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E-Commerce, Expatriating, Living Abroad, Plus Other Topics..... . Is tax competition among countries a good or a bad thing? Jan 27th 2000 - From the Economist print edition . “BILL GATES would be fabulously more wealthy if he had started Microsoft in Bermuda,” says William Woods, chief executive of the Bermuda Stock Exchange. “He may have known a lot about computer programming when he started the company, but his ignorance about tax cost him a fortune.” Mr. Gates has not done badly even so, but he knows better now. Teledesic, a company co-founded by the Seattle-based billionaire that plans to offer broad band Internet access by satellite, is incorporated in Bermuda. . http://www.economist.com/displayStory.cfm?Story_ID=276995 . If the Bahamas is willing to roll over, what country is still safe or at least willing to stand up for itself? If the OECD is on the attack, what small country can, or is willing to survive? These and many other questions sent in by clients (and readers) are all very valid. To provide some insight as to what government leaders in small countries really think about it all, I am enclosing a recent news article, which touches upon this very topic. . Do you think all small countries will buckle under such pressures from larger (high tax) nations? Think again, and stay tuned for more interesting developments as smaller countries band together and start to realize just how much bargaining muscle they have. In short, they are competing very fairly for business and investment via advantageous tax or other legislation. As a result, they are achieving an incredible amount of success and will not see their economy or their future go down the drain for simply doing what any country has the right to do in a free market (namely, compete). . Ironically, it has been the US mostly that has complained about so-called unfair competition, and has attempted to punish such countries accordingly with high tariffs on imports, etc. Watch out for possible retaliation, such as tariffs on the only real exports the US still has left or leads in (entertainment, motion pictures, software) and possible refusal to purchase US government debt (or tax legislation from these small countries making it more favorable to invest elsewhere). After all, as the article title suggests, these are now small states with big money. In addition, these small economies have some of the highest percentages of new middle class consumers, making such markets very important for countries such as the US and European nations regarding exports. The balance of trade is very much negative for most of the OECD nations, meaning they import more than they export (manufacturing & clothing especially). What remain are service businesses and other non-manufacturing, such as the motion picture industry. We know how much of a burden it is to physically move or set up a factory elsewhere, yet the labor cost and tax savings have prompted many companies to make the move accordingly. The company that makes the popular Etch-A-Sketch toy in Ohio has recently announced it will move all of its production to China, closing out a legacy regarding a product made in America for decades. . The question is, if moving a factory is a pain, yet companies are willing to do so anyway, how hard is it then to move any idea or service? How difficult would it be to move a virtual or online travel agency to a free zone (thus eliminating all corporate income taxes)? How difficult would it be to move some of these newer online banks or car insurance companies as well? After all, you simply need computers and good telephone service, but you do not need much more. Good telephone or communication services and inexpensive phone rates mean there is not much difference anymore between calling Texas vs. calling Thailand. . The point is, if the remaining industry or business left in the OECD nations (service businesses) decide to pack it up and move, what is the impact? Perhaps a new tariff on movies distributed in Latin America will make it attractive for Warner Brothers to close up shop in California and move to sunny Costa Rica or elsewhere. How much would it cost to build a new movie studio in the Dominican Republic (inside a free zone). Perhaps the saving is half the cost or one-third the cost of the US? Plus Warner Bros. Latin America (for example) could eliminate corporate income tax for films and programs made inside a free zone (in a Spanish speaking country) for distribution outside of the country to the English speaking market. Sound crazy? How crazy is saving production costs or paying zero income tax? . This is really the heart of the matter, namely FEAR. Are the OECD nations scared out of their wits? You had better believe they are. As more business moves away to gain tax or other advantages, their tax base erodes even further, making it more difficult to support the bloated government that already exists. As its citizens move away too, there are even fewer taxpayers to chase after as well. Is all of this wrong or unfair? Well, this is the natural progression in a FREE MARKET economy. The winners are always those than can turn out a better product (or service) and hopefully at a better price. If the demands of the consumer change, the company that reinvents itself or finds new applications for its product survives. The main difference here is, we are discussing governments and not private business directly. That is to say, those countries that offer lower labor costs, lower taxes and a better business environment, will come out on top. The free market economy system rewards the efficient. Is this unfair or wrong? . . SMALL STATES, BIG MONEY Sep 21st 2000 - From The Economist print edition . AT THIS month’s United Nations millennium summit, Lester Bird, the