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Consider
the Entire World as a Tax Haven
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John
Schroder answers some commonly asked questions about offshore Investments
and Banking
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It is true that 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.
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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.
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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).
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Is this 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.
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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).
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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?
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The following
has been reprinted from the Freebooter Newsletter. We have provided
this information because we think it is of interest for our clients:
http://www.freebooter.com/
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BANKS VOLUNTEER TO
BECOME GOVERNMENT SPIES
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An international
alliance of major banks has agreed to become government spies, to force
clients to disclose private information and to report suspicious financial
activity to the financial authorities.
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The banks
in question are: ABN AMRO Bank NV; Barclays Bank; Banco Santander Central
Hispano SA; Chase Manhattan Corporation; Citibank NA; Credit Suisse Group;
Deutsche Bank AG; HSBC (Hong Kong Shanghai Bank, which owns Marine Midland
Bank in New York); JP Morgan Inc; Societe Generale; and UBS AG.
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For comprehensive
coverage of the principles the banks have agreed to uphold - principles
covering identification of clients, beneficial owners of accounts, due
diligence, increased scrutiny of "offshore" activities, reporting of suspicious
activities, monitoring and disclosure - visit:
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http://www.transparency.de/documents/press-releases/2000/wolfsberg_principles.html
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Editors Note:
We have always advocated the idea of staying away from foreign bank branches
of US banks (such as Citibank, Chase Manhattan, First Union Bank, etc.)
and any bank in general with a US banking license. This is the reason
why.
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DIRTY TRICKS, AND
DAVID VS. GOLIATH
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Much of what I 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.
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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.
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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).
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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 dependant 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 .
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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.
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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?
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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 middleclass 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?
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For additional information regarding
tax-free offshore mutual funds, please contact us.
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