they can explain or justify them to the authorities at home or abroad, or to the media. Complexity certainly does not allay suspicions, and certainly does not improve reputations. After all, nobody can criticise a person who establishes companies and trusts in their own jurisdiction.”

Olesnicky says there is no way this global regulatory and compliance juggernaut will reverse, especially as governments around the world are taking on so much additional debt especially in this pandemic period, that ultimately will have to be paid for by corporate and individual taxpayers.

“The political reality is many of these initiatives are brought in by the OECD, and the majority of the members of the OECD are EU countries,” he comments. “Many of the EU countries are effectively bankrupt, and they desperately need money. This is far from an academic exercise; it is all about money in the coffers. It doesn’t need to make sense, it doesn’t need to be fair, and it doesn’t need to be intellectually precise – the drivers are political and economic.”

“Although all of these proposals considered in aggregate sound fanciful, the reality is that they are all initiatives of the OECD or EU or both, which are two organisations that have demonstrated their effectiveness in controlling the global tax agenda.” Hence, Olesnicky concluded, the issue with these proposals is not ‘if’, but ‘when’.

All in the same boat

He sees some positives in all these likely changes as far as both Hong Kong and Singapore are concerned. “There has been and will continue to be a movement of companies out of the no-tax jurisdictions to jurisdictions such as Hong Kong and Singapore where it is currently viable to create substance and still pay relatively low rates of tax. And many wealthy clients will be bringing their offshore structures back home. However, Pillar II might have far-reaching implications, as the 12.5% mooted is above the average corporate tax rates in Hong Kong and Singapore of well below 10%.”

Further afield, Olesnicky comments that the no-tax offshore jurisdictions will no doubt have more need to reinvent themselves again. “Offshore financial centres have for some time been facing a lot of challenges, from governments and from the media, but they have thus far shown considerable resilience and indeed have come through the Economic Substance rules without being burdened excessively, but Pillar II will be a game changer; they will certainly need to reposition and repurpose themselves again.”

Getting Personal with Michael Olesnicky

Australian by origin and multi-decade Hong Kong resident, Michael Olesnicky has more accreditations to his name than almost anyone else in Asia’s world of tax advisory and wealth management.

Aside from his current role with Baker McKenzie in Hong Kong, he is also Chairman of the Joint Liaison Committee on Taxation, a quasi-governmental committee which interfaces between tax practitioners and the Hong Kong Inland Revenue Department, as well as an Executive Committee member of the International Fiscal Association Hong Kong, and Branch Chair of the Society of Trusts & Estates Practitioners (STEP) in Hong Kong. He is on the advisory board of several specialist tax journals and is a former Chairman of the Tax Committee of The Australian Chamber of Commerce, and as well is an Honorary Lecturer in tax law at the Hong Kong University’s Department of Professional Legal Education. For 11 years, from 1985, he was also a Member of the Hong Kong Inland Revenue Board of Review.

Law has been in his blood since he studied at the University of Adelaide in his native Australia, and then at Columbia University in the US. He began working life in Sydney with Baker McKenzie, then had a hankering to become an academic and moved to Asia with the Hong Kong University back in 1982, before rejoicing Banker McKenzie in Hong Kong a few years later.

“It was fun to be part of a large firm that grew rapidly in Hong Kong from a relatively small size when I joined to becoming one of the top firms here by the time I first left in 2014, then joining KPMG. There were many uncharted waters in Asia in those early years in the 1990s onwards, it was almost pioneering work, much of it, and it has certainly been an exciting and rewarding journey.” He re-joined Baker McKenzie in March 2019 in his current role, which he reports he is enjoying tremendously.

In normal times and when time permits, he enjoys visiting his 26-year-old daughter in Sydney where she works in real estate. Spare time at home in Hong Kong these days is often spent reading. “This has been a great time to catch up on some books on my shelves,” he says, “I have always had a love of reading, and I am targeting a book a week going forward. My inclination is more towards tomes on sociology, philosophy and the state of our societies, those types of books.”