prime minister of Antigua and Barbuda, used his five-minute slot to accuse the world’s rich countries of “the most blatant disregard for the rules of international law”, complaining that “rules no longer apply” and that “only might is right”. . Tired bluster, perhaps, of a kind familiar at the UN. But behind it lies a cry of pain from a group of the world’s smallest countries. Antigua (population: 70,000) is one of the six small independent island nations which, along with Montserrat (still a British Overseas Territory), make up the Organisation of Eastern Caribbean States (OECS). Even St Lucia, the largest, has only 152,000 people. . Just a short cruise away from the United States, these states are understandably touchy about sovereignty. Now they see a new threat to it, through their economies. European trading privileges which once protected their rum, sugar and banana industries have been eroded. Tourism prospers, but with a GDP smaller than the sales figures of many companies they do business with, the islands fear bullying from airlines, telecoms firms and cruise lines. . http://www.economist.com/displayStory.cfm?Story_ID=374290 . Recent US headlines are full of news stories regarding layoffs and cutbacks in business production, all related of course to the current state of recession in the US. Whether the US recession is real, or simply a self-fulfilling prophecy generated by the media, is something that can be debated. However, what is very tangible, is the fact that US retailers such as JC Penney are laying off 5,000 workers, and so-called stable food production companies like Sara Lee, 7,000 workers. . Ironically, a very recent news article is suggesting that job opportunities for laid off US employees can be found “south of the US border”, specifically in Latin America where such economies are more stable due to traditional manufacturing and a more diversified economy. This is in contrast to the US economy, which is primarily a service economy and one reliant on growth from the new e-commerce or dot.com companies. Incredibly enough, such Internet based businesses are now going elsewhere (offshore) for both lower taxes and less government regulation. In addition, many new immigrants to the US that are involved in computing or e-commerce are now going back home, fueling the Internet phenomenon in countries you would never expect (we reported in our last update, that it is very easy to pack up and move an e-commerce business). Read these and other related news stories below. . Aside from job or new business opportunities abroad, in a recent article from FORBES magazine, reporter Alexandra Kirkman writes the following commentary for investors: . If you are looking for markets with a low correlation to the U.S., then Latin American equities might be preferable. These markets have a smaller proportion of technology stocks than Asia's; the main companies tend to produce such staples as beer and food or steel. . . Broaden your travel experience: Get a job overseas (Reprinted sections from the article, plus the link below) January 15, 2001 . Financial pundits say the economy is heading south; don't let their predictions send your travel plans in the same direction. Unless, of course, you're thinking of heading south of the border -- or beyond the equator. And if the slowing economy provides you with an unexpected extended vacation, you can use your hiatus to realize your travel dreams. Get a job abroad. . The idea isn't as farfetched as you may at first imagine, and there are far-reaching opportunities to broaden your horizon while you satisfy an immediate need for employment. . Editors Note: I tend to disagree with the exuberance that the author shows regarding finding employment in such areas as teaching English, etc. My experience has been there is quite a bit of competition regarding other people that wish to do the same, plus the salaries are no where near what one might expect. In my opinion, the best opportunity and security exist for those people that start their own small business. However, this is not a complete criticism of the article, as it is very interesting that a news service, such as the Tribune, is even suggesting the idea of Americans looking outside of the US for work. . http://www.cnn.com/2001/TRAVEL/ESSENTIALS/01/15/overseas.jobs.lat/index.html . . Many foreign immigrants to the US that have come to silicon-valley and other places to seek a better life and fortune in the US (specifically regarding Internet or Computer related industries), are now returning back to their native countries. A good number of these people are finding that better opportunities or infrastructure now exists in their home countries, plus taxation and the general business environment (regulations) are more favorable. The article calls this phenomenon, the brain drain reversal (see our next article immediately following, which highlights our previous report that many companies in silicon valley were recruiting overseas due to lack of qualified applicants in the US). . http://www.cnn.com/2000/TECH/computing/08/01/brain.drain.reversed.idg/index.html . . We reported to you some time ago, that many high tech companies in the US were desperately recruiting overseas workers, because there were (are) not enough qualified applicants at home. Why is this so? A very good question, but the answer is found with American schools and education. US children rank far behind children in India, China and elsewhere regarding mathematics and science. Two very important skill sets required for the computer industry (math especially). Here are some excerpts from the news article, and the online link as well: . . THE POLITICS AND uncertainty surrounding the controversial H1-B visa program wound its way back to Congress last week, as lawmakers began debating