Monitoring the amount of wealth hidden by individuals in international financial centres

The report is a follow-up study of Vellutini et al. (2019) [see our research summary]. It provides updated global and by-country estimates of offshore wealth held by individuals and related tax revenue losses for the 27 member states of the European Union.

To estimate the global amount of offshore wealth, the authors use the discrepancy between global portfolio assets and liabilities reported in international macro statistics following Zucman (2017), Pellegrini et al. (2016), and Vellutini et al. (2019). These assets and liabilities should balance globally in theory. In fact, less assets are reported, which may be due to wealth owners not reporting their assets held in International Financial Centres (IFC) accurately to their domestic authorities.

In a second step, global offshore wealth is allocated to its countries of origin. This allocation derives from the distribution of ownership of cross-border deposits which can be observed in BIS locational banking statistics. The authors assume that investment patterns are similar for deposits and securities, which is an imperfect but commonly used proxy. As in Vellutini et al. 2019, the authors refine the allocation method by assuming that countries with a large outgoing FDI stock have a higher share of offshore deposits owned by corporations and adjust the share of offshore deposits owned by private households accordingly. In addition, they undertake some adjustments to account for offshore deposits held through shell corporations in other tax havens as these likely belong to residents of non-havens as well.

Based on the amount of wealth hidden offshore, the authors estimate related tax revenue losses. These include capital income taxes on returns to offshore wealth, taxes on wealth, and wealth transfer including inheritance taxes and personal income tax on the original income that was transferred offshore. Results suggest that the EU lost about EUR 13 billion of capital income tax in 2018, EUR 7 billion of wealth-related taxes, and EUR 103 billion of personal income tax assuming that the original income constituting today’s offshore wealth was not taxed either.

As households hold also other forms of wealth, the authors provide a rough approximation of how much cash, life insurance, and real estate wealth may be concealed from domestic authorities. By combining several data sources, they estimate the share of each wealth category in total reported household wealth held by the richest 10% of the population in each member state. Under the assumption that households underreport the same share of wealth across different wealth categories, they extrapolate the amount of offshore wealth held in form of cash and life insurances for each member state. They also compute the amount of real estate wealth held offshore by extrapolating from the finding that 18% of ultra high-net-worth individuals invest in real estate property offshore – a number extracted from the Knight Frank Wealth Report 2019. Combining all five asset categories (deposits, securities, cash, life insurances, and real estate), these extrapolations would suggest a total offshore wealth of EUR 3.4 trillion held by individuals of the EU and the UK in 2018.

In addition to these offshore wealth estimates, the report presents information on the characteristics of owners of offshore wealth and their motivations as well as typical arrangements used to conceal wealth ownership. Information was collected from tax administrations, financial investigative units, journalists, and NGOs by means of expert interviews. The report further investigates the dynamics of offshore wealth over time relating them to increased tax transparency under the Common Reporting Standard and developments of security prices.

Key findings

• Global financial wealth amounted to USD 9.8 trillion (EUR 8.6 trillion) in 2018.
• Offshore wealth held by individuals across the EU in 2018 amounted to about 12% of GDP, up from 9.7% in 2016.
• Cyprus, Malta, and Portugal hold the highest share of wealth offshore in the EU.
• Tax loss for EU-27 is estimated at EUR 124 billion for 2018.
• Hong Kong and Singapore continue to attract a greater proportion of global offshore wealth, while the relative share of offshore wealth held in Switzerland and the Cayman Islands is decreasing.
• After the introduction of the Common Reporting Standard, bank deposits in IFCs held by EU non-banks dropped by 8% over 1Q 2017 – 3Q 2019.

Data

Data sources used for the estimates of offshore financial wealth include IIP and CPIS data from the IMF, as well as the External Wealth of Nations (EWN) database, BIS locational banking statistics data on cross-border deposits, and data on outgoing FDI. [read more about the data]

Other data sources include the Capgemini World Wealth Report 2020, the Knight Frank Wealth Report 2019, and the Household Finance and Consumption Survey by the European Central Bank.

Methodology

Estimates of offshore wealth result from descriptive data analysis combining various data sources and extrapolation methods.

Other results of this study are based on literature review, stakeholder interviews with national authorities, academic experts, civil society actors, a series of country-case studies, and analysis of public statistics.

Go to the report

This report was commissioned by the Directorate-General for Taxation and Customs Union (European Commission). It can be downloaded from the website of the Publications Office of the European Union. [PDF]