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Weekly
Update Bulletin On-Line.........
.. In The News and Readers Write In (with our answers to Questions).......... |
| GENERALLY SPEAKING:
. Many readers have written in about financial or economic topics lately. Obviously the big story in the US is the bankruptcy of Enron and all that entails. I want to comment on this because there are two very important points I see coming out of this incident, and also pass along the view many foreigners have outside the USas well. . First and foremost, the myth that the US is the safest country to invest in has been broken. That is to say, the argument always was that the US has some of the strictest security laws and market regulations in the world (and they do). However, the Enron incident proves that the system is not foolproof. Also, having a big name independent auditing firm does not offer any guarantee as well. Many would say Enron's books were not only cooked, they were baked and broiled. All while Arthur Andersen looked the other way. Indeed, this is a larger major problem because such auditors certainly have a conflict of interest. They are charged with auditing and acting as an independent watchdog for the same companies that pay them (which is true the world over). . If they walk away from a client or stop doing business with them, they loose a paycheck in the process. During my previous life in the banking and brokerage industry in New York, I have had quite a bit of experience dealing with people from KPMG and similar firms when conducting so-called independent audits. I was the inside company guy that often got stuck sitting with them for a month or more. My job was to handle them. Which is often the job assigned to middle or upper level managers of companies when the outside auditors come in to do their annual review. This encompasses a number of things, including trying to take them out to lunch and get them drunk (you think I am kidding, but I am not). I often had to report in to my boss everyday in private (what did the auditor say? what is he looking at? did he find anything damaging? etc.). In general my job was to be nice to them and keep them away from anything that can get me, my departments (and more importantly my boss) in trouble with the big guy (the company President). For a month every year I was a corporate Mata-Hari, a double agent if you like. And so it goes, and this is what goes on in corporate America all the time. It is nothing new and not unique only to Enron. Believe me when I tell you. The other thing that I think is important to note from all this, was the announcement that Enron had about 800 Offshore Companies set up in the Cayman Islands for tax purposes. This was not the reason, by the way, that Enron had problems, just the opposite as it saved them millions of dollars in taxes. In fact, it was reported that Enron has not paid Federal income taxes for five years (since 1997) due to the tax credits, etc., etc. The real point is that a former IRS official and some high level people came out publicly on the CNN Lou Dobbs Money Line program to state that this was not illegal at all. In other words, a public declaration of what I have been saying all along. . Namely that large companies have used tax havens and offshore companies for tax savings and tax planning for years. It not illegal in any way shape or form for a US citizen or a US Company to set up an offshore company and or have an offshore bank account either. Granted, I do think 800 companies sounds a bit excessive and questionable to me (less than 10 I think would be reasonable), but it does highlight both the legality of any American that wishes to do the same. It should be clearly noted that Enron lost money due to some bad decisions regarding losses in it's energy trading division and not because they set up offshore companies. In fact, I want to reiterate that the offshore companies saved them money in terms of taxes, rather than act as the reason for their demise (which is what I sure many will now try to say to discourage the practice even more, setting up offshore companies that is). . On another topic or subject in the news, I think some trends might develop this year, which could be of interest to investors. Namely involving the European Union, Latin America and US foreign policy (which includes things like economic aid and trade agreements. Argentina is the big story of late in Latin America, but there is one key item to come of this to keep an eye on. Specifically I am speaking of the Bush's administration position on any kind of economic aid package to Argentina (Bush said NO). I am not saying they should or should not, by the way. However, the comments coming out of Latin America are, How is it possible the Americans run to bail out South Korea, but not a country in their own part of the world? Once again, Latin Americans view this as a slight or discrimination against them in general, whether it is meant to be or not. That is to say the hypocrisy and two sided-ness of American foreign policy. How is it possible China gets most favored nation trading status with the US, when the Chinese were selling weapons to Bin Ladin and Al-Qaeda? . This is the argument or what others see, especially in Latin America. Right, wrong or