Understanding wealth management in Singapore

I am spending a few weeks in Singapore as a visiting professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore. Singapore, a city-state with a population of 5 million (about one million of whom are temporary guest workers in construction, domestic help, and other unskilled occupations), now has one of the highest standards of living in the world.

Like China, it is filled with new high rises. But compared to China, the architecture is generally more graceful, the city planning much less chaotic, and – last but not least -- the air much cleaner. With its humid and often rainy year-round tropical climate -- the country is close to the equator -- the city is filled with greenery and blessed with a newly developed waterfront and harborside walking area, dominated by a brand-new Sands casino and adjacent art museum, both architecturally spectacular. (A former student from Singapore complained to me about living in a city whose signature building was a casino.)

The old areas of the city -- Chinatown, Arab Street (where Malays traditionally lived), and India Town -- each represent one of the traditional ethnic groups making up Singapore's population, and in fact were set up as ethnic conclaves by Singapore's founder, Sir Thomas Stamford Raffles. They have been spruced up and painted bright colors so they currently look considerably better than they probably did when first built, somewhat touristy and Disneyesque but nonetheless fun to walk around.

Shortly after arriving, I had a Sunday lunch with another former student who had lived in Hong Kong for several years after graduating, and who recently came to Singapore to work in “wealth management,” first for one and now for another bank. The clients are wealthy people in mainland China and Taiwan. (OK, this is not exactly public service – maybe he’ll return to public service later.) I learned a lot about this world when I asked him the simple question: “Why would a client choose to send his money to Singapore to be managed?”

Part of his answer to my question was relatively straightforward and didn’t surprise me: Singapore has strong rule of law and contract protections, so a wealthy person could be quite sure that his money wouldn’t suddenly be confiscated by an arbitrary government or a corrupt official, as can occur in many places. (I blogged about this regarding Russia last summer.)

But then he added that people brought their wealth to park in Singapore because Singapore had no capital gains tax, no inheritance tax, and low income taxes. My initial reaction was to wonder how that would help, because they would need to pay taxes on the earnings from their wealth in their home country, unless of course they cheated. Then he told me something I should have known but actually didn't -- the U.S., it turns out, is one of the very few countries in the world that taxes its citizens based on their worldwide earnings.

If an American earns a million dollars abroad, that income must be declared for taxes in the U.S. If the local tax where the income was earned is lower than the U.S. tax rate for the income, an American must pay the difference to the IRS. (If it is higher, an American gets credit for the higher foreign tax, lowering their tax liability.) So there is no tax advantage for an American to put their money in Singapore, with its low taxes, because you still need to pay the U.S. tax rate back home. However, if Chinese investors put wealth in Singapore, they do not need to pay taxes in China on the income earned in Singapore, only Singapore taxes. So tax differences pay a huge role in attracting funds from wealthy people to a country.

There's more. Singapore has strict bank secrecy about local bank accounts, stricter than Switzerland. But U.S. law no longer recognizes bank secrecy -- Americans may not set up a bank account in Singapore without signing a form stating that they waive Singapore bank secrecy laws. Furthermore, U.S. law requires foreign banks to report significant transactions to the U.S. government.

Tiny Singapore thus is becoming one of the world's -- and certainly Asia's -- centers for wealth management. All the big private banks have a large presence here. But wealthy Americans have no reason to join the party.