Take the Money and Run

ILLUSTRATION FOR TIME BY KEITH NEGLEY

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But it's Switzerland, the most famous tax haven of all, that remains the global leader in attracting cash from overseas. The number of tax exiles living there shot up from 2,394 in 2003 to 4,175 in 2006, according to consulting firm KPMG, and they poured around $917 million into its tax system in 2006 alone. The central government lets foreigners negotiate how much tax they pay directly with whichever of the country's 26 cantons they move to; an annual lump sum is calculated, based on five times the rental value of the expat's Swiss home. Rates average around 30%, but vary among cantons — in Geneva, taxes are on the higher side, while in less crowded cantons like Zug (an increasingly popular spot for foreign hedge-fund managers) they can be less than 15%. For good measure, there's the added thrill of being able to call singer Shania Twain, tennis champion Boris Becker and Formula One stars Michael Schumacher and Lewis Hamilton your neighbors.

Another big draw is Switzerland's tradition of discretion. Its strict banking privacy laws are a bonus for foreigners who don't want anyone peeking at their accounts. But the European Union, worried about what it sees as rampant tax evasion, is pushing for more transparency in Europe's banking systems. The E.U. Savings Taxation Directive, which came into effect in 2005, demands that member states and their dependencies either automatically exchange information on the accounts kept in their banks by E.U. residents or start imposing a 15% withholding tax on any foreign-sourced interest paid into those accounts. Most member states agreed to share information, but a few hold-outs chose the levy instead. Switzerland, which isn't in the E.U. but is covered by the directive, was one of them. Now, Swiss secrecy comes at a price.

In 2006, Switzerland collected an extra $492 million in withholding tax from the bank accounts of E.U. residents. And as the rate goes up to 35% by 2011 in compliance with the E.U. directive, foreigners will find the Swiss tax man reaching deeper into their pockets. But for every tax haven that loses its seductive charms, there's another working hard to woo the rich. Dubai, which has been dubbed the Switzerland of the gulf, has spent billions creating zones where foreigners can set up and invest in companies free from corporate tax. And other gulf states like Qatar and Oman are following Dubai's lead by making their own tax regimes more foreigner-friendly, too.

Further east, Singapore has likewise turned itself into a major offshore haven by not taxing capital gains or income derived from outside the city-state. It's also easier now for foreigners to gain permanent residency, as long as they have at least $1.1 million to invest in a Singapore-based start-up or venture-capital fund, or $3.5 million to stick in a local financial institution. And while the E.U. is forcing European banks to open up to the authorities, Singapore has strengthened its customer confidentiality laws: anyone who reveals private financial information faces a fine of up to $88,000 and three years in prison.

Then there are Singapore's new trust laws, which help the rich keep their fortunes in the family by letting them pass assets on to beneficiaries tax-free. And the perks strongly favor foreigners. "To get all the benefits one must not be Singaporean, nor should one's beneficiaries be Singaporean," says Michael Troth, Asia-Pacific head of global wealth-structuring for Citigroup. As a result, says Troth: "Singapore is becoming the predominant provider of trust services to our Asian clients."

With so many countries doing all they can to lure the rich, Britain's decision to get tough on tax breaks seems either brave or crazy. The government's gamble is that London, in particular, has so much else to offer its nondoms — a leading position in financial services, world-class culture, easy access to Europe, the U.S. and the Middle East — that most will stay and pay. But at a time when the economy is already showing signs of wear and tear, there's clearly a danger that the foreign rich will pack up and take their fat wallets with them. "We find these changes quite bizarre," says Andrew Tailby-Faulkes, a tax partner at Ernst & Young in London. "If we do have an exodus of wealthy people, that's got to be bad news for Britain." But for the tax havens that manage to coax them to their shores, the news couldn't be better.