Wealth International, Limited

Offshore News Digest for Week of October 23, 2006

Note:  This week’s Finance Digest may be found here.

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You can make out a fast moving boat in the distance as it steers towards you on the deep-swelling, turquoise waters that separate the islands of Nevis and St. Kitts, in the West Caribbean. The trip is interspersed with white plumes of water that spray out, as the boat reconnects with another wave. It must be Tambo, the only local boat-taxi to be out in his 6-seater boat in this heavy sea.

Tambo is just one of the characters of Turtle Beach life that is starting to attract the attention of people looking at development land for holiday homes or retirement properties on the southern peninsula. Land is still relatively cheap at $8 per square foot compared to Frigate Bay ($12/sf), or Antigua ($15sf). This is a beautifully lush, narrow peninsula with central peaks that drop down to 10 miles of desolate, sandy beaches and unhindered, mesmerizing views across to the island of Nevis. We fell in love with this area, buying land a few years ago for $4/sf and there are many opportunities to still get in early before full off-island developments take hold.

St.Kitts, an island of 64 square miles has a population of approximately 46,000. Its major industry used to be sugar cane, but when the last factory closed in 2005, a large percentage of this land became government controlled and the island focused heavily on tourism. isitors to the island can slowly pass their days going golfing, scuba diving, sea kayaking, trekking through the tropical forests to the top of the island volcano, or island hopping over to Nevis with its almost permanent white cap of cloud hanging over its volcano.

House prices above Turtle Beach range from $400,000 to $1 million. Building on the island can be frustrating, slow and costs can escalate, so be sure to follow up on all references from builders. Talk to locals and find out which architects are recommended the most and go look at the homes they have built. Non-nationals purchasing land must apply for an Alien Land Holder for permission to buy. The license, primarily for background checks, takes a couple of months. Residential Property tax and Land House taxes vary, depending on location and type. For example, the southern peninsula is 0.5% of the market value. Frigate Bay is calculated by taking 4% of the market value (property or land), then taking 5% of that value to arrive at the annual tax. A 25% rebate is given for properties occupied by their owners, solely for residence. Purchasers only pay local attorney fees of about 2% of the purchase price for handling and transfer of the property title, and the Alien Landing license.

Time is running out. Stop your dreaming as you flip the pages of the glossy travel magazines and “wish you were there” photographs and take the plunge. There is still time to get in at the ground level and “Live the Life” on Turtle Beach.

Link here.


Wishing to escape the artificial pressures of Western living, burdened by endless debt and payments, fed up with the emptiness of acquisition and with their government (have you noticed the shocking number of new political books appearing with the words “lie” and “lying” in their titles?), more and more Americans and other “affluvia” are turning to sites like this one [EscapeArtist.com]. They seek less stress, simplicity, safety, and a coconut in the shade. Perhaps they seek refuge from corporate indifference, from the spectrt of identity theft, from calling a number and being put on ignore. These things can be had, I am glad to say – but at a price, I am sad to say.

Consider Sabah, one of two states that comprise East Malaysia, on the northern tip of Borneo. When I was a kid poring over atlases in the library after school, Borneo was the end of the earth, a land of mysterious and terrifying headhunters and fevers, from which few returned. Today you can take packaged river cruises in the Indonesian part of Borneo, to the south, and venture into its dark heart where headshrinkers may even still be removing neuroses by removing heads. Contrast that with Brunei, the third nation on this island and one of the richest and most modern in the world, and somewhere in between these extremes you will find Sabah and its poorer sister-state, Sarawak.

Modern life in the West has been likened to a jungle, a tangled, out-of-control biomass, struggling ever upward toward success and sunshine, roots deep in past decay, with the strong and the parasites living together in uneasy, messy equilibrium … or do I carry my metaphor too far? Well, the jungle – both jungles – are here in Sabah too, and the best way to escape them completely is to find a clean and cheap place to live, with decent roads and services (and there are plenty of those here), cut up your credit cards and throw away your cellphone. If you are not prepared to go that far however, the country offers what it calls its “Malaysia: My Second Home” plan. This is a welcoming incentive program whereby certain foreigners can reside here, extending their visas more or less indefinitely. If you have a nestegg, a home to sell or sufficient income of some sort, the requirements are not onerous, but if it happens that you are an impecunious teacher/writer/composer like myself, vastly wise, compassionate, and with a cosmic sense of humor but living on a small pension, yer outa luck, see?

But if you can meet the requirements of mm2h, you have access to a peaceful and prosperous land where cocoa grows on trees, where hurricanes hardly ever happen, and where the living is easy. Mostly. Always remember though, the jungles, both of them, await the unwary. Don’t venture into the rain forest without your leech socks, and don’t flee the pressures of home just to come here and restart them! Relax with your coconut after a satisfying $3 meal and enjoy the slow pace – maybe study Eastern philosophy and see what you have been missing.

Link here.


A recent Abbey National survey showed that Languedoc Roussillon was the most popular area for UK overseas buyers, with the majority of those buyers intending to invest between £50,000 and £150,000 in the project – and with good reason. The region has continued to buck the French property price slow-down with consistent monthly price increases of over 10% (as reported by property specialist Creme de Languedoc) for houses and apartments. As these increases are starting from a lower base than the more famous neighboring Provence, investors can still pick up a great property for considerably less than a UK equivalent.

With millions of visitors to the region last year, the second-home, rental or investment markets are unlikely to disappear, even given the increased competition from emerging Eastern European markets, due to the strong underpinning by the tourism industry and local demand. But will these prices continue to rise? Well this is the million euro question, and as ever the economics of demand and supply will dictate this. Nobody can be certain but there is a strong evidence to suggest that there is still plenty of room for growth in this ever popular region. Here is why.

Link here.


Panama is embarking on an ambitious expansion of its storied canal to accommodate today’s larger ships, recognizing that one of the engineering wonders of the world badly needs an update. In a referendum marred by relatively low turnout, voters Sunday authorized the construction of a third set of locks so that vessels too wide for the current 108-foot-wide sections can take the shortcut between the seas.

President Martin Torrijos’s government said the $5.25 billion project, the largest in the canal’s 92-year history, would create 40,000 jobs in a country where 40% of people live in poverty and were unemployment sits at 9.5%. Currently the canal employs 8,000. The Panama Canal Authority, the autonomous government agency that runs the waterway, says the project will double the capacity of the canal. Construction is set to begin in 2007 and will take up to eight years to complete. It will be paid for by increasing tolls, which will pay back $2.3 billion in loans to cover the initial costs.

Critics contend that costs could balloon for this debt-ridden country and the size of the program could lead to corruption. “The expansion is necessary, but we all have to watch closely, make sure there is not embezzlement and corruption,” said Igor Meneses, a 34-year-old advertising executiv is a lot to steal.”

On the sweltering streets of Panama City, those wearing green T-shirts, bandanas, caps and vests supporting expansion were everywhere Sunday. Cars and trucks with “Yes” bumper stickers and flags jammed streets. “Voting ‘no’ is like closing the door on the canal. It’s the top source of income for Panama and improving it means more money for the government and less poverty,” said boat salesman Leonardo Aspira, who sported a “Yes” shirt and baseball hat in Kuna Nega, a largely Indian town of dirt roads and banana trees on the outskirts of the capital. About 78% of voters favored of the expansion, with 95% of polling stations counted by the country’s electoral tribunal. Turnout among the more than 2.1 million voters was 43%.

Link here.


Mexico, unable to borrow in pesos at a fixed rate for longer than a year as recently as 1999, plans to sell 30-year local-currency bonds as slowing inflation and a narrowing budget gap spark demand for the nation’s debt. Local pension funds will be the main buyers of the securities, said Alberto Ramos, senior Latin America economist at Goldman Sachs. The funds, confident inflation is tame enough to preserve the value of longer-term bonds, last month had a record 23.4% of their money invested in fixed-rate peso debt maturing in a year or more.

The auction marks the first sale by a Latin American government of 30-year fixed-rate, local currency bonds, underscoring Mexico’s rebound from a devaluation in 1994 that caused the banking system to collapse. Annual inflation was 4.1% in September, down from 52% in January 1996. “This bond is coming out at a great time,” said Alonso Madero, who manages 8.2 billion pesos ($756 million) at pension fund Actinver SA. “The medium- and long-term economic outlook in Mexico is positive. I expect there will continue to be a great deal of interest for the long end of the yield curve in Mexico.”

The 20-year bond, the government’s current longest fixed- rate peso security, yielded 8.27% on Monday, according to Santander Central Hispano SA. That yield is down 185 basis points from when the government first began selling 20-year fixed-rate securities in January 2005. Mexican yields have declined as President Vicente Fox reined in spending and took advantage of record oil revenue to post the country’s first budget surplus in 10 years, helping keep the peso stable against the dollar and bring down inflation. The year-to-date surplus was 112.6 billion pesos ($10.38 billion) in August. The government targets a balanced budget. President-elect Felipe Calderon plans to continue Fox’s policies after taking office December 1. Calderon inherits an economy growing at an estimated 4.5% for this year, according to the government.

