The United Nations has offered a framework for countries that want to consider a wealth tax. For advisers of ultra-high net worth clientele in the US, a concern is the continued tendency of multilateral quasi-governmental bodies to push a "one ring to rule them all" uniform system of taxation with a net wealth tax being the latest policy du jour.
That concern isn't from a political point of view as to the merits of the policy objectives guiding the UN's efforts, but rather from the perspective of a practitioner in the wealth planning space. Once a net wealth tax is ubiquitous in the domestic taxing legislation of a significant number of countries, the inevitable next step will be defining the reach of that tax, including extra-territorially.
The UN offers that a net wealth tax would apply to both residents of an enacting jurisdiction likely on a worldwide basis and on nonresidents on those assets "situated" in the enacting jurisdiction. This raises a question for practitioners: What novel rules will revenue-hungry countries come up with to find an asset situated within its borders?
While there is likely a long way to go before the UN's model net wealth tax legislation is supported and enacted by numerous countries, it isn't difficult to see enacting countries targeting the assets of wealthy nonresidents whose assets have attenuated nexuses with those countries' borders.
If one looks at the efforts to enact a market-based allocation of multinational corporate profits, traditional rules that have governed sources of income are evolving to de-emphasize where income-producing activities take place to ensure a "fair" allocation. That is happening especially with respect to income earned from the digital economy (rightly or wrongly isn't the point).
From a planner's point of view, that is the aspect of the UN's efforts that presents concerns, especially for individuals with significant stock holdings in multinational enterprises, or through complex global structures.
The UN's framework intends to provide practical guidance and policy options for jurisdictions considering how best to tax wealth. But the guidance exists more in theory than reality given that it isn't specific to any one jurisdiction's existing domestic tax system.
Many policy objectives underpin the framework, but the use of a net wealth tax is primarily directed at alleviating wealth inequality. A UN panel will draft model legislation for implementing jurisdictions to use as a foundational tool in drafting country-specific net wealth tax rules.
The UN's guidance goes through issues that should be considered, both in the methodology of conducting studies supporting a wealth tax (such as measuring revenue to be raised) and in designing the tax itself (such as taxpayers and property to be covered, potential rate structures, possible exemptions, etc.). Regardless of how those issues are resolved, the net wealth tax is imposed on the value of certain property held by certain taxpayers at a certain date.
Meanwhile, there is a more pressing and immediate issue involving wealth tax in the US. In Moore v. United States, the Supreme Court is being asked whether the government can impose tax without a "realization" of income—in this case, on undistributed offshore earnings.
Judging by oral arguments in Moore, it feels like realization as a concept won't be completely discarded, so the specter of an imminent US net wealth tax may soon recede from atop the mind of practitioners. The justices' questions suggest that their eventual holding will find that Congress can attribute income realized by a corporate entity to the shareholder, but the idea of completely abandoning a realization requirement doesn't seem to be in the cards.
What seems more likely is that the court will avoid making a definitive pronouncement as to whether realization is required at all or what "income" is in the constitutional sense, but likely with some concurring opinions or dicta cautioning that a tax on appreciation alone may be a bridge too far under the 16th Amendment's taxing authority.
How the high court ultimately decides Moore will say a lot on whether the wealth tax the UN is encouraging will even be possible in the US—putting aside the political obstacles to imposing one, if so.
Originally published by Bloomberg Tax.
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