indifferent, this is what the US conveys with its foreign policy. What is the point? Well, Spain takes over the Presidency of the European Union very soon, and they have publicly stated one goal they have is closer economic ties to Latin America. If you couple that with the sentiment that the US is perceived to be anti-Latin America with its policies, I think you can see where this might go. More clearly, a quasi alliance between the EU and Latin America, which may not be a bad thing for either one, all things considered. The EU might get a favorable trade pipeline to the growing economies of Latin America, which overall has one of the fastest growing numbers of new middle class consumers. In other words, an economic group or class of people who can now buy things like television sets and take overseas vacations (as opposed to the American held stereotype that all Latin Americans are either drug dealers or poor people living in tin huts under banana trees). This may result in stronger diplomatic ties as well, including issues regarding easier access or visa free travel. . Spain has already made comments that they will (and already have) relaxed policies to allow Dominicans especially to visit or work in Spain. If this slowly rolls out on a broader scale policy wise (regarding Europe as a whole) and Americans continue with their current comments and thinking, Europe will be the big beneficiary of any new and wealthy consumers from Latin America. After all, what would you do? . For example, the US publicly slaps the Dominican people in the face by having someone from the US Embassy denounce the education system as being substandard (talk about the pot calling the kettle black). Yet Spain says, come on over - you can work in our country, you're invited just the way you are. Include that with perhaps easier travel opportunities to Europe, and where would you travel (to spend your money or take vacation) if you were a Latin American? If you had a choice of buying European products and American products, assuming European products are less expensive due to favorable trade agreements (tariffs) - what would you buy? . This of course is all commentary and observation on my part, but given the current trends and events, a real possibility for the future. Why care if you are an American or someone that invests in the US? Well, all of these things might have a strong impact on the US economy, the travel industry and balance of trade in general going forward. All I am doing is to try and offer an explanation, should these things come to pass and you wake up one day asking - What Happened? . |
| READERS WRITE
IN:
. Dear John: . Here is an excerpt from one of your recent UPDATES that I would like to comment on. Regardless of what the government says, it is the case that it will only be applied if the people are in agreement. Case in point, motorcycle helmet laws. Despite a law that says everyone must use a helmet, the vast majority of people do not because they do not want to. The police got tired of handing out tickets (which I suspect no one paid anyway) and simply stopped enforcing it. Read between the lines. . There are definitely some things about doing business in Latin America that I do not care for, but the propensity of the average citizen toward civil disobedience is one of the endearing things about that part of the world. North Americans and western Europeans have been well trained by their state run education systems to believe that there is no higher calling in life than to conform to their nation's wishes. That is, "Be good little girls and boys and do what you are told". . Once a government is out of control, getting it back UNDER control is usually prohibitively expensive in terms of the amount of blood that is required. But that needn't be the case. CIVIL DISOBEDIENCE is the most potent weapon available against many forms of government abuse. JUST REFUSE TO CO-OPERATE. Of course, the problem with this is that this action is still not without cost. Case in point. An acquaintance of mine once received a form from the USA IRS basically demanding that he tell the IRS everything he knows about a certain individual. He was told to sign the form under penalties of perjury. . The foundation of government power is INFORMATION. If enough Americans, Canadians, Brits (or whoever else) simply told their government agents to shove-it whenever asked to inform on Someone; that government's power would begin declining overnight. But they won't do it. The cost of freedom is too high for an American or Canadian or Brit, etc. Taking a stand could cost them their homes, bank accounts, automobiles, boats, TVs, stereos, baseball card collections, electric tooth brushes, and etc. So they submit to requests to RAT on their "friends" and neighbors. As the snitch sees it, "It's better my neighbor get into trouble than ME." . I don't know if Latin Americans have more guts than North Americans or if their defiance of government is simply a function of not having as much to lose. The acquaintance I mentioned above, of course, spilled his guts. He has a business, a nice home, nice vehicles, new furniture, and etc. Why should he risk everything HE has to protect a friend's home, vehicles, and furniture? After all, LOYALTY TO ONE'S GOVERNMENT IS A MUCH HIGHER