February 2003 Offshore Information News Bulletin | Offshore Incorporations | Offshore Banking | Panama | Dominican Republic | Taxes | Residency | Second Passports | Expatriate Issues | Real Estate | Retirement

Finally, after some admitted foot dragging on our part, we are pleased to announce that we have made some special arrangements with Mr. Lyle Burke of Tropical Pathways, who will be doing his very first Dominican Republic tour in May or possibly as early as April. Lyle has been doing these kinds of tours for over three years now to places such as Panama, Honduras and Belize. But, Lyle recently has just finished up visiting the Dominican Republic for the first time, and like many people, has walked away literally amazed. Lyle told me, John - I never knew about the modern infrastructure, wonderful resorts and very reasonable real estate. He also told me, John - You are 100% correct, this is one of the absolute best-kept secrets in the Caribbean, and this might very well be one of our best tours yet. We could not agree more, and we have been working to help Lyle with some of the local resorts and other information so he can offer clients a first class program. Aside from viewing beautiful real estate, also included will be a seminar involving various speakers (yours truly included) on topics such as local tax-free banking, residency, healthcare, real estate related legal information, and much more. In addition, tour participants will have a chance to visit the Santo Domingo area, beautiful Punta Cana - Playa Bavaro and the breathtaking Samana area as well - all on one tour - and stay at some of the nicest beachfront resorts in the country in the process.

WASHINGTON (CNN) -- The Internal Revenue Service, hoping to recapture tax money lost through the use of offshore financial dodges, is offering violators a chance to escape prosecution if they come clean -- and give the IRS information on people who promote the illegal practices. To qualify under the program, taxpayers who have used offshore payment cards or other offshore financial arrangements to hide taxable income must first report the income; second, pay any back taxes, interest, and some "accuracy or delinquency" penalties; and, finally, give the IRS complete information about promoters of the suspect arrangements. Taxpayers who formally request to participate in the program -- named the Offshore Voluntary Compliance Initiative -- by April 15 will be able to avoid criminal prosecution, as well as civil fraud and information return penalties. The IRS estimates that thousands of U.S. citizens may be purposefully avoiding taxes through such practices as transferring unreported income to foreign financial institutions and then using credit, debit, or charge cards issued by those institutions to spend the money. Holding the cards is not illegal, the IRS said, but using them and foreign institutions to hide income is.

The government estimates that 1 million U.S. citizens hold undisclosed credit cards from offshore banks. While the cards are not illegal, the law requires taxpayers to report ownership of foreign accounts. Bank secrecy laws in 30 tax-haven countries have enabled people to hide large incomes, and evade U.S. income taxes, while living lavishly with their plastic. The IRS began obtaining records in 2000 from Visa, MasterCard and American Express to target people for audits and prosecution for tax evasion. The IRS so far has about 1,000 active cases, including names of prominent and famous Americans, congressional sources said Monday.

One tax lawyer said prosecuting the people who market such arrangements could be difficult, because the cards and accounts are legal. The burden arguably is on the taxpayer to report the arrangements and the income, said Jacob I. Friedman, chairman of the tax committee at the law firm Proskauer Rose in New York. But if the customers go away, it doesn't pay for (the marketers to continue, which would solve the IRS's problem, he said. As part of the new initiative, the IRS also will watch the filing of amended tax returns closely. Taxpayers trying to disclose their offshore income this way still will be prosecuted, IRS officials said.