Link here.


After ten years of fruitless (so to speak) negotiation, Ecuador, the world es largest exporter of bananas, plans to file a complaint over EU banana tariffs with the World Trade Organization. The EU unilaterally imposed a new import tariff of €176 per ton to apply starting January 1, 2006 to bananas imported from countries – mainly in Latin America – enjoying Most Favoured Nation status, which includes Ecuador. The new import regime also includes a duty-free annual import quota of 775,000 tonnes for ACP bananas. The new regime, reflecting preference for ex-colonies by a number of EU member states, including the UK, was not approved by the WTO – and certainly not by Ecuador, which continued to negotiate in hope of a better outcome.

Link here.


The adoption of International Financial Reporting Standards in Canada will have a major impact on reporting standards for Bermuda firms, the new president and chief executive officer of the Canadian Institute of Chartered Accountants, Kevin Dancey FCA said. In his role at CICA, he is directly involved in issues of the profession not only in Canada, but globally. “International Financial Reporting Standards (IFRS) will replace Canadian Generally Accepted Accounting Principles (GAAP) over the next five years,” Mr. Dancey said.

He said the industry is also introducing mandatory professional liability insurance, mandatory continued professional development and is improving the consistency of disciplinary procedures. A large majority of Bermuda firms use Canadian GAAP so the change in reporting standards will have direct effect on reporting standards followed in Bermuda. “This represents a significant change and will be a major transition,” he said. “In Canada we felt that we had to adopt global standards of financial reporting.” International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) is also working closely with the Financial Accounting Standards Board (FASB) in the U.S. toward the convergence of existing U.S. and international standards.

Institute of Chartered Accountants of Bermuda Council chairman Tom Conyers said, “Financial reporting and business is complicated and reporting standards for the insurance industry is also complicated. Making one global standard is big step to simplicity.” Mr. Conyers said the growth of the reinsurance industry in Bermuda has meant that public accounting firms are under a big strain to meet the demand for qualified and trained resources to comply with rules such as Sarbanes Oxley and how to evaluate internal controls and report. “There is a great career ahead for Bermudians entering this profession on the Island and obtain training and experience as good as anywhere else in the world.”

Link here.


Coupled with the trend in globalization, the communications technology revolution of the 1990s has transformed an impoverished, sclerotic, Soviet-inspired state into a booming center of world capitalism in which businessmen like Bill Gates are greeted with more pomp and circumstance than most visiting heads of state. Despite the economic reforms of the past two decades, India’s state sector still resembles the decrepit socialist experiment described above. Perhaps even worse, most of India’s roads are in abysmal repair, and the traffic congestion in most cities is bad enough to make Los Angeles rush hour look appealing. Moreover, living conditions for large segments of India’s population are appalling. The Financial Times reports that there is one toilet for every 1,500 people in some of the poorer parts of Mumbai (previously known as Bombay).

The good news is that the power of information technology has allowed the new economy to largely bypass the state and its rickety infrastructure altogether. It has also brought unprecedented wealth to India’s educated middle class while supplying the West with a vast supply of skilled knowledge workers at a fraction of the price it would cost at home. This new generation of young professionals is earning and spending at an unprecedented rate for India, and this trend will only continue as they progress through their life cycles – marrying, buying homes, and raising their children – spending ever more in the “keeping up with the Jones’s” tradition of Middle America. Even though the country is still in the early stages of its economic modernization, over the longer term India’s prospects are brighter than those of China, South Korea and Taiwan.

In the July/August 2006 edition of Foreign Affairs, Gurcharan Das published an insightful article titled “The India Model” that explains how the country has taken a very different path from most of its contemporaries in Asia. It is one particular development – the emergence of a viable domestic consumer economy – that we find particularly appealing. With most of the developed world facing an unprecedented demographic-induced recession or even depression after 2010, countries that have viable domestic consumer markets should fare much better than those that are focused on exporting to the West. This makes India’s growth boom much more durable than that of, say, China. Das’s article points out that personal consumption accounts for 64% of India’s economy, vs. 58% for Europe, 55% for Japan, and 42% for China.

U.S. consumption has hovered around the 70% mark for many years. In an economy dominated by services and information – like that of the U.S. today and the one developing in India – savings and capital spending become less crucial to sustaining growth. China saves and then invests an enormous percentage of its GDP in building new manufacturing capacity, which puts China at a real risk for over-capacity and deflation in the event of downturn. India, in contrast, appears to be skipping the industrial phase of its development altogether and moving directly to services and information, thus looking much more “American” than any other developing country.

India’s demographics are slowly beginning to look more American. After decades of high birthrates and overpopulation, Indian mothers are having fewer children as more join the ranks of the middle class, while spending far more money on the ones they do have. Expect India to boom as its enormous young population begins to move through its Spending Wave over the next 40-50 years much like the American Baby Boomers of the post-war generation.

Despite the overwhelmingly bullish case for India over the coming decades, it is important to remember that India is still an underdeveloped country and is at a much different stage than many other countries labeled as “developing”, such as South Korea or Taiwan. Per capita income is still pitifully low, on par with Iraq or Cuba, and India’s government is certainly not immune from the occasional populist rash of anti-globalization sentiment. There will definitely be setbacks that rattle investors. India also has an unresolved conflict with Pakistan that could erupt into war at a moment’s notice.

Needless to say, India is volatile. The world-wide stock correction of this past summer that sent the S&P 500 down 8% took a full 30% cut out of Indian stocks. For this reason, while we are enthusiastic about India’s prospects, Indian stocks must be viewed with extreme caution and are best bought after substantial corrections.

Link here (scroll down to piece by Charles Sizemore).

India’s Special Economic Zones set to raise $5 billion, says premier.

India’s SEZ program has run into stiff resistance, but premier Manmohan Singh is sticking to his guns against a motley crew of opponents. The SEZ law was passed in 2005, but detailed regulations were issued only in February this year, and there have already been more than 500 applications for SEZ status, of which 180 had been approved by the end of September. They range in size from 10 to 100 hectares, and give firms 100% tax exemption on export profits for first five years. Foreign investors are automatically allowed to have up to 100% direct control of firms in SEZs.

The initiative is seen as part of the government’s attempts to liberalize India’s constipated economic structure, where every move forwards falls prey to special interests. And it is exactly those special interests which are intent on stopping the SEZ program in its tracks. Agrarian interests fear that SEZs will use up farmland (this in the third biggest country on earth and one of the least developed). IMF officials, the head of the Central Bank and politicians from the left and the right are among those who are opposing the program for a variety of other reasons. The Communists, who support the government’s majority, argue that displaced farmers should receive more compensation. And even the Finance Minister has said publicly that he fears the loss of tax revenue that the SEZs will bring about.

One of the more reasonable objections to the SEZs is that there are going to be too many of them, and they will be too small. But in India, industrial and even fiscal policy in every state is at the whim of local authority, and the Prime Minister presumably sees the SEZ program as a way of breaking up the stranglehold on innovation and development exercised by petty officials. Another objection with some teeth is that the WTO may well be used by other countries to attack the SEZ program – but it has not happened to China, with vastly more expansive SEZ areas. So far the government is standing firm.

Link here.


By the end of October China’s foreign-exchange reserves are likely to top $1 trillion, twice their level two years ago and more than one-fifth of global reserves. This handsome sum would be enough to buy all the gold sitting in central banks’ vaults (indeed, twice over) or almost all of London’s residential property. China’s massive hoard is the result of its large current-account surplus, significant inward foreign direct investment, and big inflows of speculative capital over the past couple of years. In theory, flows of foreign money into China should push up the yuan, but China has resisted this, forcing the central bank to buy up the surplus foreign currency.

China’s official reserves already far exceed what is required to ensure financial stability. As a rule of thumb, a country needs enough foreign exchange to cover three months’ imports or to settle its short-term foreign debt. China’s reserves are equivalent to 15 months of imports and are six times bigger than its short-term debt. The explosion in reserves is also a headache for the central bank. It creates excess liquidity, which risks fuelling higher inflation, asset-price bubbles and imprudent bank lending. There are two simple ways to stop reserves rising. China could set free its exchange rate or it could relax restrictions on capital outflows and allow private citizens to hold foreign assets. Significant moves of either kind seem unlikely in the near future. So long as China runs a large external surplus (the natural result of its high saving rate) and refuses to set its currency free, its stash of foreign currency will probably continue to mount.

How that money is invested has big implications for the world economy, not just for China. Brad Setser, head of global research at Roubini Global Economics, estimates that about 70% of it is invested in dollars, mainly Treasury securities. This has propped up the dollar and reduced American bond yields – by up to 1.5 percentage points according to some estimates. A big shift out of dollars could therefore push up bond yields and hence mortgage rates, damaging America’s already crumbling housing market.

