Offshore Banking - Offshore Investing: The World As a Tax haven


reasons to expatriate Most people will immediately think of countries or places commonly known to be Tax-Havens when contemplating offshore banking or other activities (Trust & Company Formation).  In fact, this is part of the problem.  If say, The Bahamas, The Cayman Islands or other places pop into your mind right away when thinking about banking and tax benefits, so it is true as well for the tax authorities (and others wishing to do you harm).  That is to say, they will (and already have) focused on the obvious places most people would tend to go.  The answer is then to not be so obvious.  One might even say, bank in plain sight.
 
Right away you are curious, and want to know how can this be.  First of all, let us set the stage by explaining that many countries have regulations in place to encourage foreign or even local investing.  They do this by enacting legislation that permits tax-free bank account or other kinds of investment interest for foreigners, and often their own citizens as well.  This is done as an incentive for the local economy and has nothing to do with the idea that such a country has any other motive in mind (being considered a naughty tax haven country).  However, in many cases, it could mean that such a country in reality may become an additional place to consider with regards to tax free banking (plus it is not on the list of so-called tax havens).  Considering that investment accounts or bank accounts are tax-free, there then is no government reporting of accounts or interest earned.  The only reason to report is for tax calculation purposes.  If there is no local taxes for interest earned in such accounts, no reason exists for the bank or financial institution to report.

Why do many countries have such programs or incentives in place?  They do this because it makes sense and encourages liquidity or increased capital that becomes available for local investment.  Directly following World War II, Japan encouraged local citizens to invest or save money by creating the Postal Savings Account.  These were savings accounts offered through the government run post offices, which allowed investors to earn interest on a tax-free basis.  Why?  When you take away taxation and encourage investors to save, two things happen.  First there is tremendous liquidity in the banking system, and more money becomes available for loans, etc.  Liquidity fuels economic growth and allows the country to internally fund its own needs for expansion.  The other alternative for any small country is to go begging the IMF (International Monetary Fund), or the US, which always means restrictive strings are attached and an outside government has you by the throat.  So, allowing for tax-free banking encourages its own citizens to save and greatly aids the economy.  If such an incentive is also available to non-residents, then foreigners have a direct incentive to bank or invest also (thus bringing even more money into the banking system & economy). 



The United States IS A TAX HAVEN (For Everyone Else)


Are tax advantages or tax incentives just something found in the so-called poor countries?  Well, do you consider the United States, Sweden and a number of other high-tax countries to be poor?  In the case of the US with regards to brokerage accounts owned by non US citizens (or non US residents), capital gains earned from stock market investing is exempt from local taxation in the US.  Why?  Simply because this gives an incentive to foreigners to invest in the US stock markets.  While no such benefit exists for US bank accounts owned by non US citizens or entities, a foreign company or foreign individual can ironically enjoy tax-free capital gains in a country which attempts to tax its own citizens to death.  Not surprisingly, many US citizens had become aware of this and have started to do their stock investing through offshore banks and / or with offshore structures to take advantage of having a US brokerage account titled as a foreigner.  The IRS has become wise to this strategy, and will discuss this a little later on.


In the case of other countries known for very costly government run social programs and high taxation as well, such as Sweden, bank accounts owned by foreigners enjoy tax-free interest.  In addition, in this very same country whereby the banks are required to deduct government tax (with regards to interest earned) directly from the citizens account and send it along to the government tax offices, these foreign owned accounts are not even included in the banks computer generated reports.  So here we have a case whereby bank accounts owned by foreigners are not even disclosed to the local government, when extensive reporting of accounts owned by its own citizens is the normal course of action.  The point is, Sweden is not a tax-haven by any stretch of the imagination, but for you, it could be with respect to tax-free banking (and your account, as a foreign owned account, is not even reported to the local government authorities).


For obvious reasons I am not going to publicly mention the list of countries where this applies (I am sure a group of American tax agents are on their way to Stockholm as you continue to read this article).  In any event, the point is, there are roughly twenty countries or jurisdictions known as tax havens.  There are probably 100 countries offering tax-free banking for either foreigners or local citizens alike.  Let them turn over every sea shell or palm tree in the Bahamas looking for your money.  You might have your money safely tucked away someplace they would not even think of (because its not on the list).  Maybe it is now a question of looking in over 100 places instead of just twenty.  Maybe it is a much bigger political issue as well.  If you are a large and powerful country, you can pick a fight with a few small countries, but the entire world?


Is Offshore Investing only for the Very wealthy ?

 

Much of what we write about may seem to be slanted towards helping people who have something illegal on their minds.  I can assure you it is not, and I for one am in no way justifying anyone that may have such an interest.  However, I am very much concerned about individual freedom, and the basic right for every human being to do what is best for them.  If someone wishes to relocate to another country, why should they not be able to do so, (with their own legally hard-earned money they have already paid tax on)?  How could it be that a so-called democratic government has the right to tell it citizens they cannot leave, or that they are still subject to taxation after they relocate?  Many such democratic governments were formed or created because the citizens of these very same countries wanted a change from the existing unfair or abusive governments ruling them at the time.  Yet, it would seem, we have come full circle with the same abusive tax schemes and government controls that were the reasons for a change or revolution in the first place.  Sound a little heavy handed or ridiculous?  Think about it.


