Chief Investment Strategist
Summary: "The OECD agrees in 2023 to move to a more aggressive stance on tax havens, launching a full ban on the largest tax havens in the world." - Peter Garnry.
In 2016, the EU introduced an EU tax haven blacklist identifying countries or jurisdictions that were deemed ‘non-cooperative’ because they incentivize aggressive tax avoidance and planning. This was in response to the leaked Panama Papers, a trove of millions of documents that revealed tax cheating by wealthy individuals including politicians and sports stars. However, that blacklist excluded the biggest tax havens, in part due to effective lobbying. Thus, the global tax haven ecosystem continues to thrive. And it’s not just wealthy individuals that are heavy users of tax havens—entire industries such as private equity and venture capital also leverage tax haven vehicles like offshore feeder funds to attract capital from foreign investors in different tax jurisdictions.
As the war economy mentality deepens further in 2023, national security perspectives turn increasingly inward to industrial policies and the protection of domestic industries. As defence spending, reshoring and investments in the energy transition are expensive, governments look for all available potential tax revenue sources and find some low-hanging fruits in haven-enabled tax dodgers. It is estimated that tax havens cost governments between USD 500 and USD 600 billion annually in lost corporate tax revenue.
Based on advice from economic advisors that tax havens offer little economic purpose, the OECD agrees in 2023 to move to a more aggressive stance on tax havens, launching a full ban on the largest tax havens in the world such as the Cayman Islands, Bermuda, The Bahamas, Mauritius and the Isle of Man. The ban means that corporate acquisitions in OECD countries cannot be made with capital arriving from tax haven entities and only from OECD countries or countries that adopt OECD transparency standards on capital, which would include automatic exchange of information, beneficial ownership registration and country-by-country reporting.
In the US, the carried interest taxed as capital gains is also shifted to ordinary income. The EU tax haven ban and US change to the carried interest taxation rule jolts the entire private equity and venture capital industries, shutting down much of the ecosystem and seeing publicly listed private equity firms dealt a 50 percent valuation haircut.
Market impact: iShares Listed Private Equity UCITS ETF falls 50 percent2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