SAN FRANCISCO (AP) - A federal appeals court has ruled the Internal Revenue Service committed fraud and acted deceptively after giving secret deals to two pilots in return for their testimony against 1,300 other pilots who had bought into the same tax shelters. The 9th U.S. Circuit Court of Appeals on Friday overturned a previous ruling against the pilots who were found guilty of tax evasion and were ordered to pay more than $2 billion in penalties. In order to remedy the IRS misconduct, the court ordered that all the pilots should receive the same deal that one of the pilots received. As part of the secret deal, pilot John Thompson escaped paying the taxes he owed and received a $60,000 refund through falsified tax returns prepared with HELP FROM THE IRS. Thompson used the refund to pay his legal fees. He also collected $20,000 in interest, according to the ruling. The second pilot, John Cravens, also received a secret deal. IRS lawyers Kenneth McWade and William Sims, who prosecuted the case, never revealed to the tax court that the two pilots' cases had been settled, much less revealed the conditions of the settlement. The appeals court said the lawyers' silence turned into outright misconduct when, during a trial, it became apparent that Thompson was going to testify about his settlement and McWade quickly shifted his question to unrelated topics. The ruling requires the IRS to pay tens of million of dollars in tax refunds, interest and legal fees to the pilots who paid the disputed taxes more than 20 years ago. The court criticized the IRS for not taking serious action against the lawyers who tried the case. McWade and Sims were suspended for two weeks without pay. They both insisted in testimony that they had behaved properly. The IRS office in northern California did not immediately respond to requests for comment Sunday. The group of pilots participated in an investment program and tax shelter designed by now-deceased Honolulu businessman Henry Kersting who claimed the shelter was a legitimate investment. The program allowed the pilots to purchase stock with loans from Kersting-controlled entities that were financed with promissory notes. The investment enabled participates to claim interest deductions on their individual tax returns, according to the court. The IRS discovered the scheme in 1981 and did not allow the deductions and sent bills to the pilots for additional taxes and penalties.

EDITORS NOTE: Now we get to the real impetus behind this as stated in the news article from the Philadelphia Inquirer and elsewhere. Which is to say, POINT NUMBER ONE: Owning or having a credit card (or any other kind of such card, meaning debit cards as well) from a non US bank is 100% legal for US citizens - Thanks for telling us something we already did know. POINT NUMBER TWO: what they really want to do is now somehow put pressures on non US Banks and anyone else offering or assisting with such card accounts to stop doing so (helping US citizens obtain credit or debit cards from non US banking institutions) - again something which is NOT illegal. POINT NUMBER THREE: The IRS does not follow the law, or shall we say, good or ethical conduct in how it behaves, never mind pointing such a finger at others, as demonstrated by the US Court of Appeals ruling mentioned above. In fact, the exact word used was FRAUD.

There seems to be some kind or implied threat here in terms of any bank or other (attorneys, accountants, and others) that somehow assist US citizens either with offshore trust, companies, banking or whatever. It is not completely clear what the threat is, other than of course the taxpayer gets some sort of reward or lenient treatment for coughing up a confession of some sort. But how can you justify threatening someone who is not doing something illegal (providing legal services such as incorporation services completely within the law, or banking services also completely within the law)? Furthermore, what about the vast majority of cases whereby such persons (accountants, attorneys, bankers, etc.) have no requirement to report such accounts (of clients) to anyone (in many cases not even the local government, never mind any foreign government)? They say desperate men (or governments) often take desperate measures (and throw the law and reason out the window in the process). If this does not convince anyone that the US government must be pretty hard up for tax revenue (and pretty well frightened as well), then I do not what else will. In other words, despite the sound bites and rhetoric, they must be broke or well on their way (and they know it). What else is the reason for such tactics? It has already been reported that about 35 US States are operating at a cash flow deficit and many have already announced an increase in income and other kinds of taxes. And that is just at the local State level, so what about the US Federal Government? How broke or in the red are they really? Is the economy really improving, or are the public sound bites something different than the actual truth (which they might NOT be saying)?

To recap all of this, owning such cards are perfectly legal for US citizens, with the only issue being that US Citizens are required to report the ownership of such cards or such accounts, which holds true for a number of other matters, meaning non US bank accounts, investment accounts and so on. However, the sticky wicket, if you will, is that it is very difficult if not impossible to glean such information from the banks or government agencies in those jurisdictions where such accounts might be held. In addition, the waters get a bit muddied when we start getting into technicalities about who actually owns such accounts, the US citizen (in their own name) or someone else? In other words, let us suppose you are working or are a consultant for a non-US company, and the company issues you a corporate visa card? Does this mean you, as a US citizen, have a tax and reporting issue because you have use of a company charge card? Regardless, we know have a new game plan, which is to first try and glean such information from the credit card transaction processors themselves, which are US companies by the way (Visa, MasterCard and Amex), and scare taxpayers as well (we know who you are and we will get you, unless of course you confess first). My question is, if they know you are doing something illegal and have the evidence, why announce it? Why not simply lock everyone up that fits this situation or audit everyone that fits this profile? Do they really know or are they just on a public fishing campaign?