China’s central bank is thought to be switching from Treasury bonds to American mortgage-backed securities and corporate bonds in an attempt to earn higher yields. Chinese officials have also discussed in private the need to diversify reserves out of dollars in order to reduce exposure to a big drop in the greenback. The bank may be putting a bigger slice of any increase in reserves into euros and emerging Asian currencies, but so far there is little sign of a shift out of its existing stock of dollars. One problem is that China’s investments are so big that they move markets. Fear of a capital loss, and dissatisfaction with unrewarding yields, have triggered a flurry of ideas on how to put the money to better use. One popular idea is to use some of China’s reserves to buy oil and other commodities. The snag is that stockpiling oil would push up prices, yet absorb only a tiny proportion of the sums at China’s disposal.

Another proposal is to spend more money on infrastructure investment, which would yield a much higher return than American bonds. However, since China’s investment already accounts for 40% of GDP, it is not clear that China needs more. Writing off banks’ non-performing loans might seem more sensible. But all proposals to spend money at home misunderstand the nature of foreign reserves. The problem is that conversion of the foreign currency into yuan would put upward pressure on the yuan and so force the central bank to buy yet more foreign currency to hold it down. Reserves would return to their original level. The only real solution to the poor return on China’s reserves is to stop accumulating them. Before that happens, China’s reserves could well hit $2 trillion.

Link here.

China cracks down on corruption.

China has punished more than 17,500 officials in the first eight months of this year on corruption charges, according to state news agency Xinhua. A total of 67,505 government officials have been punished in China for corruption since the beginning of 2003. The government is trying to crack down on rampant corruption, fearing it could weaken the Communist Party’s rule. China’s chief prosecutor, Jia Chunwang, told a conference on corruption being held this week that “corruption, if not controlled, would undermine democracy and the rule of law and engender an increase in organized crime and terrorism.”

The most publicised corruption case in recent months is the ongoing investigation into alleged misuse of a multi-million dollar pension fund in Shanghai. More than 50 people have been detained so far in connection with the scandal, a Beijing-funded Hong Kong newspaper has reported – including several senior Shanghai officials and businessmen. The first high-profile head to roll in the pensions scandal was Chen Liangyu, who was dismissed from his post as chief of the Communist Party in Shanghai last month. Also tainted is the country’s chief statistician, Qiu Xiaohua, who was dismissed from his post. One of the country’s richest men, Zhang Rongkun, was also arrested over the weekend. The funds were allegedly used to make illegal loans and investments in real estate and other infrastructure deals.

The corruption scandal demonstrates the problems facing those who wish to end graft in China, according to the BBC correspondent in Shanghai, Quentin Somerville. The courts do not operate independently and almost all of those detained in Shanghai have not been seen or heard of since. Auditors and corruption investigators are limited, and the usual checks and balances that expose corruption – such as a free press and regular open elections – do not exist.

Link here.


Nearly four decades ago, South Vietnamese leaders mapped out their battle plans inside the presidential palace in Ho Chi Minh City. When they lost the war, the palace became the base for the Ho Chi Minh City People’s Committee, which worked to impose tight Communist control. But in September it was the scene of a very different gathering – a board meeting of the Hongkong and Shanghai Bank.

In the three decades since Vietnam has gone from communism to a form of capitalism, it has begun surpassing many neighbors. It has Asia’s second-fastest-growing economy, with 8.4% growth last year, trailing only China’s, and the pace of exports to the U.S. is rising faster than even China’s. American companies like Intel and Nike, and investors across the region, are pouring billions of dollars into the country. Overseas Vietnamese are returning to run the ventures. In the latest sign of Vietnam’s economic vitality, trade negotiators from around the world are preparing, after more than a decade of talks, to put the finishing touches on an agreement, possibly by October 26, for Vietnam to join the WTO. President Bush, President Hu Jintao of China, President Vladimir V. Putin of Russia and other heads of state plan to come to Hanoi in mid-November for an Asia-Pacific Economic Cooperation summit meeting.

For Vietnam, the meeting will be a coming-out party, critical to its pride in much the way the 2008 Olympics in Beijing are for China. “I think they are the next China,” said Michael R. P. Smith, chief executive of the Hongkong and Shanghai Banking Corporation. “It’s not the scale of China, but it’s a significant economy.”

The latest Asian economic tiger, Vietnam now produces and uses more cement than France, its former colonial ruler. The main index for the Ho Chi Minh City stock market and a smaller exchange in Hanoi have nearly doubled in value this year. Vietnam has become the talk of investment bankers and investors across Asia. But with such growth has come controversy, in Vietnam and in the U.S. Republicans in Congress are divided over a coming vote soon after the midterm elections: Should the United States grant permanent, full trade relations to Vietnam, given the two countries’ history and Vietnam’s current position, where it sells almost nine times as much to Americans as it buys?

Corporate America is divided, too, over a Bush administration initiative to win votes for full trade status by throwing a bone late in September to Southern senators representing states where textiles are made. Vietnamese officials are furious with Washington over what they see as a last-minute protectionist attempt to limit the exports of their country’s booming garment industry.

In Vietnam, nearly double-digit growth is starting to produce the same shortages of skilled labor as in India and China. Executives at multinationals like Groupe Lafarge of France and Prudential of Britain say that local accountants, human relations managers and other professionals are so scarce that salaries are soaring 30 to 50% a year. Roads and ports in this country are increasingly choked with cars and ships. The congestion is worse than China’s but not yet as bad as India’s. Yet deep-seated corruption has slowed construction.

Balanced against these problems is a government that, like China’s, has embraced capitalism after becoming disillusioned with the widespread poverty and sometimes hunger that accompanied tight state control of the economy. Economic liberalization policies have been pursued in earnest since the early ‘90s, after poor harvests and economic mismanagement left millions facing malnutrition in 1990.

Link here.


Gibraltar-based PartyGaming released its third quarter results, revealing the impact that the firm’s forced withdrawal from the U.S. – along with many of its counterparts – has had. Group revenue was reportedly up 53% to $337.2 million and group revenue from non-U.S. facing operations was revealed to have increased 158% to $92.0 million. However, restructuring its operations following the passage of anti-online gaming legislation in the U.S. earlier this month is likely to cost in the region of $250 million, the firm stated.

Commenting on the announcement, Mitch Garber, PartyGaming CEO, said, “Given the change in our business environment, the Group has already moved swiftly to reduce its cost base. Notwithstanding this, it is expected that the Group’s Clean EBITDA margin for the full year will be significantly lower than it was in the first half of 2006, reflecting the one-off costs of rationalizing our business as well as the fixed nature of certain costs that were previously absorbed by a much larger revenue base.”

Link here.

Betcorp bows out.

Gaming firm Betcorp announced that it has entered into an agreement, subject to shareholder approval, to sell the Group’s gaming operations and operating infrastructure in Antigua and Toronto to Bodog Entertainment Group SA. Betcorp will receive a maximum cash consideration of $9 million payable in five instalments. $3 million is payable on completion and the balance of $6 million in four equal quarterly installments during the 12 months following completion. In addition, Bodog will assume the net current liabilities of the gaming operations of $2 million, implying an enterprise value of $11 million. Had the Group’s gaming operations been closed down, the firm has estimated that the cost of severance and closure would have been approximately $6 million.

Link here.

North Dakota’s poker plan folded by U.S. Congress.

Last week’s best quote from a North Dakotan came from no less than the attorney general. “It’s time to fold ‘em,” Stenehjem said to those who have persisted in pushing for gambling by playing poker online to be be legalized in North Dakota.

Fold ‘em. The game is over before it really began. New federal legislation passed by a Republican Congress and signed by a Republican president makes it all the more a sure bet that it is not going to happen. Judging by his reaction, Republican state Rep. Jim Kasper must have been dismayed to have his pet issue be dynamited by his own party’s powers – especially since it was accomplished by a back-door maneuver executed by the honcho in the GOP-dominated Senate, Majority Leader Bill Frist. He made sure the Internet poker regulation was attached, like a hedgehog riding on an elephant’s back, to a must-pass bill dealing with homeland security of seaports.

The new gambling law prohibits financial institutions from in any way handling Internet gambling transactions. That includes banks and other firms that issue credit cards being forbidden from processing credit card charges rung up by Internet gamblers. It was a goofy idea all along the way that the state-owned Bank of North Dakota could be debased into being a clearinghouse for gambling transactions. For those who dreamed of North Dakota becoming North Aruba, surely they could have more lofty aspirations for our state. Bid bye-bye to hauling in a big pot from cyberspace.

Link here.


The November 7 congressional race will be the most expensive midterm election ever, with spending reaching some $2.6 billion, a non-partisan group that tracks U.S. campaign spending said. “2006 will be the most election for U.S. Congress ever,” said Sheila Krumholz, acting executive director of the Center for Responsive Politics which tracks the influence of money on elections and public policy. The group’s research indicates that spending by candidates in the November 2006 race represents an 18% increase over the last midterm congressional election in 2002. “Money in this campaign has been flowing fast and furiously.”

Link here.

U.S. federal subsidy programs ballooning.