CALLING THAN LOYALTY TO ONE'S FRIEND OR NEIGHBOR! . I admire Susan McDougal. Assuming that her refusal to talk to the grand jury was not simply in fear for her life (which may be a BIG assumption), I admire her loyalty to her friends. I know she is probably a crook and that she was probably protecting crooks. But, not forgetting the above assumption, the woman has guts. She is a loyal friend. I admire her. . EDITORS REPLY: First and foremost, thank you for your letter and your thoughts. I cannot respond to anything concerning Susan McDougal, but I will say the following. I certainly do not approve of or condone anarchy and violence, however one must take the definition of these things into perspective. On the surface, with respect to the Dominican Republic, many might take the conclusion that Dominicans are not law-abiding citizens. This is not the case at all. However, it does touch upon what I might call cultural differences between them and North-Americans. That is to say, Americans and I would say Canadians also, tend to accept whatever baloney the government and news media hands down. One must be able to separate the kernel from the corn, or perhaps ask some questions and do some independent thinking. . Dominicans, to their credit, do not blindly accept anything and will voice their dissatisfaction one way or another. In the case of governments and politicians, power corrupts and absolute power corrupts absolutely. Dominicans, whether they realize it or not on a conscious level, do seem to understand this or at least are ready to assume the worse and have themselves proven wrong. Also, while it is true the illiteracy rate is probably higher in the DR than the US at the moment (although according to recent reports on the US education system, I wonder), I would say Dominicans also sometimes seem to have more common sense. Some one told me a long time ago, do not believe anything you hear, and believe only 50% of what you see. I would say that this sums up the thinking of the Dominican people as a whole, or on a collective level. Which is better? To be sheep herded off by some dope with a stick that may have even less sense than the sheep, or ask whether or not the guy in charge really knows what he is doing or where he is going? To say one will accept anything and everything out of loyalty to country or patriotism is not only the reverse of truly loving one's country and wanting what is correct and best, it is also downright stupid. Is refusal to obey laws the answer? . Not necessarily and certainly not in all cases. One would have continuous anarchy on their hands (believe me, the DR is very low key - no road rage here). However, there does exist a line that delineates between politicians serving the people vs. serving them up. To know the difference is the key, as much as knowing what course of action might be appropriate as well. . On your comments about civil disobedience and simply refusing to cooperate, I will say I disagree slightly in that no one should conduct them-selves in way that will get them locked up. I do agree with you, but I think the answer is to simply check out. That is to quietly and peacefully exit or leave. Do not fight with the police, do not fight with government officials (or low-level bureaucrats even less), do not draw attention to yourself, do not take out your dissatisfaction in a way that will hurt you or others - just take your money and go someplace better. Go on vacation and never go back. End of story. . . Another Reader Writes: . John; . Some of your readers may get the impression that fixed income investments such as Bank CDs, commercial paper, corporate bonds are not without risk. Any time an institution is paying well above international market rates for CDs, commercial paper or even money market funds, they are compensating investors for an increased level of risk. . Japanese savers found this out the hard way when they found out that the money market funds with major Japanese brokers were under water because of losses by these funds in Enron and Argentina bonds. When you purchase a traditional CD, you are investing in that financial institution, or you may be investing in a brokered CD that is held by a group of unrelated investors. In addition, some of the high yield CDs have "call" or other special features that mean lower effective rates. The point is that the higher yields are there for a reason, and that reason is higher risk. . EDITORS REPLY: Thank you for your letter, and also allow me to say that you are 100% correct. However, I think one should also add or investigate cases whereby interest rates might be higher for a particular reason as well that has nothing to do with credit risk. For example, if you can remember back to days of former US President Jimmy Carter, US interest rates pushed the 20% level. Did this mean the US Government was perceived to be a bad credit risk at the time or that US banks somehow were a risk? The answer lies with other factors that also have an effect on rates, such as the inflation rate, supply and demand of money in a particular market and cases where the rates are artificially manipulated by the Central Bank (US Federal Reserve in the case of the US). . In some cases the Central Bank might have a very good and prudent reason to try and intervene