For an entrepreneur or business owner, wealth creation is only the beginning of the journey. I, myself, am familiar with ‘the frugal grandfather figure’ who started with very little before the waves of commerce and swept in and transformed our lives forever.
Recently, our team read Philip Marcovici’s book The Destructive Power of Family Wealth. It is a must-read for all entrepreneurs, investors and leaders who’re running or perhaps even thinking of starting a family business. From psychology to personal relationships to practical advice–Marcovici’s book has it all.
Philip Marcovici is retired from the practice of law and consults with governments, financial institutions and global families. He was a partner of Baker & McKenzie, a firm he joined in 1982, and practiced in the area of international taxation in Hong Kong and Zurich while with the firm. Philip has also practiced law in New York and Vancouver, British Columbia. Philip retired from Baker & McKenzie at the end of 2009. Among others, Philip is a member of the Public Policy Committee of the Society of Trust and Estate Practitioners and chairs its Responsible Stewardship of Wealth thought leadership group.
In this conversation, Philip and I discuss taxation and the role it plays in wealth creation, destruction and preservation.
Dipa: What role does low income tax play in wealth creation and how can entrepreneurs leverage global tax planning to start their businesses?
Philip: Taxation is a very important topic not only in wealth creation, but in the succession plans of wealth and business owners. Clearly, where assets pass from one generation to the next with no or low estate or inheritance taxes, this makes a big difference on the ability of families to grow assets over generations.
For the entrepreneur and the issue of wealth creation and how businesses are established, it is important to understand that it is relatively easy to structure the start of a business – and much less easy to restructure it later once there has been growth and success. Tax planning is something that is important to consider at the outset.
Tax issues arise, broadly, at three levels – where the entrepreneur lives (and in some cases, also based on the citizenship of the entrepreneur, as is the case for U.S. citizens), where the entrepreneur invests and carries on business, and where intermediate holding companies or other vehicles may be located.
There are many choices on all fronts, and the world of taxation is a fast-changing one. Today, there is huge and growing transparency in terms of what governments are able to find out about how global businesses and investments are run – the days of hiding money are well behind us, and this is a good thing.
But there are many upcoming challenges for entrepreneurs as governments seek to address the realities of income and wealth inequality, over-aggressive tax planning, tax evasion and more.
A further challenge is that not all countries are ready for full tax transparency – there are a number of countries in the world where tax authorities and governments mis-use tax information for political and other reasons. Tax can therefore be part of the political risk the well-advised entrepreneur needs to navigate.
Dipa: As a business grows and develops in international markets, entrepreneurs will inevitably be exposed to a wide variety of risks. What are some of the big-picture factors that entrepreneurs should take into account to find a balance between their tax exposure and the cost of implementing their plan?
Philip: I have already mentioned that tax can, depending on the country involved, be viewed as an element of political risk, and this needs careful navigation.
In the big picture, simplicity is important, as is the question of substance.
More and more countries are punishing approaches that allocate income to entities that have little substance. Setting up the tax plan and the business itself to ensure that substance is taking place in countries with stable and fair tax systems is the future, as is taking good advantage of tax treaties and investment protection agreements.
“For the entrepreneur and the issue of wealth creation and how businesses are established, it is important to understand that it is relatively easy to structure the start of a business – and much less easy to restructure it later once there has been growth and success.”
Dipa: Digitalisation is nothing new. The COVID-19 pandemic, however, has accelerated the rate of change—especially in more traditional sectors of the economy. What are some of the tax planning opportunities and challenges that you foresee occurring as a result of this trend?
Philip: Technology is clearly helping tax authorities around the world be in a better position to understand the realities of how wealth and businesses are owned and operated and contributes hugely to the reality of tax transparency and how this will grow in the years to come.
In relation to the pandemic, governments need to pay for the costs they have incurred, and the pandemic has also highlighted the realities of income and wealth inequality. This is all putting a greater focus on raising revenues not only from businesses, but from those considered to be wealthy. And the issues are sometimes ones that are kidnapped by populist leaders who then impose confiscatory taxes on political enemies.
We are, sadly, in a world where wealth and business owners have to plan around the risk of capital levies, expropriations, wealth taxes, and increasing tax rates overall.