whether or not to allow more workers into the country via the specialized program. . The issue resonates in the high-tech industry in particular, as many companies, not content to wait for Congress to act, have had to scout for creative ways to land much-needed technical talent from overseas. Some, stung when the allotment of H1-B visas ran out this past spring, have had to put work on hold because they lacked staff. . These shortfalls had the industry and some lawmakers pushing Congress hard last week to raise the limit on H1-B visas, which are designed to bring in temporarily the most skilled foreign technical workers. “Until we can more fully develop enough highly trained and skilled workers (US workers), temporary visas for skilled foreign professionals are essential," reads a recent letter signed by 22 congressional members calling for an increase in these figures. . http://www.infoworld.com/articles/hn/xml/00/09/25/000925hnh1b.xml . . Editors Note: Let’s see here. The US makes it extremely difficult for people from other countries to even visit the US for vacation (most notably the so-called poorer or third world nations). When such persons apply for a simple tourist visa (to visit the US), they must bring proof of a bank account to the US consulate (and show how much money they have in the bank). They must also provide proof of a job, proof or information regarding family, all of which is somewhat demeaning or humiliating, in my opinion (considering Americans can show up half naked with their birth certificate only to enter many Caribbean countries). Aside from this, citizens desiring a US visa must stand outside in the rain all day waiting, plus pay US$ 20 or more for the privilege (which does not get refunded, by the way, if the US consulate denies the visa). . Now, despite outcry from US business, there is difficulty in obtaining the needed employees from abroad American high tech businesses claim they need. All because such qualified people cannot be found at home, which is maybe another reason such companies may want to pack up and move where the skilled labor is – if the labor cannot come to them. . In addition, the current of existing skilled foreign workers are also leaving, because the economies in their own countries are doing well, and offer a more favorable environment for business. . What is the future trend or outlook, if no one is left to pay taxes (with respect to both business and individuals that are leaving)? What is the future outlook when the countries with the money and clout, are these small nations, who were previously treated with disdain? What happens when American and other companies want to enter these new markets because that is where the money & growth is? What happens when the consumers in these small countries start to have big spending power (many already do) and visiting the US is a hassle? Maybe they remember how they were treated before and decide to spend their tourist dollars elsewhere – (such as Japan or France, which also now has a Disney-Land). . I do not have any concrete answers to these questions, as I cannot say what the future will hold. However, I do think they are interesting dynamics to consider as we move forward. As many clients ponder the recent actions and rhetoric of the high tax nations (US & European members of the OECD), it is very worthwhile to note these trends and issues. That is to say, many smaller countries trying to compete and offer business incentives for companies attempting to relocate have experienced a slap in the face (as opposed to a pat on the back). If for nothing else, some very interesting food for thought regarding possible future politics & policies. . . The US Internet industry and E-Commerce is going overseas. Is this a serious long term trend, or just our isolated opinion? http://www.ascotadvisory.com/ . Well, you can read for yourself what others are saying via the following except from a recent INFOWORLD news article about this very subject. Sections from the article appear below, along with the online link: . . BEFORE CONDUCTING even the first transaction on the border-less Internet, more technology upstarts are now shopping internationally for the best location in which to launch their e-businesses. . Companies are increasingly looking for e-commerce-friendly nations in which to conduct business, said Douglas Graham, a New York-based partner at KPMG's financial services and consulting practice. "These companies are not shopping around just because they want lower taxes. They also want regulatory simplicity," Graham said. He added that KPMG has seen a notable spike recently in the number of companies considering a move offshore. . Other groups such as the Software & Information Industry Association and the U.S. Chamber of Commerce are also noting among the Internet industry increased attention to international economic climates. . The US Chamber of Commerce is so concerned that it is educating lawmakers on the dangers of overplaying their hands on e-commerce-related initiatives, said Rick Lane, director of congressional and public affairs at the Chamber of Commerce. "If we begin over regulation of e-commerce activities, it could be the case that the Internet will push some of the dot-com companies offshore," Lane said. . Losing e-companies to other countries has long loomed as a backdrop to the ongoing U.S. debate over Internet tax issues. Several groups have pressed decision-makers on Congress's Advisory Commission on E-Commerce to consider the United States' competitive interests in keeping Internet taxes at a minimum, said Stan Sokul, a commission member representing The Association for Interactive Media. . "Internet tax issues are really a subset of a larger issue," said Sokul, who is based in Washington. "And people have said all along in the tax