Along these lines, it is very important to understand how credit cards work and the relationships between the transaction processors (Visa, MasterCard and American Express) and the non-US banks that might issue such cards. First and foremost, it is a misnomer to call these companies - credit card companies, because they do not issue credit, at least not to individual consumers. What they do instead is to offer a franchise right to banking institutions to become a member of the card network, and the banks themselves accept credit applications from customers (and print nice little plastic cards with the bank's name on it, along with the Visa logo, or whatever). So, in reality, the so-called US Credit Card Companies do not have any direct detailed information about individual cardholders, and neither do they care. After all, it is the individual bank that issues the card and not Visa (using Visa as just one example), and it is also the bank that is on the hook if the client does not pay off his debit balance. So, in terms of personal credit history and other information about the cardholder, all of this information sits with the issuing bank, which might be offshore and which might be in a jurisdiction that prohibits turning over private clients information to foreign governments (or anyone else for that matter).

So, what does Visa or MasterCard know? To be quite plain, only what you tell them, or what the merchant you buy from - tells them. In other words, companies like Visa and MasterCard process the transactions and connect the bank to the merchant (and vice-versa) for payment. They could care less if cardholder number 12345678 is a German, a South African or a one-eyed monster from Mars. In fact, they themselves do not really know if someone with a Visa Charge Card is in fact a one-eyed monster from Mars - ONLY the bank issuing the card knows, and they are not talking. So, how is it that Visa and MasterCard have damaging information in their records? Well, they only know what goes through the pipeline in concert with whatever transactions takes place, and that itself is not 100% proof of anything either- and I will offer two points the IRS will touch upon to prove linkage between a card holder who may (and I would like to emphasis MAY) be a US citizen. In addition, I would also like to illustrate the problems at hand as well.

For example, Jaime Lopez (second cousin to Coco Lopez) is visiting his niece in Miami (Lopi Lopez) and uses his Visa Card to buy his niece dinner one day at a very fancy restaurant. So, aha, the IRS now has a record of a Visa Card issued by a non-US bank being used inside of the US at a luxury restaurant no less. But, poor Jaime is a Jazz Musician from Lima, Peru simply on vacation in Miami. So, does a US based credit card charge transaction (involving a card issued by a non-US bank) indicate that the user of the card is a US citizen evading taxes? You decide, but this is flashpoint number one and criteria number one for database sorting by the IRS (you have got to have some sorting mechanism because you can only imagine the number of transactions going through the Visa and MasterCard computer systems on a monthly basis). Although, the IRS has said previously that they will focus on high-end purchases involving non-US bankcards made inside the US (as if everyone is running out to buy Rolex watches). Of course, you do have a large number of foreign tourists using their charge cards in general inside the US, so you can imagine what that list must look like in terms of the magnitude of names on it.

Example number two, our hero Jaime decides since he has three weeks to kill staying at his nieces house in Miami, and thus decides to buy some Jazz CD's from Amazon and provide his niece's Miami mailing address for delivery. Aha, flashpoint number two, a US address being provided for a credit card transaction involving a credit card issued by a non-US bank. Does this mean that Jaime MUST be a US citizen evading taxes? Maybe and maybe not, but for sure poor Jaime will most certainly appear on the IRS database print out. His poor niece - they will probably try and place a tax lien on her house. Oh well, life in America.

In any event, you now have the two top scanning criteria and the possible problems with it. However, the address thing is probably the most crucial, and what will be the strongest issue, I think. So, for example, any PERSON with a card from a non US bank that has also provided a US address to receive monthly statements and or has indicated a US address on transactions whereby an address is asked or required, will for sure pop up on this wonderful IRS credit card list. So, now you know who might be on the list, and it is a very big list to be sure (and why it would be much easier to scare people into coming forward on their own than to spend thousands of hours trying to follow up on all this). With that said, or perhaps conversely, I can say with some certainty who I think will NOT be on the list (here is goes): US citizens that established a credit card account offshore and did NOT provide a US address for statement purposes to the bank, or for transaction purposes (when they charged something) - US citizens who only used such cards at US ATM machines, which falls into line with the previous comment. Also, US citizens whom have obtained residency and or citizenship in another country and used that as a basis for establishing accounts (which to some extent, goes back to the previous as well because the address thing especially is quite crucial considering that citizenship does NOT come into play when you use a credit card - which is to say, no one asks your nationality and it is not part of the data going though the Visa and MasterCard computer systems during the normal course of transaction processing). Although, getting a valid and legal second citizenship is very important for your own financial survival as a very smart long-term idea anyway.