The Cato Institute has released a study showing that a net 271 new federal subsidy programs have been added to the federal budget since 2000, the largest increase in programs since the 1960s. At the same time there has been a large increase in the number of subsidies or “incentives” in the tax code. Chris Edwards, Director of Tax Policy Studies at Cato, says that the proliferation of special interest spending in the federal budget in recent years has created much waste and corruption. Politicians have helped special interests while helping themselves. But the main problem has not been that politicians have their hands in the cookie jar. It is that the cookie jar has grown so large.

There are 1,696 subsidy programs in the federal budget, which dispense hundreds of billions of dollars annually to state governments, businesses, nonprofit groups, and individuals. The number of subsidy programs has increased 44% increase since 1990. The largest recent increases have been in the Departments of Agriculture, Health and Human Services, Homeland Security, Interior, and Justice. The number of farm programs has soared partly due to the bloated 2002 farm bill, and many Homeland Security programs have been added since 9/11.

Mr. Edwards points out that each new subsidy program comes with complex rules regarding eligibility, funding formulas, reporting requirements, auditing, and other types of paperwork. And each new program spawns interest groups that favor program expansion and politicians who battle to keep the subsidies flowing.

Link here.



The U.S. Joint Economic Committee will begin a study of the interactions between the virtual economies of online role-playing games such as World of Warcraft and Second Life, and the official U.S. economy. In a statement, the Committee explained that, “The past few years have seen a dramatic increase in the popularity of online gaming and the virtual economies that accompany them. The population of these online worlds has been estimated to exceed 10 million people worldwide. Because of their newness, some uncertainty exists regarding taxes and intellectual property rights.” Chairman Jim Saxton went on to add that, “There is a concern that the IRS might step forward with regulations that start taxing transactions that occur within virtual economies. This, I believe, would be a mistake.”

The staff of the Joint Economic Committee has therefore begun an examination of the public policy issues related to virtual economies. A virtual economy is defined as the universe of transactions that occur within an online community. These transactions include the sale of goods and services and take place entirely within virtual economies. There is no real-world or physical exchange. However, a real-world value can often be assigned to such transactions using exchange rates or other methods. Based on existing law, if an individual generates cash income in U.S. dollars from transactions in virtual economies, the question may arise whether a tax is due on that real-world income. However, if the transaction takes place entirely within a virtual economy, then it seems there is no taxable event.

The Committee observed that, “Such distinctions should be addressed and resolved in a common-sense manner. Clearly, virtual economies represent an area where technology has outpaced the law. The goal of the forthcoming JEC study is to help lawmakers understand the issues involved and head off any premature attempt to impose a tax on virtual economies.” According to reports, the currency used in Second Life, known as the Linden dollar, is often traded on third-party exchanges and on eBay. In addition, real life companies are expressing an increasing interest in selling their wares to a virtual captive audience.

Link here.


Senator Max Baucus has been holding up confirmation of the U.S. administration’s nomination of a top Treasury official since June because he does not accept that the Treasury is doing enough to close the “tax gap”. Last week, he agreed to study eight strategies to close the gap drafted by the Joint Committee on Taxation. In September, the Treasury unveiled a comprehensive strategy for reducing the tax gap that outlined an aggressive strategy for addressing the tax gap - but it was not enough for Senator Baucus. The Treasury’s latest eight proposals are set out in a 47-page document under the following headings:

Link here.


The USVI is trying to encourage investment in high-tech companies after the Treasury extended the Islands’ 90% tax break to businesses dealing in intellectual property in September. The USVI program allows certain types of business with investment of at least $100,000 and at least 10, mostly local employees, a 90% income tax deduction.

In 2004, the IRS and Congress clamped down on abuse of the program by U.S. citizens falsely claiming to be resident in the USVI in order to claim the tax break on income received from local businesses, or on income attributed to them because of their ownership of such companies. Under the new rules, incorporated in the American Jobs Creation Act of 2004 (AJCA) a person has to be resident for at least six months of the year in order to claim the tax break. Last February, the U.S. Treasury Department and the IRS issued final regulations under the AJCA providing guidance for determining whether an individual is a bona fide resident of a number of U.S. possessions including the U.S. Virgin Islands. The Treasury Department and IRS issued a comprehensive package of proposed and temporary regulations in April of 2005. The final regulations incorporate many of the comments received on the proposed and temporary regulations, including a number of revisions intended to better reflect the realities of life in the U.S. possessions.

Michael Fields, a former top Oracle executive, is now re-marketing the tax-break program based on the September ruling, and the enormous bandwidth available in the USVI through traffic hubs operated by Global Crossing and AT&T. The tax break program was instituted in 1986 and was highly successful until the 2004 clampdown.

Link here.


New draft guidelines have been published under which UK-based investment managers of offshore funds could see their funds’ profits losing their tax-free status in certain circumstances, according to Big Four accounting firm, KPMG. HM Revenue and Customs (HMRC) has published new draft guidelines on the tests which investment managers need to satisfy to qualify for the “Investment Manager Exemption (IME)” enabling profits from offshore funds to remain outside the UK tax net.

KPMG tax partner, John Neighbour, formerly of the OECD and HMRC, where he was in charge of the review of the tests for the IME, warned that, “These new draft guidelines are of huge significance to investment managers, particularly in ‘alternatives’ such as hedge funds. Assuming these new draft guidelines are adopted, they will all need to review their arrangements as a matter of extreme urgency in order to ensure that the funds for which they act maintain their tax free status. We expect most fund managers to adapt their arrangements as necessary in order to remain in the UK and keep the funds’ tax free status.”

The key changes in the new draft guidelines affect the “customary remuneration” test and the “independence” test. Under the current customary remuneration test, an investment manager of an offshore fund needs to demonstrate that the remuneration received for this management service is not less what is “customary” for that class of business. There has been little guidance as to what is meant by customary but under the new draft guidance, HMRC confirms that it will determine whether this remuneration is “customary” by applying the transfer pricing concept of arm’s-length pricing. Mr. Neighbour commented the burden of proof that the arrangements are satisfactory shifts from HMRC to the UK fund managers.

The previous guidance set out a list of circumstances under which HMRC will regard the independence test to be satisfied. The new draft guidance now states that no one factor will be treated as decisive in determining whether the manager and the fund are independent – the list merely illustrates what may be significant. Neighbour observed that, “These moves are the latest steps in the increasing level of scrutiny HMRC is applying to the fund management industry. There is a perception that some fund managers have played a little ‘fast and loose’ and HMRC is tightening up the rules in response.”

Link here.

Continued success of Britain’s financial services industry could be “fatally undermined” by high taxes and oppressive legislation, says report.

The continuing strength of Britain’s financial services industry should not be taken as a given, a new report says, 20 years after the country’s financial markets were first deregulated. The study from the Centre for Policy Studies claims that high taxes and oppressive bureaucratic legislation from the EU could “fatally undermine” the UK’s competitiveness.

The report was launched to mark two decades since the “Big Bang” event that saw the City’s markets deregulated, the distinction between stockbrokers and stockjobbers erased, and the massive leap from open outcry to electronic, screen-based trading. Describing the Square Mile as one of the driving forces behind economic stability and growth in the UK, the report’s authors claim that the City has directly created 700,000 jobs in London alone and has elevated the capital to the premier financial hub in Europe.

But Nigel Lawson, Conservative chancellor at the time of the deregulation, writes in the report that continued success should not be taken for granted. “It is far less difficult to maintain preeminence than it is to achieve it. There is no reason why London should not remain the world’s premier truly international financial centre,” he said. “But the overriding characteristic of the global economy in which we now live and work is that it is unforgivingly competitive, and with the emergence of the new economic giants of the east set to become increasingly so.”

The report concludes that long-term financial success is reliant upon economic nationalism being eroded in the EU, with longstanding free market disputes needing to be ultimately resolved.

Link here.


Members of Hong Kong’s Legislative Council last week supported a motion, moved by Dr. Hon Yeung Sum, opposing the introduction of a Goods and Services Tax in the territory. Commenting on the motion, Financial Secretary, Henry Tang told journalists that, “We are disappointed at the outcome. Actually the biggest difference between the Government and the Hon Yeung Sum’s motion is that the actual effect of the motion will suffocate further discussion on broadening the tax base and a Goods and Services Tax. I hope in this incident, that LegCo members have not misjudged public sentiment nor have they lost a valuable chance to discuss a very important subject in the community.”

Link here.


Chief Minister expresses optimism about the Rock’s future.

A new two-tier system of personal taxation which will encourage the recruitment of expatriates for jobs in Gibraltar’s finance sector is to be introduced next year, Chief Minister Peter Caruana told the “finance” lunch which forms part of the Gibraltar Day extravaganza held in London every October. Raised eyebrows and delighted smiles greeted Caruana’s announcement to the record 140 financial and property development figures who attended the lunch.

Details of the proposals have still to be finalized, but they will provide similar tax revenues as the current system while giving employers – and their expatriate employees – a chance to enjoy similar tax advantages that a string of concessions related to factors such as insurance and home ownership offer Gibraltarians and other permanent residents, Caruana said.