by doing things, which will lower or raise interest rates. In fact, this is what is going on every time the Federal Reserve changes the discount or Federal Funds Rate. But it still is an artificial intervention and not a true function of the free market that is changing rates in such a case. In other words, what would the interest rates really be in the US if the Federal Reserve did nothing? In the least, the current inflation rate of 1.6% in the US would have an effect in that interest rates would be certainly greater than this amount. If you factor in money supply, and banks wanted more liquidity or new deposits to loan out, they would raise deposit or CD rates to attract deposits, to address a particular concern which may have nothing to do with credit risk. The flip side of this would mean than loan rates could be higher also, which is what the Federal Reserve does not like to see because it has an economic effect contrary to what they want to see (and why they monkey with bank rates the way they do). What is the point? . Many Central Banks of other countries do not try to manipulate the money supply or the local interest rates, as does the US Federal Reserve or to the same degree. Many cannot afford to, think it is too costly an idea or think it not wise regardless of the cost. Case in point, the decision by the Central Bank of Argentina (which is the same thing as saying the Government) to stop pegging the local currency to the US Dollar. Which, by the way, costs a fortune in that the Central Bank has to tie up foreign US Dollar reserves in the process. The moment they stopped, the exchange rate moved to what it should be without the artificial government support, which is now about 1.40 to US$1. The morale is that every time you try to artificially tinker with the free market, it will cost you - sooner or later. Usually it is something that does not have a direct effect on citizens right away, such as inflation or devaluation of the currency, which often comes later as a result. For this reason, individuals do not think much of it or question the government at the time (because there is no immediate negative effect, but it does come eventually). . Many speculate the US Dollar to take a nosedive in world exchange markets this year, and some say that this is exactly what the US Government wants. Why? US manufactured goods (and there are not many of those anymore) will become cheaper in overseas markets, hopefully boosting production and employment in the US. Also, foreign travel will become more expensive for US citizens, forcing them to travel domestically and spend money at home rather than abroad. However, you the consumer will loose because the cost of foreign made items will go up (due to the devalued US Dollar) which means your purchasing power will go down, and possibly your cost of living will go up (aka inflation, which is a devaluation of the currency). I did not mean to go off on a tangent to answer your letter, but all these things are relevant and the truth is, the average American has no idea what the real free market interest rate is in the US. In fact, I would bet that if the Federal Reserve cut off the artificial cheap money supply to the US banks, you would find out for sure just how bad things really are with the US banks at the moment (and the economy in general). That is, the ratio of bad loans, their actual razor thin profit margins and the incredible dependency on unsecured credit card debt for the bulk of earnings - which is where YOUR money could be going or is being lent out. Right now, the US economy and the banking system is trying to be propped up with cheap money (courtesy of the government) but as someone told me long ago, cheap is expensive. Granted, perhaps it is better to curb unemployment and solve the economic problem in the short-term. However, there is always a price to pay later on, which the average consumer does not think about. Your point about credit risk being a part of interest rates is absolutely correct, but it is only one instrument in the orchestra. . There are many other factors to consider or take a look at also. That is to say, I get the impression that you wish to make the point that interest rates are higher in other markets strictly because they are more risky, which I do not agree with in all cases. With respect to the Dominican Republic, there was a capital shortage in the market (and still is, but less so than before partly due to reduced economic activity). So, as a result US Dollar rates and local currency rates remain high, or higher than other places. This does not mean necessarily that there is a risk, or any greater risk, when investing with a US Dollar bank certificate of deposit in the DR (as opposed to Pocahontus Bank and Trust in the US). This is especially true if you dig a little deeper to look at what your bank is actually doing with your money, and what percentage of loans on its books are secured vs. unsecured (home mortgages vs. credit card debt for example). Rates have come down slightly in the Dominican Republic but are still higher than in the US, why is this so? The simple answer might be that yes, perhaps there is a perceived higher risk (because it is a foreign or non-US market) and local banks have to compensate for this to attract investors (which may be more psychological than anything else). . However, this then does not explain why interest rates in Panama are only very slightly higher than the US (and US Dollar rates in the DR higher than in Panama). After all, most American investors would probably put all Latin American countries together and hold the opinion that the risk of having your money in a Panama Bank is equal to that of having your money in a Dominican Bank. That is to say, I tend to think Americans in general believe bank deposits outside of the US are somehow risky no matter what the country. So, what is the difference or the reason for higher rates in the DR? The answer is need for capital to support the growing economy, which has been growing that much faster than it was in Panama and other countries as well (within Latin America). Panamanian Banks, by the way, have so much money they do not know where to invest it all, which is why much of it was put into real estate (and why you now have or did have a glut of new luxury apartment buildings in Panama). The Dominican Republic would very much like to have that problem (more money then they need), so rates can come down and local people would not need to pay 25% for a car loan or home mortgage. Money is like any other commodity, such as sugar or coffee. When a commodity is in short supply, the price goes up, or when there is more demand than what is available, the price goes up. What is the price of money? Interest rates. . By the way, rates have dropped like a rock in Mexico. Do you think this is because investors now think Mexico is a safe place to invest? I cannot comment on the Japanese mutual fund that invested in Enron, other than to say Enron was supposedly the 7th largest American Company. I am sure quite a number of people, including the former employees, are crying over the pretty bonds and stock certificates suitable for nothing more than a wall hanging right now. You are on the right track to say investors should investigate individual companies and even individual banks with regards to operations, cash flow and any credit risks. But risk alone is not the single deciding factor as to why interest rates might be higher in one country vs. another. . . Another Reader offers the Following: . Joe Bannister, the former IRS investigator, who like many, came to the conclusion that personal income tax is illegal, has issued this email. Last July, U.S. Assistant Attorney General Dan Bryant and Congressman Roscoe Bartlett signed an agreement to hold a recorded, congressional-style meeting on Capital Hill,in a public form, to give American citizens the opportunity to challenge the legality of the personal income tax. This meeting will take place on Capitol Hill on February 27 and will be telecast live. If you are interested in this subject matter, please read the information below and at their web site www.givemeliberty.org, and pass on to like- minded individuals. . EDITORS REPLY: Thank you for the information and I have gladly reprinted it for those having an interest. Personally, I think Mr. Bannister will have an easier time trying to pull a decayed tooth from the mouth of a Gorilla, without anesthesia, than he will making any headway with the powers that be. However, I wish him well and give him my admiration for trying. . . Another Reader Send in the Following: . Canadian passports go high-tech By Jennifer Lang - Terrace Standard . The cost of a new passport jumped to $85 for adult Canadians earlier this month, when the federal government announced it will spend $7 million on added security measures for passports. If you plan on travelling anywhere outside Canada's borders, you - and your children-are going to need one. Foreign affairs officials have always advised Canadian Travelers to use valid passports as identification when heading to the United States - or abroad. The U.S. now requires all Canadians to produce picture identification at border crossings and at airport customs. There are changes to the passport application process for Canadians as well. Applicants will be now asked to provide their employment and residential history, and background information and checks on guarantors will be enhanced. Children under 16 will also need their own passports to travel. Post Sept. 11, the government is pushing ahead with plans to develop a high-security passport designed to make fraud more difficult, including embedded photos, holograms, and other security features. The government is also developing a pilot project that uses biometrics features-think DNA samples; fingerprints or even iris scanning-too help verify the passport owner's identity. It also plans to introduce a new identity card for Canadians with landed immigrant status or who are here on work and student visas. Since the attacks on the U.S., the number of Canadians applying for passports has risen by more than 40 per cent. Government officials' say that's probably because people want identification that helps them travel with less hassle. Birth and baptism certificates, for example, are no longer accepted as valid identification by U.S. customs authorities. Information in this story came as a result of security briefings sponsored by the Department of Foreign Affairs ad International Trade in conjunction with the Canadian