Dipa: Death has a way of changing everything and any form of inheritance (or lack thereof), can leave families and ensuing generations in a state of chaos. Estate Duty or ‘Death Tax’ can destroy family wealth during a succession period. What is the rationale behind estate duty and how can early-stage entrepreneurs plan for it?
Philip: My own view is that taxation at death is absolutely fair and one of the tools governments can and should use to ensure a broad tax base and a fairer world. I am against, for example, that Hong Kong and Singapore have eliminated their estate duty regimes. This said, I am also strongly against inheritance or estate tax rates that destroy family wealth and businesses, something that is the case in a number of countries. I am a believer in simple and transparent tax systems that have low rates and high levels of compliance and with broad tax bases.
This all said, we are in a world of complexity – a family based in Singapore, where there is no tax on death, may face huge inheritance taxes where there are international holdings, business or otherwise. Keeping safe boxes in countries with high inheritance taxes, owning foreign real estate and many other circumstances need to be considered and navigated.
Many families do not know that the U.S. imposes an estate tax on foreigners owning U.S. shares, even publicly listed ones. While there is planning that can avoid such taxation, failing to undertake such planning can, at present rates, result in as much as 40% of the value of assets going to estate taxation – not 40% of profits, but 40% of the value of such investments. And the U.S. is not the only country where this type of issue arises.
The simple guideline I would recommend is that it is always easy to get into an investment – but what is critical is to understand and plan for the eventual exit, including the transition to the next generation. Legal avoidance or minimization of taxes on death are out there and involve a number of approaches depending on the countries involved. But planning needs to be undertaken early.
Dipa: What are common pitfalls and errors that entrepreneurs may overlook and how can they best mitigate or pre-empt unnecessary losses from occurring within a taxation context?
Philip: Many entrepreneurs still have the false belief that “no one will find out” and rely on tax evasion rather than proper planning. The simple reality is that wealth and business owners only have two choices – play by the rules of the countries involved or get out of the countries involved. There is no third choice of just hiding things and hoping no one will find out.
And as mentioned earlier, the time to plan is as early as possible, and ideally before the investment is made as this will affect how the investment might best be structured. And today all families are international families – either because family members live in different countries and have different citizenships or because investments are in different countries – or both. This all needs careful attention.
“The simple guideline I would recommend is that it is always easy to get into an investment – but what is critical is to understand and plan for the eventual exit, including the transition to the next generation.”
8 thoughts on “Author Spotlight | Philip Marcovici on Global Tax Planning for Entrepreneurs”
I’m actually very interested in understanding more about what a successful transition actually looks like. All we hear in the media are stories of scandals and it’s great to read stories on family businesses that focus on the solutions.
If there is one thing that I can say is that it is very important for the younger generation to be well prepared for their future roles. This means that they should be involved, in an age appropriate way, in the succession process and thinking. Surprises are for Halloween, not for when someone passes away in terms of their succession plans. And preparation also means preparing not only family members who may be going into the family business, but preparing the next gens for their roles as beneficiaries/owners or whatever else is planned. Going through the “what ifs” is critical – disability, divorces, second and third marriages, children not getting along, influence of third parties, “kidnapping” of ownership structures by advisors and many more issues need to be addressed by families. Sounds complex, but it is much easier than dealing with destructive disputes when the older generation is not around….
That was a message from Philip Marcovici…
One of the trends I have noted is the change of values from generation to generation. Like Dipa, I am familiar with the frugal grandpa who started a legacy. A lot of the difficulties that arise across generations is that values change. The children, wives, in-laws and even the people who work in those businesses do not share the same values of frugality and may only be there for a pay check (or a slice of the pie for no work at all)!
The frugal grandpa was someone who worked hard, did a lot with very little and saved for a rainy day. The Millennials (and perhaps my generation as well, I am in my 30s), do not share those values. The baseline with which we started life is very different. I understand we need to bridge the gap between generations and that it needs to be done with a successful transition period that takes into account the various nuances.
I guess it’s more that we don’t really know what a good model of succession looks like as many of the stories we are exposed to are those scandals.
“The time to plan is as early as possible, and ideally before the investment is made as this will affect how the investment might best be structured.”
My father always used to say that if you fail to plan, you plan to fail.
I’m a proponent of reasonable levels of estate duty as well. I think all this sons (and to a lesser extent daughters and younger offspring) inheriting their family’s wealth is a recipe for disaster.