Historically, Gibraltar’s fiscal structure was based on low tax for non-residents and high tax for residents whose burden was eased by a range of allowances. The new measures were an attempt to “eliminate the difference” and rebalance the tax demands, he told his lunchtime audience. The tax burden on residents which had been reduced in recent years would continue to be lowered – particularly in view of the fact that there would be a general election “within the next 18 months,” he remarked later.

The promises of tax changes were part of an upbeat and optimistic speech that Caruana was to echo later when he spoke to almost 1200 guests packed into the central hall of the historic Royal Courts of Justice. In both addresses he stressed the successful outcome of September’s Cordoba talks. These were part of a past year which had been good for Gibraltar both economically and politically, Caruana told the lunch. As well as producing an annual GDP of £602 million, which has grown at a rate between 5% and 7% each year for the past decade, the economy was producing record surpluses … record capital investments yet, at the same time, allowing tax cuts and record Government savings to create a “wonderful” economic equilibrium. “If he asks, I’ll tell Gordon [Brown, Britain’s Chancellor of the Exchequer] how to do it,” Caruana quipped.

Politically the past year had been particularly good, Caruana said. After two years of negotiation, a new relationship with Britain and a new constitution had given the Gibraltar government responsibility for every aspect of the Rock’s affairs other than in matters of defence and foreign policy. It was “as far as you can go without actual independence – which is something Gibraltar does not want.” At the same time, although there had been no shift in either side’s position on the issue of sovereignty, there had been a change in the nature of management of the relationship between Gibraltar and Spain. It had taken 10 years “to persuade Spain, and I suppose Britain, to behave democratically” but the years of work had brought about a wide range of change.

Returning to then broader economic pattern, the Chief Minister stressed that Gibraltar was “committed to a low-tax environment and a competitive tax environment.” However any new tax regime would challenge none of the interests of companies already established on the Rock. In the light of the recent ruling by the European court in the “Azores case” he anticipated that changes in Gibraltar’s tax structures would be made “during the course of next year” bringing about a system of greater parity and eliminating the ring-fencing of offshore businesses. Indirectly acknowledging local concerns about the Rock’s increasing regulatory and compliance requirements, Caruana stressed that while the Government understood the importance of a good and sound regulatory system it also recognized “the need to do the business and strike the proper balance.”

Link here.



For a few years in the late 1990s, the term “asset protection” became synonymous with offshore planning. The offshore tax/debtor havens were booming, and offshore trust companies, banks, mutual funds, and other supporting services were sprouting like dandelions after a spring rain. Many planners came to believe that the only effective method of protecting assets was to transfer them offshore, and more specifically in a foreign asset protection trust. The major European banks that had branches in the offshore jurisdictions created trust and incorporation services to attract the literally billions of dollars that were flowing offshore from the overheated U.S. dot-con economy.

In about two years, this all changed. In 2000 the OECD and FATF announced that they would seek sanctions against the tax havens unless they agreed to enter into treaties with the U.S. and other industrialized nations to allow the investigation and pursuit of tax cheats. Then, in July the Ninth Circuit dropped a nuclear bomb on foreign asset protection trusts in the Anderson case, and judges throughout the U.S. decided that offshore trusts were bad and they would simply throw people into jail until the money would come back irrespective of what the trust documents said. Then 2001 brought the 9/11 tragedy and heightened scrutiny of financial transactions, and particular those involving the offshore havens. The IRS started aggressively pursuing offshore tax shelters. “Offshore” no longer seemed safe or desirable. People who had involved themselves in stealthy offshore tax schemes quietly started filing amended returns and paying their back taxes, interest, and penalties. By the fall of 2001, the offshore world was a mere shadow of the 1990s boom. The Nassau financial services sector contracted to barely 30% of its 1999 size.

Most of the contraction in the offshore industry came from the loss of tax-generated moneys, and undoubtedly some loss of moneys from the decrease in offshore trust formations post-Anderson, as well as the decrease in money laundering activity post 9/11. However, a solid core of the offshore industry remains and is available for use in certain circumstances. For risk management purposes, offshore planning can sometimes provide unique and effective planning solutions.

We have always been strident critics of unreported or “hide the ball” offshore planning. To the extent you utilize offshore planning, everything should be properly reported to the IRS and done in anticipation that creditors will figure it out. Take the fullest advantage of offshore laws, but just do not put yourself in a worse position if offshore secrecy and privacy does not turn out to be what it is advertised to be – because it often has not.

Offshore planning for U.S. persons usually requires extensive reporting, but this reporting basically generates what amounts to a roadmap for creditors to follow in unwinding offshore asset protection schemes. Thus, U.S. persons often must choose between the failure to file the appropriate IRS reporting forms, which will probably lead to fines and possibly lead to imprisonment, or file those forms and give creditors the keys to unlocking the offshore asset protection. Between the two, most people would wisely rather be in full compliance with the law, which is largely why offshore asset protection is much less popular than it was in the mid-1990s when the offshore reporting requirements were significantly more lax.

Link here.

Offshore finance attracts attention.

Offshore financial centers (OFCs) typically refer to low-tax and lightly regulated jurisdictions that provide regulatory infrastructure for individuals or companies to set up companies or banking accounts. They often have numerous financial institutions that conduct business with nonresidents and have external assets and liabilities out of proportion with their domestic economies. The growing volumes of investments destined for OFCs continue to attract the attention of the international community and nation-states. Their concern is to combat tax evasion, money laundering, terrorist financing and other sophisticated fraudulent activity.

The appeal of higher real investment returns, combined with the attraction of secrecy and relatively lower levels of regulation and taxation, continue to drive the popularity of OFCs. Today, there are roughly 50 jurisdictions globally that are designated “tax havens” by the U.S. OFCs offer commercial and financial services in an environment often marked by secrecy – it can be a crime to even divulge the name of an account holder or transmit any account-specific information without a long process initiated by international tax enforcers. While OFCs have become popular locations for individual and corporate investment, the international community has become suspicious. Due to international efforts, secrecy has been on a steady decline as international clampdowns on money laundering and tax evasion have forced tax havens to become more transparent.

OFCs have little incentive to implement increasingly strict regulatory reforms. OFCs that change regulations in response to international pressure will alter their competitive position. Some of this international scrutiny is predictably having negative impacts on OFCs’ profitability. As international regulation and oversight restrict some of the secrecy and financial maneuverability of long-standing OFCs, others inevitably emerge in a bid to capture the growing share of global wealth seeking to stay outside onshore tax and regulatory structures. Moreover, international safeguards to prevent money laundering, terrorist financing or tax evasion can easily result in regulation that hinders the execution of legal transactions.

Link here.


The ranks of people seeking to erase their debts have thinned noticeably in the year since the biggest changes in U.S. bankruptcy laws in a quarter-century took effect. At a public session at the U.S. Trustee’s office in Alexandria, Virginia, on a recent morning, only about half the 50 or so chairs were occupied – in a room that used to be jammed with anxious people and their attorneys. Most were there seeking to file under Chapter 7 of the U.S. Bankruptcy Code, which wipes the debt slate clean after certain assets are forfeited. The bankruptcy trustee’s red-jacketed files on them land with a thwack on the official table, fattened by new documents required by the landmark bankruptcy law that took effect on October 17, 2005.

After an 8-year campaign by banks, retailers and credit card companies, Congress changed the law to require for the first time an income-based test for measuring a debtor’s ability to repay obligations. Those deemed to have insufficient assets or income can still file a Chapter 7 bankruptcy. But those with income above their state’s median income who can pay at least $6,000 over five years are forced into Chapter 13, where a debt repayment plan is ordered. In Virginia, where the median annual income is $43,000, more cases are ending up in the latter category. “It’s designed to make life miserable for anybody who owes money,” says Lawrence Brooke, an attorney in Alexandria, across the Potomac River from Washington, D.C. “It’s a help-the-banks, squish-the-little-guy law.”

Numbers tell the story. There were 263,660 personal bankruptcies filed nationwide in the first half of this year, down dramatically from 851,683 in the first six months of 2005 and 809,867 in the same period in 2004, according to the American Bankruptcy Institute, an organization of bankruptcy judges, lawyers and other experts. Chapter 7 filings accounted for 58.8% of this year’s first-half total, down from 75.8% in the first half of 2005 – while filings under Chapter 13 debt reorganization jumped to 41.1% from 24.1% a year earlier.

Brooke is one of several lawyers in northern Virginia who have abandoned consumer bankruptcy work since the new law took effect. “I won’t have anything to do with it,” he said, even though it has reduced his income. Brooke said the paperwork hurdles for debtors to qualify for Chapter 7 have become insurmountable for many, and the workload and aggravation for attorneys have increased. “It’s a whole different game now,” said Gordon Peyton, one of the trustees in Alexandria. “It’s much harder to file bankruptcy now.” Bankruptcy lawyers say the required changes have meant more work for them, and they are charging clients more for their services.

Proponents of the law say it has created a more balanced system that eliminates abuse and provides debt relief at the level at which people truly need it. But some experts predict bankruptcy filings will eventually rebound. Filings “will come back,” said John Hartgen, spokesman for the American Bankruptcy Institute. After the shakeout period, with the underlying causes of indebtedness – such as job layoffs – still prevailing, equilibrium should return, he said.