Another interesting issue with all of this is the ANONYMOUS Debit and Credit Cards now available. Which is to say, in relation to the above, that the ONLY information going through the MasterCard and Visa computer systems in a transaction with a number only (no name, no address, nada - unless of course it is asked for on included as part of the merchant transaction). Thus making it even more difficult to pinpoint account ownership (specifically in terms of citizenship of the card holder). However, there certainly are some drawbacks to this kind of card, such as when using it for car rentals, airline tickets and any transaction whereby identity is an issue. Although, I will say that I have purchased airline tickets for other family members (that have a different last name) over the telephone, which leads me to believe that the air carriers could care less provided the card goes through and they get paid. In any event, it is certainly true that restaurants rarely ask for ID and small businesses, the same thing. Also, ATM machines as well. So, there are some practical uses for these anonymous cards, but the biggest benefit of all is privacy. The official argument against such cards is that it is a mechanism for terrorists, drug dealers and so on. Perhaps, but that is similar to saying that terrorists and drug dealers have a tendency to use cell phones, therefore everyone with a cell phone might be a potential bad guy (and come under scrutiny as a result).

At the end of the day, what is it all about? It is to catch and jail terrorists, drug dealers, evil lawyers and offshore financial planners or perhaps even wayward Star Trek fans? You decide, but remember that things like offshore trusts, offshore companies and offshore bank accounts have been around for years (much longer than I have been alive for sure). So, why is it such a sticking point now? The only common denominator seems to be money, or lack thereof in regards to the US government, and they want it. The question then is, despite all of the positive comments about the economy and special tax cuts - what do they really know that we do not, and why is this such a hot issue now (offshore accounts, credit cards, etc.)?

EDITORS REPLY: Well, I cannot do too much about all of the scam artists out there, but I do think if you simply use some common sense (and not emotions or greed), then at least you can make a sound decision about what you are doing. On that note, we have gotten a number of inquires from people claiming to be involved with some sort of financial deal in Nigeria or some other African country, whereby there are promises of a financial windfall, etc. I try to counsel people as best as I can, but almost all insist the big payday is coming - after many have already shelled out US$50,000 or more. In any event, read the following news article for a CNN reporters opinion on these type of offers:

John: I was reading your latest newsletter with great interest, as usual, and happened across the question sent to you regarding the movement of funds from the US to foreign bank accounts. I was wondering what your opinion is of the various internet based, precious metal depositories that are now available such as E-Gold and the many others that are out there. Funds transferred to these entities can be done using money orders and numbered accounts with virtual anonymity. Once on deposit, those same funds are backed by whatever precious metal you choose and they can then be accessed from (or sent to) anywhere in the world via the stroke of a few keys on secure web sites. These companies have in essence created alternative metal-based currencies without the border limitations of nation state based currencies yet they can be converted and cashed out in whatever currency you desire.

EDITORS REPLY: Well, I am not sure how or where it got started, but I do know it is registered somehow in Nevis. But to answer more directly on the idea, I do think it to be a wonderful idea and in fact and alternative payment system to Visa, MasterCard and so on. However, this is part of the problem. Meaning, E-Gold is a way to transfer money between two private persons electronically or as a way to pay for goods purchased electronically as well (using gold as the medium or basis for the exchange). But, one must remember that Visa and MasterCard are directly threatened by E-Gold and have a substantial monopoly on the electronic payment system market (credit cards, and in turn merchant accounts for business owners). As such, I suspect that these companies (Visa and MasterCard) are behind much of the pressure placed on banks not to accept or support E-Gold, and you do NEED to have the participation of banks to make it viable. In addition, while I do know that there are some merchants that do accept E-Gold, it is not as widespread as Visa or MasterCard. So, from a marketing point of view, acceptance by merchants and acceptance by the general public, I do thing it has a long way to go (and an uphill battle as well fighting the banks that keep trying to close them down). Apart from that, I applaud the idea and hope it has staying power.