Community Newspapers Association. . EDITORS REPLY: Thank you for the information. A few things stand out to me from the article. One, passport applications have increased by 40% despite the fact that Canada is participating in the very same recession as the US and as such should discourage more costly foreign travel, not the other way around. The bottom line or conclusion I reach is that more Canadians than ever are planning on expatriating (leaving for good). Canada will become one spacious place with all those people gone (presumably gone with their money). Two, Americans no longer trust their friendly neighbor to the north, now requiring all sorts of complicated ID to enter the US. I am not going to comment one way or another other than to say it is an interesting change in policy. Third, what does employment history have to do with getting a passport? I thought, a citizen was a citizen and proving so is enough to get a travel document from your own country. And what exactly is a guarantor and how does it relate to a passport? Do you now have to guarantee you are NOT expatriating from Canada, and if you do, they take your mother's house away (if she is the guarantor)? I have heard of countries trying to guarantee that visiting foreigners will not overstay their tourist visa, or stay with the intent of working illegally inside the country. But does this mean the Canadian Government wants to guarantee that its own citizens do not escape or leave permanently? This is what it sounds like to me. Maybe someone can write in and clear this up? . Many people in Government today seem to forget one basic premise, which is that government exists to serve the people and not the other way around. Former US President Bill Clinton once used the term worker-citizens to describe I guess what he considers as the ideal member of society. I do not know if this was some Freudian slip on his part or not, but it alludes to the thinking that citizens only exist to conform and work hard to support the state (financially and otherwise), no matter what the state does or says. Certainly a symbiotic relationship exists between a government and it's people. Some would say a social contract between the two and I would add an economic contract as well. However, both sides need to be in agreement and also to fulfill each side of the contract. Citizens do need to pay SOME taxes to maintain and support the government and government needs to fulfill its part in providing the basic services it is charged with providing. I will also add that government needs to behave in a fiscally responsible way with the taxpayer money they are collecting and charged with disbursing in regards to its activities. My point has always been - what are the citizens' rights when government does not behave in a fiscally responsible way or changes its perceived scope of duties in midstream? In other words, paying your fair share of taxes so that government can provide basic services (roads, schools, police, etc.) is agreeable to most people, in my opinion. However, acting as a conduit for simple wealth distribution or as a tool to carry out certain socialist ideals is not the proper role of government or at least this is what I believe. Socialism is a nice idea, but it does not work either in the fiscal sense or otherwise. That is, it costs a great deal of money, it often wastes money in bureaucratic management, and it certainly stifles the motivation and initiative of those people trying to work 18 hours a day to provide a comfortable life for themselves or their families. In fact, I would say that such a role is NOT what most people originally signed up, believed in or had in mind when fighting for an independent government some 200 years ago. This is the case for the US and Canada generally speaking, although Canada's historical past is different - yes I know. So what is the point? In the case of this new initiative in Canada with regards to passport applications, it would seem this is nothing more than a tool being implemented to enforce compliance of the fairly new socialist agenda (new meaning only about 50 years old). In other words this idea of the good little worker bee - non-thinking citizen drone toiling away for the so-called good of society (or what others define as being the good of society, which not everyone blindly subscribes to). AND now, in the name of fighting the bad guys, if you are not a good little worker bee (or subscribe to this agenda), well - no passport or government issued travel documents for you my friend (a government policy unthinkable just one year ago). Perhaps this is an over reaction on my part. Perhaps I am reading too much into it, but this is the only conclusion I can come to when I hear employment records and so on required when applying for a travel document. What does your employment history have anything to do with a driving license, a passport or any other kind of government issued document for that matter? Why is it important to prove you are currently employed - that you were working or what your profession is? What difference does it make and how does this help fight terrorism? Or is all of this documentation to demonstrate you are the good little worker bee conformist? That is, that you are a good socialist paying into the state? Sounds more