Link here.


Americans are drowning in credit card debt – over $5,000 on average. A recent study by the Government Accountability Office found that credit card companies do a poor job disclosing fees. Below we tell you what you need to know about fees and disclosures.

Here are some fees you need to look out for – fees for making payments over the phone, fees for balance transfers, fees for increasing your credit line, over-limit fees and cash-advance fees. They can range from $10 to over $30. And penalties are far stiffer than they were in the past. Late fees have more than doubled in the past 10 years. And if you miss a payment – even by a few hours – your interest rate could increase to 30%, according to Curtis Arnold of cardratings.com.

All credit card offers must have a disclosure box that lists the annual percentage rate, finance charges, and annual fees. But what you want to know is what triggers a late charge or whether the credit card company has a universal default clause that raises your interest rate if you miss a car payment or you are late on a mortgage payment. That information is in the Card Member Agreement details. Make sure you call the customer service line and ask questions about the specific details of the card.

If you have a corporate credit card, your personal credit may still be on the hook. Late fees on company cards can lower your credit score and bump up the interest rate on other cards – even if it is your company that is late paying the bill. 60% of federal employees and 23% of private sector employees have corporate cards, says Rick Palmer of Eastern Illinois University who has studied this issue. Bottom line is that your name is on the card, so you may be on the hook. First, find out if your corporate card is listed on your credit report. Then you will want to know what your company’s policy is when it comes to payment. Of course make sure you file your expense reports with plenty of time to spare.

Credit card companies are trying to encourage you to use plastic to pay for small transactions – like coffee or a magazine – by not requiring a signature on payments less than $25. This is not a good idea since it is often hard to remember all the “little purchases” that can really add up at the end of the month.

Link here.


On its 50th anniversary in 1998, Israel abolished exchange control. All of a sudden, Israelis were free to conduct any transaction in any currency in any country. The children of Israel (and their parents) found this fascinating as they could now legally do business and hold investments in offshore companies incorporated somewhere with an established legal system but with little or no taxes – such as the British Virgin Islands, Jersey, Isle of Man, Switzerland, Lichtenstein or another 60 or so jurisdictions. It is difficult to classify land-locked countries like Switzerland or Lichtenstein as “offshore” but you get the drift – somewhere outside your home country.

The Israeli Tax Authority also got the drift. In 2003, Israeli residents became taxable in Israel on all their worldwide income (the “personal” or “residency” basis of taxation). And for good measure, the rules against improper tax planning and offshore companies have been steadily tightened. In this respect, Israel has largely copied other countries, including the U.S., UK, Canada, Australia and South Africa. On the other hand, tax rates are being gradually reduced – in particular, the tax rate on capital gains, dividends and interest has been reduced from 50% in 2002 to 20% in many cases commencing and other rates are also declining.

So what are the main rules and concepts to consider before using an offshore company? If an Israeli resident individual or company performs activities on behalf of an offshore company, the offshore company would generally be viewed as doing business in Israel. Consequently, the foreign company will be required to pay full Israeli taxes on income attributable to the activities in Israel. Subject to any tax treaty, a company is deemed to be both resident and taxable in Israel if it was incorporated in Israel or if the control and management of its business are exercised in Israel. This is derived from the old UK principle of “central management and control”. According to the Israeli Tax Authority (ITA), what matters is the ability to effectively decide, influence the conduct of a business, and give binding instructions of decisive effect.

Israeli residents are taxed at a rate of 25% on dividends deemed to be received from a Controlled Foreign Company (CFC) if they hold 10% or more therein. A foreign company is considered to be a CFC if all of three conditions apply. The taxable deemed dividend is the Israeli taxpayer’s share of passive undistributed income. A deemed foreign tax credit is granted against tax on the deemed dividend.

A Foreign Professional Company (FPC) is deemed to be controlled and managed in Israel, and, accordingly, taxable in Israel at regular rates (31% in 2006). A company is an FPC if it has five or fewer individual shareholders, is owned 75% or more by Israeli residents, most of its 10%-or-more shareholders conduct a “special profession” for the company, and most of its income or profits are derived from a “special profession”. The “special professions” include engineering, management, technical advice, financial advice, agency, law, medicine and many others. The effect is to make many foreign service companies, onshore or offshore, liable to Israeli company tax. Few other countries have such broad provisions.

Israel has a broad “general anti-avoidance rule” in Section 86 of the Income Tax Ordinance. This allows the Israeli Tax Authority to disregard a transaction if it is “artificial or fictitious” and it is liable to reduce the amount of tax payable, if a disposition is not in fact carried out, or if a principal objective is improper avoidance or reduction of tax – even if it is not contrary to law. In various cases, the Israeli Supreme Court has ruled that artificial transactions lack a commercial purpose, which is a civil matter, while fictitious transactions are non-existent – a criminal matter.

Israel has a general requirement that arm’s-length pricing principles be applied to transactions between related parties (including offshore companies). Proposed new regulations will strengthen this requirement. They will apply not only to transfer prices for goods but also intercompany services and credit transactions.

According to proposed regulations, an Israel resident who holds 25% or more of any means of control of an entity resident in a country that does not have a tax treaty with Israel (or receives NIS 500,000 or more from such an entity) will be required to disclose this tax planning act in their tax return. The assessing officer may then issue a partial best judgment assessment of their income and tax due, disregarding the act. Israeli banks are required to withhold tax at a rate of 25%-31% from most payments to a foreign entity unless advance written approval for a lower rate is obtained from the payor’s tax office. In addition, transactions conducted in Israel or with Israeli residents are generally subject to VAT at the standard rate (15.5%) with limited exceptions.

Notwithstanding the above, offshore companies have their uses. There may be non-tax reasons such as the need for privacy or to present a non-Israeli front to nationals of other countries. There may be overseas tax reasons. Finally, there may be sound business reasons for using a low-tax country. The European Court of Justice recently accepted this claim from Cadbury Schweppes, a UK group with subsidiaries conducting treasury operations in the Republic of Ireland where corporation tax on such operations happens to be only 10% or 12.5%. The effect would be to defer tax until income is repatriated back home. But if any of the above anti-avoidance rules do apply in a particular case, there may well be full immediate Israeli taxation, and it becomes necessary to claim a foreign tax credit, where possible, under Israel’s foreign tax credit rules.

Link here.



FBI Director Robert Mueller called on Internet Service Providers to record their customers’ online activities, a move that anticipates a fierce debate over privacy and law enforcement in Washington next year. “Terrorists coordinate their plans cloaked in the anonymity of the Internet, as do violent sexual predators prowling chat rooms,” Mueller said in a speech at the International Association of Chiefs of Police conference. “All too often, we find that before we can catch these offenders, Internet service providers have unwittingly deleted the very records that would help us identify these offenders and protect future victims,” Mueller said.

The speech echoes other calls from Bush administration officials to force private firms to record information about customers. Attorney General Alberto Gonzales, for instance, told Congress last month that “this is a national problem that requires federal legislation.” Justice Department officials admit privately that data retention legislation is controversial enough that there was not time to ease it through the U.S. Congress before politicians left to campaign for re-election. Instead, the idea is expected to surface in early 2007, and one Democratic politician has already promised legislation. Industry representatives claim that if police respond to tips promptly instead of dawdling, it would be difficult to imagine any investigation that would be imperiled.

It is not clear exactly what a data retention law would require. One proposal would go beyond Internet providers and require registrars, the companies that sell domain names, to maintain records too. And during private meetings with industry officials, FBI and Justice Department representatives have cited the desirability of also forcing search engines to keep logs – a proposal that could gain additional law enforcement support after AOL showed how useful such records could be in investigations.

At the moment, ISPs typically discard any log file that is no longer required for business reasons such as network monitoring, fraud prevention, or billing disputes. Companies do, however, alter that general rule when contacted by police performing an investigation. A 1996 federal law regulates data preservation. It requires ISPs to retain any “record” in their possession for 90 days “upon the request of a governmental entity.”

Link here.


The Hong Kong Security Bureau’s Narcotics Division is seeking remittance agents and money changers’ views on a proposal to lower the threshold for verification of a customer’s identity and record keeping from $20,000 to $8,000. The proposal is in response to the Special Recommendation VII of the Financial Action Task Force on Money Laundering, the international anti-money laundering standard-setter. Approximately 1,700 remittance agents and money changers would be required to verify customer identity and keep records of transactions over $8,000 under the proposed rule.

Remittance agents would also be required to record and retain particulars of the sender and the instructor of a remittance transaction if the two are not the same person, and would be encouraged to take an additional step to combat terrorist financing more effectively by including the sender’s information in the message accompanying the remittance. Local remittance agents and money changers have been invited by the Narcotics Department to forward their views and comments in writing by November 20. It is anticipated that the requirements will also be implemented by the banking industry in January.

Link here.



