big $ writes the tax laws
TAX FREE ART STORAGE FACILITIES FOR THE
RICH
by
JOHN ZAROBELL
_____________________________________________________-
John Zarobell is associate professor and chair of
International Studies at the University of San Francisco. He is
the author of Empire of Landscape and Art and the
Global Economy.
An archipelago
of tax-free storage facilities around the globe play a leading
role as tax shelters for collectors of fine art. But governments
are fighting back. The fifth Anti-Money Laundering Directive,
or MLD5, went into effect in the European Union in January. The
law stipulates that those storing goods in freeports must disclose
the ultimate beneficial owner to customs authorities. The UK parliament
likewise passed a law to keep the country compliant, though Prime
Minister Boris Johnson expresses interest in developing the freeport
model for his post-Brexit country. The United States considers
similar legislation.
Most
people are unaware of how freeports contribute to lost tax revenues
for governments. A 2014 study by the Canton of Geneva found that
its freeport generated tax losses worth almost US$300 million
annually for the canton, even though 80 percent of the owners
of its storage spaces were foreign.
Freeports
are the equivalent of the Swiss bank account for holders of luxury
goods – storage facilities that shield contents from regulatory
authorities in the owners. Goods stored in a freeport are considered
offshore, officially not residing in any country at all. So import
and export taxes – as well as wealth and estate taxes –
do not apply. As many countries tighten anti-money laundering
legislation, elites struggle to shield their liquid assets from
tax authorities. One response has been to transfer money to solid
assets such as art. The contemporary art market has expanded forcefully
in the past two decades, and the wealthy use freeports to park
their possessions to avoid taxation.
A culture
of secrecy makes it is impossible to know how much art is stored
in freeports, yet global expansion over the past decade suggests
that many collectors rely on these devices to manage their collections.
Freeports have opened in Singapore, Monaco, Luxembourg, Beijing,
Delaware and New York City. The Geneva freeport, the largest of
its kind, added 10,000 square feet in 2014.
Freeports
are only one device for the ultra-wealthy to avoid taxes, one
that extends into the world of finance and the art market. In
brief, these luxury warehouses are part of a larger network of
the accumulation and distribution of capital worldwide. The global
growth suggests that speculation has become a major aspect of
investment in art. More collectors remove artworks from circulation,
depositing them in vaults beyond the view of regulatory authorities.
Deloitte and ArtTactic reported in 2019 that 81 percent of collectors
are motivated by investment, while 86 percent of wealth managers
report that their services should include art services.
Art,
stored as an asset in freeports, reflects broader economic developments,
concerns and innovations. Freeports operate as tax havens, severing
the asset from an individual for tax purposes. In Tax Havens,
How Globalization Really Works, the authors explain that
tax havens are designed to sever an individual from “taxable
events” by placing them in separate countries with different
rules. Freeports achieve the same effect, separating the owner
of an artwork from the tax liability that might be owed. This
allows legitimate collectors to avoid taxation in their home countries,
but also opens doors for money laundering and transfer of illicit
profits.
Rising
income disparity, leading to the amassing of large fortunes all
around the world since the start of the century, has combined
with the rise of financialization, securitizing any asset for
its tradable value and then investing that value to generate further
growth. This convergence has led to the global boom in freeports.
Like all tax havens, freeports are “secrecy jurisdictions,”
as detailed by the 2016 Panama Papers leak from the law firm Mossack
Fonseca. A series of news articles and books by Bastian Obermayer
and Frederik Obermaier and Jake Bernstein detail their operations,
implicating a number of art world figures. The reports are the
tip of the iceberg, so to speak, regarding secrecy jurisdictions
and use of offshore corporations, trusts and freeports to shield
assets from regulatory scrutiny. Transactions of fine art go unreported
and unregulated. Many of these works are stored in freeports,
with no individuals censored, let alone punished.
External
national and international watchdogs do not regulate the art market
as they do the financial industries. So the new anti-money laundering
legislation targets a variety of practices allowing illicit transfer
of assets through freeports. Works of art do not have a fixed
value as currency does, and the value can be wildly inflated legitimately
or through other means such as conspiracy among bidders at auction.
Another way to transfer ill-gotten gains is to “gift”
a valuable artwork and suggest the recipient put the work up for
auction. In such a model, the parties transfer funds, using the
auction house as the unwitting fence. Such an arrangement benefits
the auction house since their business model is to collect commissions
on sales. While one expects auction houses to follow the law and
perform due diligence, governments have not been explicit about
these processes until now. The European legislation establishes
a threshold of €10,000, above which all sellers must determine
the ultimate beneficial owner of the purchase. This figure applies
to artworks moving through freeports.
Art investing
is an expanding industry facilitated by freeports. Once art is
in storage, owners do not want its value to sit – the equivalent
of having cash stashed under a mattress. Some owners use art as
collateral to buy more art, or other collectibles or real estate.
In this way, freeports can drive art investment and multiply art
values by providing credit to buy or bid on more artworks, hiking
prices further. And, there are more complicated investment vehicles,
such as the buying and selling of risk, hedges and reinsurance,
to say nothing of the blockchain technology startups that sell
“tokens.” Freeports generate their own budding economy
in a neoliberal capital framework: severing owners from their
assets during taxable events for tax benefits, with added implications
for the market.
A number
of new enterprises have come into existence, many of which pool
resources from investors to buy a portion of an artwork, like
stock in a company, and the blockchain company Maecenas specifically
sells options for fractional ownership of artworks in storage.
Another new company, Malevich, offers the luxury of buying art
virtually so ownership comes without worries about storage, condition
issues, valuation for tax purposes or other concerns that collectors
must shoulder. Works of art are actually challenging to own. Proper
care to insure one’s investment can require the services
of a variety of specialists. Freeports eliminate these complications.
Such a model of investing liberates owners to employ the value
of their assets without having to look at those paintings.
There
is reason to be hopeful that MLD5 will stop or slow such purchases.
Scrutiny of all purchases of art objects over €10,000 could
deter money launderers who often hide behind third parties and
trusts. The law requires identities to be revealed. Further, the
UK law stipulates that dealers and auction houses must operate
proactively if they have any suspicions of foul play and punishes
anyone, including freeport operators, who would turn a blind eye.
However,
the legislation affects only Luxembourg’s freeport, and
this organization has adhered to these regulations since its opening
in 2014. The largest freeport in Geneva has not and will not be
constrained, though Swiss customs officials now have a list of
works held inside after illegally obtained works were discovered
in the freeport in 2012. Even if more countries pass such legislation,
the offshore domain has many loopholes, with new strategies constantly
being devised to allow investors to sidestep the rules, including
banking laws passed by Europe in 2005 and the US in 2010.
Regulations
and taxes, it would seem, are for those who cannot afford to hire
accountants and lawyers. Like other forms of offshore investment,
freeports are likely to thrive wherever investors can count on
secrecy.
This
article is reprinted with permission from YaleGlobal Online
www.yaleglobal.yale.edu