EDITORS REPLY: On the subject of purity my guess is that you mean non-ties with a US based bank, and assuming that is the case, the honest truth is that I am not aware offhand of all of the licensing that Santander has, or in which countries. However, Banco Santander is probably one of the best managed and is certainly up on the list of one of the largest banks in the world. Most Americans have not heard of it, but the parent bank is actually in Spain, and they have been aggressive about expanding into other Spanish speaking countries for some time now (such as Chile). So, do I think Santander is a good bank and a safe bank? The answer is yes. Does the fact that the stock is traded on the NYSE have any correlation to the US banking authorities? No, and in fact quite a number of companies are dually traded (London and New York exchanges, Amsterdam and New York, etc.).

As I sit here in Panama City in my US$450 per month two-bedroom, two bath apartment, plus maids quarters (includes her own bath), corner windows, fourth floor, palm trees just outside my window, parrots roosting by the hundreds every evening - yes downtown Panama City. I bought a whole fillet minion yesterday, US$2.99 per pound, cooked two three inch steaks off it - can smell the roast and gravy cooking now with the rest of it. I do not have a live in maid, like my privacy, but she just left, has been cleaning since 8:30 now 4:00 - cost me US8 - does this twice a week. A year ago, I sold everything I own in the states but my pickup truck, motorcycle and my televisions and stereo equipment - spent about 5,000 total to relocate (including all new furniture but my water bed). I go home once every three months to see my parents - will as long as they are with us, US$390 round trip plus tax (thanks to my 25% pensionado discount), by the way thanks again for help with that. First read about it in your newsletter and got the rest of the details from the package you sent me. YES YES YES you can and the sooner the better. My only advice is to live someplace a year - rent a place , and then buy if you want - and no they don't look for us small folks that left a bunch of debt behind. The best advice I ever got was for free was from another expat, and he told me- it aint against the law to not pay income tax - and it aint against the law to not pay your bills, but you got to file. Well, I aint got to do nothin but die and I don't plan on that any time soon. Thanks again and do so look forward to your letter.

From what I understand, only "Subpart F" income, or passive investment income, is immediately taxable in the year it is acquired. As such, income derived from actual business operations such as trade and/or services are not considered as Subpart F income to its shareholders. Consequently, an IBC could continue to accrue profits offshore and defer income taxes for its US shareholders. The income is taxible upon repatriation when issued to the US shareholders in the form of either payroll income or dividends. The IRS has tried to circumvent this problem by using "excessive capitalization" guidelines to assess taxes even if dividends were not issued, thereby forcing US shareholders to pay taxes on income not even received.

EDITORS REPLY: Well, ironically enough you are correct on both counts, and it would seem that the regulations are in direct contrast to each other, when comparing tax treatment of domestic US corporations and non US corporations. In a nutshell, the bottom line is that the IRS wants to discourage and penalize US citizens from creating or maintaining a non-US incorporated company. In addition, they also want to try and discourage or eliminate the various tax beneficial rules that may apply to US corporations (such as holding back retained income and deferring it to a later date so shareholders can postpone a tax event, in regards to a dividend distribution). In plain English, if you have a US corporation, you can elect not to distribute that income to shareholders. In terms of a non-US incorporated company (whereby the share holders are US citizens), they throw this idea out the window and claim you are liable for taxes on the portion of dividend income attributable to you as a share holder, REGARDLESS if the non-US company paid it out to you or not. It's the old, even though you did not get it - we will tax you as if you did routine. Of course the real answer to this is to avoid a case whereby a US citizen is the shareholder of a non-US company. For example, the share holder can be another physical non US citizen (your favorite Aunt Milly in Argentina) or if you do not have one of those, then a another non-US entity, such as a Trust or Foundation. Where there is a will, there is a way - all perfectly legal.