Anyone who hoped that U.S. military detention of Americans accused of terrorism expired with the transfer of American citizen Jose Padilla from military custody to Justice Department custody have seen their hopes dashed by the Military Commissions Act that the president signed into law yesterday. Although the act limits to foreign citizens the use of military tribunals and the denial of habeas corpus, any person, including American citizens, can still be labeled and treated as an “unlawful enemy combatant” in the war on terrorism.

What does that mean for the American people? It means the same thing it did for Jose Padilla. You will recall that Padilla was arrested in Chicago for terrorism and transferred to military custody, where, according to Padilla, he was tortured and involuntarily injected with drugs. The government’s position is that since the entire world is a battlefield in which the war on terrorism is being waged, U.S. officials now have the power to arrest any American suspected of terrorism, place him in military custody, and subject him to the same “unlawful enemy combatant” treatment that Padilla received, until the war on terrorism has finally been won, no matter how long that takes. The government’s position was that Padilla, as an “unlawful enemy combatant” suspected of having committed terrorist acts, was not entitled to the procedural rights guaranteed to criminal defendants in the Bill of Rights, including the rights to counsel, due process, and trial by jury.

The district court ruled in favor of Padilla at his habeas corpus hearing, but the Second Circuit Court of Appeals reversed that decision, upholding the government’s “unlawful enemy combatant” argument for Padilla and, by implication, all other Americans. Before the Supreme Court could rule on Padilla’s appeal from the Second Circuit’s decision, the government announced that it wished to transfer him from military control to federal-court control on the basis of a grand jury indictment charging him with terrorism. Even if Padilla is acquitted in the federal-court action, there is little doubt that the Pentagon will immediately take him back into military custody as an “unlawful enemy combatant” in the war on terrorism, requiring Padilla to once again embark, in a habeas corpus proceeding, on a long legal journey to the Supreme Court.

Currently, under the Second Circuit’s decision in Padilla, and now also under the Military Commissions Act, the president has the power to order the military arrest and incarcerate any number of Americans suspected of terrorism. Americans would still have the right to file a petition for writ of habeas corpus in federal court because the Military Commissions Act canceled that right only for foreigners, not Americans. Keep in mind, however, that a habeas corpus hearing is not a full-blown trial to determine guilt or innocence but is simply designed to determine whether the government has legal justification for holding a prisoner. All the government would have to do at the habeas corpus hearings is provide some evidence that the Americans it is holding in military custody have engaged in some act of terrorism and then cite the Second Circuit opinion and the Military Commissions Act in support of its power to continue detaining them. Of course, the cases would ultimately go to the Supreme Court, but that would inevitably entail a lengthy delay, a period of time during which lots of Americans could be tortured, abused, and even “accidentally” killed, just as foreign “unlawful enemy combatants” in U.S. military custody have been. Moreover, there is no guarantee that the Supreme Court will rule against the government.

How does an American who is labeled an enemy combatant ultimately get tried? He doesn’t. Under the Military Commissions Act, trial by military tribunal is limited to foreigners. The irony is that while foreigners will be accorded the kangaroo tribunal treatment, Americans accused of terrorism will continue to languish in military prison indefinitely without the benefit of a trial. Of course, given that the tribunals will have the power to impose the death penalty, Americans might do well not to complain about their indefinite detention.

Link here.

Military Commissions Act does affect U.S. citizens.

Neo-Con government mouthpieces and others are claiming that the Military Commissions Act of 2006, which heralded the official end of the “great experiment” of the American democratic republic, does not affect U.S. citizens, only illegal aliens and foreign terrorists. Recent history of how terror legislation was used to target American citizens clearly indicates the legislation will be used domestically. A coordinated effort to downplay the implications of the fact that the bill affects American citizens, in the face of extensive coverage on the part of Keith Olbermann, is underway in an attempt to offset the possible repeal of this draconian legislation.

The most recent example of a U.S. citizen being targeted using terror legislation involved BBC investigative journalist Greg Palast, who was pursued by Homeland Security and charged with unauthorized filming of a “critical national security structure”, (an Exxon Oil refinery that was readily available to anyone with an Internet connection at Google Maps), under PATRIOT Act legislation. The charge was later dropped after an activist outcry. The recent historical precedent for U.S. citizens being charged under legislation originally passed in the name of combating non-U.S. terrorists only, provides clear motivation for the Military Commissions Act to be used in the same way.

Since 9-11 the PATRIOT Act has been used in numerous cases involving American citizens, including strip club owners, toy store proprietors, the homeless, owners of websites, writers, artists, photographers, and common criminals. Section 802 of the PATRIOT Act is specifically aimed at U.S. citizens and announces any crime as “domestic terrorism”. Citizens can be held without a trial as “Enemy Combatants”. The 4th U.S. Circuit Court of Appeals ruled in January 2003 that U.S. citizens can be stripped of their citizenship and held as enemy combatants. Therefore any legislation passed by Bush automatically applies to American citizens because, as the Washington Post reported, after 9-11 Bush announced his “parallel legal system” in which he could declare any individual on the planet an enemy combatant and order their summary execution.

The trick being played on the American people in falsely assuring them that they are not the target is simple to decode. The Act states that it only applies to enemy combatants yet the President and his legal advisors like Alberto Gonzales have routinely announced that the President has the power to strip Americans of citizenship and declare them to be enemy combatants.

Link here.


American attorneys for jailed Uruguayan banker Juan Peirano Basso argued against extraditing him for alleged bank fraud, contending he is the victim of a political vendetta. The case involves the high-profile collapse of Uruguay’s largest financial conglomerate in 2002. In Uruguay, it sparks the kind of emotions associated with the Enron collapse in the U.S., although no one has yet been convicted.

Peirano headed the financial and commercial conglomerate Grupo Velox, which owned banks in Uruguay, Argentina, Paraguay and the Cayman Islands. He was arrested in Miami on May 19 and has been held in federal prison ever since. He was living in the U.S. with a green card. “You are the only person standing between a political vendetta and our client,” Peirano’s attorney Al Cardenas told U.S. Magistrate Judge Ted E. Bandstra. Bandstra held a 3-hour hearing on the merits of the extradition request for Peirano in a courtroom packed with Peirano’s relatives, members of the Uruguayan media, officials from the Uruguayan Consulate in Miami, observers and at least one member of a group of depositors who lost their savings.

Cardenas, who is one of a number of two Cardenas attorneys representing Peirano, argued the banker could not expect due process if he were returned to Uruguay. His three brothers, Jorge, Dante and José, have been held 4½ years but were only formally charged this month under Uruguay’s complex legal system, Cardenas said. The brothers ran the Velox Group, comprised of Banco Montevideo and Caja Obrera in Uruguay, Banco Velox in Argentina, Banco Alemán in Paraguay and the Trade and Commerce Bank in the Cayman Islands. Cardenas also said that Peirano’s 81-year-old father, Jorge Peirano Facio, who owned 70% of the Group, died in one of Uruguay’s worst prisons in May 2003.

The financial group collapsed during a financial crisis that began in February 2001 as panicked depositors withdrew their money. Much of the problem stemmed from the economic implosion in neighboring Argentina, which used Uruguay as an offshore banking center. The extradition request said that after central bank authorities took over Banco Montevideo, auditors concluded there was a gap in the bank’s funding of $306 million, the result of Peirano’s irregular practices and violations. The Uruguayan government has placed the losses at $800 million.

But Peirano’s attorneys contended that Peirano committed no crime but disagreed with bank regulators about how to confront the crisis. “We have an unprecedented banking crisis,” said attorney Joseph A. DeMaria. “I don’t believe they set something up just to swindle. They were just swept away.” The Uruguayan government has alleged that Peirano’s Banco Montevideo continued taking deposits and making loans to its offshore Trade and Credit Bank in the Cayman Islands even after the crisis hit and the Cayman institution was in liquidation. Other loans were sent through third parties to related companies, the documents said. But DeMaria argued that these practices were not criminal and regulators knew they were making the offshore loans to related institutions.

Bandstra said he would issue a ruling in a week or so, but the final decision is up to the State Department.

Link here.


The North Carolina prison where former Enron CEO Jeff Skilling has asked to serve his sentence is considered “the crown jewel” of the federal prison system, according to one prison expert, but it is hardly the “Club Fed” some might imagine. The Butner Federal Correctional Complex, about 45 minutes northeast of Durham, is sought after by convicts in the know because of the quality of the facilities and staff, said Alan Ellis, a specialist in sentencing and placement of white-collar criminals and author of a guidebook on prisons.

There are minimum-, low- and medium-security facilities at Butner that, in some ways, look like a college campus behind barbed wire, Ellis said. The medical facility at Butner is also highly regarded, particularly for its cancer-treatment programs. “They attract very professional staff, and the rule is that a happy staff makes for a happy inmate,” Ellis said. There are about 3,600 inmates at Butner, including former U.S. Rep. Randy “Duke” Cunningham, who is serving time for accepting bribes, and former Navy intelligence analyst Jonathan Pollard, who is serving a life sentence for leaking secrets to the Israeli government. Past inmates include would-be presidential assassin John Hinckley Jr. and televangelist Jim Bakker.