Where will all of this end up and what will be the outcome?  It is for sure hard to say, but a few things are quite certain.  Governments such as the US will continue to put pressure on foreign jurisdictions and will also continue to close any open tax loop-holes they find.  Very recently, after realizing that many Americans have taken advantage of this back door tax-free brokerage investing option we spoke of earlier (for US brokerage accounts owned by non US citizens or non US entities), the IRS has recently demanded a disclosure of all US account holders from foreign banks.  Specifically, they are concerned about cases whereby Americans are investing in the US stock market anonymously via offshore bank or brokerage accounts either directly or through offshore structures (such as Trusts, Companies, etc.) and gaining the tax-free capital gains benefit meant to attract only non US investors.  As a result of these pressures, many foreign banks or brokers (most notably banks in Switzerland and Austria) have told their US clients either to sell all US stock holdings with them immediately.  If not, the bank will be forced to divulge the account to the US tax authorities.  The inference is that US citizen owned accounts that own non US investments will not be reported, but who knows?  The pressure or threat used against the foreign banks is of course that they will lose the ability to offer US brokerage services to all of their clients, including the majority who are not US citizens at all.  The joke is, there is more than one way to skin a cat.  Stated more directly, more than one way to own US stocks or participate in the US stock market without owning individual US securities or mutual funds directly.  Again, I do not want to give it all away to some of the tax agents that I know are on our mailing list, but this is not such a major problem as you might think.


This leads to the larger picture concerning pressures on other countries, be they tax havens or not, whereby citizens may be banking tax-free and without any reporting by the institutions they are dealing with.  This all reverts back to what we discussed earlier.  Namely the idea of one country trying to create an environment that is attractive to both foreign & local investors alike (and grow the local economy in the process).  It is called free competition.  Something the US says they favor (but only when they are on the winning end of things). 


What we now have is a direct conflict or dilemma whereby the tax collection initiatives being forced upon small countries by the US, is in direct conflict with the economic incentives such countries have for their own improvement.  To state this more plainly another way, if countries that offer tax-free banking and indirectly account privacy via non reporting (but are not considered to be tax-havens) take away this benefit, money will flow out of the country with the same velocity of Haleys Comet.  Thus damaging the economy and perhaps making such a small country even more dependent on foreign governments for economic aid.  The other alternative is of course for smaller countries with developing economies to do what is best for them-selves, run their own country as they see fit, and tell other governments with tax collection or other problems to have a Coca-Cola and a smile.


Many small governments and local business people are starting to realize this.  Much of this comes down to playing fair and conceding that smaller independent countries have the right to run their own countries as they see fit.  The US especially often uses trade as a weapon, denying access to US markets or offering less favorable trade agreements in cases whereby foreign governments do not act as they wish.  However, often what they wish has nothing to do with reasonable requests for unbiased cooperation with international trade, and more to do with forcing other countries to take on agendas which have nothing to do with that particular small country.  One very clear example is of course internal US tax matters, and the fact the US is very upset many of its citizens are moving their money and themselves elsewhere for tax (and other) benefits.  Another example is foreign policy, whereby the US would like all other countries to follow its own position regarding Cuba, for example.  Again, another case whereby complying or following the agenda of the US has no bearing on another country, and could directly hurt the trade implications of that country.  Canada, for example, has reaped tremendous trade or shall we say business benefits by maintaining a relationship with Cuba and winning construction contracts in the process.


The point is, many people might hold the opinion that no small country can exist without the US.  This is not entirely accurate.  The smaller countries have or offer the economic growth opportunities not found in the larger industrialized countries, offer much more favorable tax codes or tax systems, and also offer much more in the way of personal freedom.  Complying with pressures from the US (and other foreign nations) with regards to the topics mentioned previously could mean that they will not achieve the goals they are after (prosperity & growth).  In addition, the new immigrants (expatriates) relocating to such countries bring business skills and money with them (Americans, Australians, Canadians, Europeans all escaping high taxation), are only adding to the prospect of prosperity for their new home in the future.  What is the impact of 10,000 new residents each depositing US$ 100,000 into the local banking system of a small country like the Dominican Republic, and bringing new skills or expertise with them?

The US has in reality gone from being a lender to the world, to being dependent on borrowing money.  Apart from this, they have also gone from being a net exporter to the world, to a net importer.  The only thing the US leads in, is entertainment (movies, music & Disney World) and some new technologies (computer software & pharmaceuticals).  I guarantee that at least 75% of the manufactured products or even clothing in your home right now were made somewhere other than the US.  The US needs these smaller emerging markets to sell to, because Europe certainly is not the answer.  They have their own domestic industries, plus they also import a great deal from lower cost nations, such as China, Thailand, Guatemala & The Dominican Republic.  They say he who has the gold makes the rules.  In this case, the gold is internal prosperity and trade or buying power.  What if these developing markets suddenly had a large middle class consumer base eager to buy American products (and could now afford to)?  What if these developing markets all banded together and created their own trading agreement, not to trade with each other necessarily, but as a lobby for trade with the US & Europe?  What would happen if say all the Latin American countries banded together and decided to pay back the US with same coin?  In other words, either refusing to accept American products or companies into the local market, or placing very high import tariffs on such products, or refusing Visa Free travel privileges to US citizens unless the US complies with their own political or economic agenda.  Could never happen?  Well, a small prosperous country would not longer need US foreign aid or hand outs to help them along.  If the country has a diversified economy that was not dependent upon tourism, they could be somewhat more demanding with visa or immigration policies.  I wonder how such countries feel about past treatment from larger nations that have attempt to push them around economically or politically, and what they will do about it going forward.  What do you think?