debate that if we impose overly burdensome tax duties on companies, there is really nothing to stop them from moving their operations elsewhere." . Not everyone sees the problem in quite such stark terms. "I'm not aware of a widespread problem [with Internet] companies running off to do business," said Brian Hengesbaugh, special counsel to the Department of Commerce's General Counsel's office. "There are developing countries that are looking to make attractive environments for e-commerce. But our idea in the U.S. has been to accomplish that by not over regulating." . Some of the countries high on the list of offshore sites include Liechtenstein, Bermuda, Cyprus, Australia, and the Netherlands. Ireland lately comes in close to the top of most lists, because the country has aggressively aimed to bring down tax rates and has embarked on a campaign to examine the regulatory burdens it imposes on business. . Executives at Iddex -- which bills itself as an ASP (application service provider) providing intellectual property services -- went far beyond taxation issues in their great pains to decide among Switzerland, the United States, Hong Kong, and Bermuda. "To call this 'jurisdiction shopping' -- which many people do -- is to trivialize what was a very serious issue for us and our clients, "Iddex's Moran said. Iddex may still locate servers in Hong Kong or Bermuda, apart from it’s # 1 choice in Switzerland. . http://www.infoworld.com/articles/hn/xml/00/02/28/000228hnetrend.xml . We reported earlier about the idea of possible retaliation against the US for unfair trade and political pressures. In this regard, we previously reported about the idea that other nations may attack the only industries the US still leads with in regards to exports, which are computer software, and entertainment (music, motion pictures, etc). Sound like something, which could never happen, right? Read about the scuffle between the European Union & US, which hits upon this theme. The following are passages taken from the article, with the online link below: . The United States is under pressure to change the FSC provision due to a decision it lost to the European Union before the WTO earlier this year. The 15-nation EU has threatened to impose trade sanctions if the bill is not passed and signed by President Clinton by the Nov. 1 deadline. . The FSC provision of U.S. tax law is used by companies to set up overseas subsidiaries to handle exports and take a deduction on export sales. U.S. technology companies, which now comprise the country's leading export industry, use their FSC subsidiaries to save billions of dollars in taxes each year. Technology companies, including Microsoft and Oracle, fought hard to get the FSC benefit, granted to them in 1997, and are now fighting to keep it. Prior to 1997 they had been excluded from the tax break because of a provision that said intangible goods, such as recordings and other intellectual property, could not be defined as export property. . In the dispute before the WTO, the United Sates argued that the FSC helps to establish parity with European tax systems, which grant their exporters tax breaks, such as a rebate of the VAT (value-added tax) and no charges on foreign-earned income. The EU, however, argued successfully that the FSC provision was an illegal export subsidy, and the WTO gave the United States until Oct. 1 to change its tax law. Last month the Europeans agreed to a one-month extension to Nov. 1. . http://www.infoworld.com/articles/hn/xml/00/10/23/001023hnusaeu.xml . The U.S. State Department says more than 3.8 million Americans lived abroad last year, the highest number in three decades. We tend to think the real numbers are closer to 10 million and growing. The following is a news story about an American couple that did find the American Dream – in Ecuador! Here are some excerpts from the article and link: . Like others, Ham and Michilena aimed for the American dream, the notion that equality gives everyone the same opportunity to succeed. It was the centerpiece of historian James Truslow Adams' 1931 book, "The Epic of America." Ham says the dream needs to be revamped. . "America is a lot different now," Ham, 37, says as he shakes the afternoon drizzle off his poncho. You give up a lot to live in United States, he says, and "I knew I couldn't do that." . http://www.cnn.com/2000/WORLD/americas/08/27/yearningforutopia.ap/ . . HOME FREE: A 1996 law attempted to stop tax deserters at the border. It ain't working. . Many clients have asked us about the expatriation tax the US congress attempted to use in 1996 (to stop Americans from leaving). The following is a not so recent, but recent enough, news article (July 1999) from Forbes Magazine that examines the issue (excerpts from the online article are directly below): . Outraged that thousands of rich Americans such as Campbell Soup heir John Dorrance III and former Star-Kist Foods Chairman Joseph Bogdanovich were renouncing US citizenship for tax havens overseas, in 1996 Congress tried to stop the flow. First it imposed a ten-year tax on expatriated Americans; then it forbade tax-motivated expats ever to visit the U.S. again. Has it worked? . NOT REALLY Since FORBES first wrote about the expatriate phenomenon (Feb. 28, 1994), it hasn't lost its popularity. . http://www.forbes.com/global/1999/0726/0214116a.html . . This information has been written or compiled by John Schroder of Ascot Advisory Services, Santo Domingo – Dominican Republic. Ascot Advisory provides assistance and advice to clients regarding offshore incorporations, banking, merchant accounts and second citizenship or residency programs. For additional information, please visit our web site: http://www.ascotadvisory.com/ or contact directly: Telephone 809-334-5387 or 809-756-1917 Email: info@ascotadvisory.com |