But like every other federal prison facility, violence is always a concern and it is not uncommon for white-collar criminals to find themselves sharing living and dining quarters with criminals with violent pasts. “As one Bureau of Prisons staffer put it to me, in low security you get punched and in medium you get knifed,” Ellis said. The length of Skilling’s 24-year, 4-month sentence means he will likely be assigned to a medium-security prison, one step below the high-security facilities where the most dangerous criminals are housed. He may be eligible to move to a lower security facility later.

Link here.



The Independent ran a photo of George W. Bush and Tony Blair on its front cover last week. “Are these the only two people in the world who don’t think the war in Iraq is a disaster?” asked the headline. Researchers recently tried to guess how much of a debacle the war really was. They focused on the number of people who had died since the government of Saddam Hussein was run out of Baghdad. Various estimates came in – between a low of 300,000 or so on the one side, and nearly a million on the other. Estimates of the costs are similarly wide – from a couple hundred billion to more than $1 trillion.

But it is a strange, strange world we live in. Can you really measure success or failure in terms of lives and treasure? The Bush team aims for “full spectrum dominance”. Who is to say the occupation of Iraq did not help them get it? And who is to say or know what fate has in store, or what purpose the heavens themselves may have for us. For the war … for the world?

An empire, being a rather grand and important public spectacle, makes many headlines. But all of them follow the same hiker’s trail – up the mountain on one side and down it on the other. The great historical achievement of the Bush team was to find a trail that got them over the hump quickly, and onto the path of self-destruction. In politics or in markets, every fad and fashion follows a predictable pattern, from Dow 900 to Dow 12,000. From the beer hall putsch to the fall of Berlin. Like life itself, each one is destined not for eternal glory, but for the grave.

No one gets to read tomorrow’s newspaper headlines today. Still, after six centuries of moveable type, and countless centuries before that of longhand and oral traditions, you would think the basic template for public spectacles would at least be vaguely understood. Seeing one set of headlines – Germany Invades Poland ... Union of Soviet Socialist Republics Declared ... Dow Surges to All-time High ... China is the New “Miracle Economy” – a reader might expect to see another, later, headed in the other direction. Looking ahead to long retreat, you would think people would be tempted to stay home. “Why bother?” they might ask themselves. The troops might stay in their barracks. Investors might put their money in the bank. Voters might avoid the polling stations. It is as if they could already know how the film ends. Funny that they do not get up and leave. But they don’t. History continues.

But why? We turn to logic – not for an answer, but for a culprit. Any man who has had teenage children must be suspicious of logic. As soon as a teenager gets the hang of it, his sense of reason seems to leave him – and does not return for at least five or six years. Or, if he takes up politics, law or economics, it may never return. The logical mind wants to take the pieces apart, examine them, and figure out how they work. The logical mind looks at politics, social order, economics, and finance as though it were a rudimentary cuckoo clock. He imagines that here, too, he can take the pieces apart and study them. It is here that he runs into trouble. The “naïve scientist” looks at the stock market and he figures it must follow some patterns. Prices go up, and then they go down. When? How? Why? And so, he sets out, investing rationally ... until his money is gone. Experts say that 90% of traders eventually lose their money. We are amazed. We thought the number was closer to 100%.

As far as anyone knows, markets are unpredictable. And if anyone knows anything to the contrary, he is keeping quiet about it – because as soon as other investors caught on, the secret would be rendered useless. Markets are “chaotic systems”, say the mathematicians. As such, they are subject to feedback loops from their constituent parts. Chaotic systems are also subject to inputs that are largely invisible and whose impact is wholly unforeseeable. It was the collapse of an unknown and unimportant Viennese bank, “CreditAnstalt”, that triggered the Great Depression in America.

Likewise, in the world of politics, small things can have huge, unforeseeable consequences. When Americans pressured Chiang Kai-shek to let Mao’s army escape to Manchuria, or when the Germans put Lenin in a train and sent him to Russia, or when Ho Chi Minh decided not to become a pastry chef, the results were enormous. Who knew how the Muslim world will react to American forces in Iraq? Who could say what would happen if Saddam were booted out of office? Who has any idea what a destabilized Iraq will mean for the future of the Middle East, or the world? Nobody knows anything. At least, a reasonable man would know what to do. He would go to a part of life where he could see what he was doing, and he would focus on his work, his family and his private interests.

But we are talking about public spectacles. And in public spectacles, a man becomes thoroughly logical ... and completely unreasonable. “The terrorists are out to get us,” he says, as if it were a fact. After that, his next fact sounds almost sensible. “We have to defend ourselves,” he says. “Better to do so in the streets of Baghdad than the streets of Baltimore,” comes the next heavy hulk. Does Baghdad have anything to do with terrorism? No, but it is close enough for government work, as they say. And so, he eventually reaches Baghdad and gets himself into such a mess that the English papers are laughing at him.

According to the Efficient Market Hypothesis, prices set by finacial markets are so “perfect” you are wasting your time trying to outsmart them. The market always has more information than an individual investor. You are better off buying an index fund, say the EMH experts. The hypothesis is nonsense. Prices are not perfect at all, but wrong most of the time – and in shifting directions, from being too expensive to being too cheap. But EMH is a useful fraud, reminding investors how hard it is to beat the broad market and how unlikely it is that they will ever understand it.

Something similar should be developed for politics, in our opinion. The world is not perfect. But it is the reflection of the judgment of the world’s people – developed, elaborated, and evolved over thousands of years of experience. If a country like Iraq has a dictator of whom we do not approve, it may make sense to refer to the Perfect World Hypothesis, just to remind ourselves that “What Is” is for a reason ... one we cannot necessarily know. We might want to replace What-Is with What-Should-Be-In-Our-Opinion. But we ought to at least think twice about it.

Link here (scroll down to piece by Bill Bonner).


“Thou shalt not steal” is a rule as old as human society itself. It must have been, else no complex human society would have proved viable. We are all taught very early to respect what belongs to others. “Don’t take your sister’s toy away from her,” your mother admonished, punishing you if you persisted in your toddler’s larceny. By the time you were three years old, you understood the difference between mine and thine. If you did not take the lesson to heart and persisted beyond your childhood years in treating everybody’s property as something for you to take, so long as you could get away with it, then you were viewed as a sociopath, an enemy of decency and of civilization itself.

Government as we know it, however, rests entirely on this kind of sociopathy. Rulers take what does not belong to them and dispose of it to suit themselves. When the government has only recently placed itself in a position of domination over a group of people, the people recognize full well that the government’s taking amounts to looting. They pony up only because they are given the stark choice of “your money or your life,” and they want to go on living. When a government has been entrenched in a society for a long time, however, its exactions become a “fact of life,” a matter of “just how things are,” and people tend to lose their awareness that obtaining something from the government amounts to receiving stolen property.

Rulers, abetted by their kept intellectuals, go to great lengths to weave a cloak of legitimacy to disguise their theft, because by doing so they ease the difficulties of extracting wealth from the rightful owners. In some cases, especially in societies with governments that attempt to justify their existence and their actions on “democratic” grounds, many people may be taken in by this ideological sleight of hand. They may actually believe that “we tax ourselves” so that the rulers “we choose” can dispose of the loot in ways that “we voted for,” failing to appreciate the gulf that separates this pristine ideological vision from the sordid facts on the ground.

Once this sort of thinking becomes pervasive, however, it serves to sanctify specific forms of predation without any clear limit. People come to believe, or at least they work hard at convincing themselves, that anything the government might stand ready to give them, they thereby have a perfect right to receive. The loot is there for the taking. You are a fool not to take it, notwithstanding that your taking it may be wrong. Financial gain trumps moral probity. Don’t be a chump, take the money. At this point, all contact with genuine morality has been lost, and because a society of sociopaths cannot remain viable in the long haul, the nation that embarks on this course has set sail toward its own ruin.

The moral rot is comprehensive, not confined to a few bad apples, and it defiles farmers, businessmen, doctors, lawyers, clergymen, students, retirees, and countless others. Virtually everybody has checked his morality along with his pistol at the entrance to the legislature. “The state,” Frédéric Bastiat told us long ago, “is the great fiction by which everybody tries to live at the expense of everybody else.” If only the great man could see us now. Even he might be amazed, and appalled, by the heights to which this futile quest has been raised. In fact, this hoary fantasy arguably has become the central truth about government in our time.

One need not have earned an A+ in moral rectitude to understand that, however one may assess the morality of modern government’s hypertrophied taking from Peter and giving to Paul, this activity bears a deadly fruit. Because it creates such widespread and powerful incentives for people to engage in government-facilitated predation, instead of production, it diverts great energies, intelligence, and other resources to the pursuit of privilege – to what the public choice analysts call “rent seeking.” As more and more such diversion occurs, the society falls farther and farther below the full realization of its potential to create genuine wealth. Eventually, everybody will be fighting to seize and consume the seed corn, and none will remain for planting next year’s crop. There is a natural, unavoidable outcome of such action. Ask any farmer.

Link here.
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