EDITORS REPLY: Well, I have to admit that this is my very first cigarette question, but here goes. First and foremost, one must understand that one of the principal agricultural products of the Dominican Republic is tobacco. So, cigarettes, including the Marlboro Brand are made here as well. Even with government taxes, a standard pack of cigarettes (10 pack) costs about US 90 cents to US$1.15 (the local brands being less expensive than Marlboro). Along the same lines, a carton of cigarettes cost US$9.00. Prices are higher in tourist areas, such as Punta Cana, but this is the price in the capital. In terms of buying cigarettes duty-free in the airport, that of course is available as well, but never having done so, I could not say if it were much of a bargain over buying cigarettes in the local market. I would suspect the costs to be slightly less, but then again, after paying US$7 in New York City for one single pack of cigarettes, I suppose anything less looks pretty good.

Dear John: I read the following at the web site of the government of the DR - Note: The Embassy of the Dominican Republic understands that a number of web sites on the Internet assert that U. S. citizens can obtain divorces in the Dominican Republic without either of the spouses having to appear in the Dominican Republic before a Dominican court and without mutual consent. This information is completely incorrect and directly contrary to Dominican law. If someone has paid any money to obtain a divorce in the Dominican Republic, but has not complied with the requirements listed above, that divorce is invalid and will not be recognized as valid by courts in the Dominican Republic or in the United States. Is a unilateral divorce possible, so long as separation of over two years can be proved? Possibly it is valid with bifurcation of financial questions being postponed?

With regards to the Dominican Republic, non-residents (foreigners) may obtain what is known as a Por-Vapor divorce. This type of divorce is different that what can be called a local divorce, applicable to residents or citizens only. The advantages of a Por Vapor divorce are that a divorce decree is handed down within 3 days from the client's appearance in front of a local judge (under normal circumstances). In addition, only one of the parties are required to visit the Dominican Republic, providing the other party provides a power of attorney allowing the visiting spouse to sign on behalf of both. In this regard, it is only applicable in such cases where the couple both mutually agree to the divorce and whereby both have settled any matters concerning division of property, etc. privately and without disagreement. Therefore, such a divorce is only advantageous where both parties are in agreement or mutually consent, and would prefer to get the matter resolved quickly (rather than waiting one year or more as may be required by their local US jurisdiction).

Once the audience date has been sent (hopefully about 30 days later), the client must personally visit the Dominican Republic and appear before the judge. However, both parties need not appear and one spouse can give the other spouse a legal power of attorney or power of representation. In addition, the law does allow for other legal representation, although most judges do discourage this and would prefer that at least one of parties personally appear (if both appear, even better). Assuming everything is in order, a divorce decree is normally handed down 3 days later.

Does the US recognize a foreign divorce decree or a Dominican Divorce specifically? Well, that depends on the US jurisdiction. Certainly many US jurisdictions are concerned about high divorce rates among its citizens, and some local regulations have been put into place to slow down or impede the divorce process. In addition, there are many US Federal Government agencies that will not recognize a foreign divorce outright. The next step or solution then is to have the divorce decree notarized by the US consulate and also have it registered or recorded with the local court where the client resides. There are some US judges that may refuse to recognize such a divorce, but there is difficulty in that both parties are in mutual agreement and that both parties are not asking the US court to settle a dispute over marital assets, etc. However, the state or governments legal right to intervene or refuse a divorce (even if mutually agreed upon by Husband & Wife) comes from the fact that you asked the state to become a party to the marriage contract when you applied for a state license to marry. Most people are not even aware of this, but this is the legal premise behind the state's right to have an opinion or voice in what most people think is a private matter between two people. In reality, or accordingly to the law, there are three parties involved in the marriage contract, and the government is one of them.

There is another kind of divorce available in the Dominican Republic, but it applies only to residents (or citizens). This can be called the normal divorce process and usually takes about three months. What is the difference between this one, and the previously discussed Por Vapor divorce? First of all, the local law comes into play and local law permits one party to file for divorce without the consent of the other party (contested divorce). It also allows a judge to grant a divorce even though the other party disputes it for whatever reason. In addition, Dominican law is very different than US common law in that matters concerning private property domiciled in one party's name, which may not be considered marital property subject to division or distribution. Some clients do in fact secure this kind of divorce also, as a legal resident.