like Cuba, the former Soviet Union or Red China to me. . . Another Reader sent in the Following Comments: . The true Pledge of Allegiance of the United States: . I pledge allegiance to the dollar of the United States of America, for all the things that it can buy, one goal, to line my pocket, for myself, with no regard for all. . EDITORS REPLY: Maybe. Maybe the politician's oath when they are sworn into office. . . Another Reader Writes: . John, Good newsletter as usual! . This writer at WorldNetDaily (our previous newsletter) is still predicting far more than a recovering recession here...more like a pronounced depression...is he just trying to sell his book maybe? Anyway you happened to mention a country in which we have incorporated and bank in your letter this week. We did it out of fear primarily but after reading this Enron stuff - see that they did it often (900 + times). Now as I understand you, when a return (Tax) if filled out you are supposed to answer the question about financial interests outside the USA. It seems, according to the article below that you can have subsidiaries in tax havens thus keeping profits earned overseas from being taxed in the USA. Do these guys just ignore answering that IRS question because it's a subsidiary business apart from us jurisdiction or do they lie? Could we put an office there in DR in your free zone and be conducting a subsidiary apart from the USA? Being that all our income is from dozens of countries outside the USA? Or, does it really make a difference in our case where we are located physically, due to the fact all our income is not from USA sales. We are an Internet Corp. . News Article Link: . http://www.nytimes.com/2002/01/17/business/17TAX.html . Tax experts said corporations create offshore subsidiaries in tax havens for many legitimate reasons, including keeping profits earned overseas from being taxed in the United States, avoiding American regulation and insulating foreign business partners from American tax law. These havens are also attractive because they do not require companies to disclose anything about their financial dealings . EDITORS REPLY: Thank you for the news link and your letter. You have some very good questions, which I will answer as follows: . First and foremost, it not illegal for US citizens or US Companies to form Offshore Companies, trust structures, Panama Foundations, etc. In fact, one might say they encourage you to do so because of all the taxes and redtape that they hit you with. However, the IRS is quite aware that people or companies use such structures as a tax planning mechanism and have tried to close any previous loopholes accordingly. One of the loopholes that existed before concerned the definitions used in the tax code regarding such structures. That is to say, what defined a domestic (US) tax connection between a US citizen and an offshore structure (and or a US company as well). Of course there are ways around this, which is what the use of things such as nominee directors, using more than one structure in conjunction with the other, etc. are all about Getting back to the point, you may or may not have a US tax liability depending if you fall under the definitions and also depending how you manage your affairs. I do not know how Enron had these companies set up, but generally speaking you could have a US tax connection or liability when: . You or your domestic incorporated company owns a certain percentage of stock in a foreign company, have cross ownership of stock between the two, share the same directors between the two, or are listed as a beneficiary of an offshore structure (in the case of a trust or foundation). That is to say, if some of these litmus tests apply, the IRS may view the relationship or arrangement as a tax dodge and therefore claim US (domestic) income taxes due on ALL the earnings or profits of the offshore structure. Of course claiming you owe taxes and actually collecting are another story altogether, which is why the US Government would very much like the cooperation of smaller nations to do their tax reporting and tax collection or enforcement for them. . However, the small country then looses the one incentive foreigners might have to invest there in the first place and loose a valuable tool for economic growth and expansion in their own country. There is the rub. . . Another Reader Writes: . Hi John . I love you and your company, and reading what you have to say. This US government pisses me off. They spend trillions of dollars on a dead end drug war, which includes costs of warehousing millions of American men and women for drug related convictions. But they won't spend money on education, which is really the real answer to their drug problem, anyway. Education is how to fight the drug problem (not war). But you can't reason with them. That is why I want out of this country. Thanks . EDITORS REPLY: You are not alone. . . This information has been compiled and presented by John Schroder of Ascot Advisory Services, for the benefit of clients and readers. Ascot Advisory Services provides assistance with such matters as offshore company formation, Panama Foundations, offshore banking, and special services in the Dominican Republic regarding residency, free zone applications, etc. For more information: |