|W.I.L. Home Page||Offshore News Digest Home|
|Sign Up||Finance Digest Home|
|Global Living & Business||Taxes||Asset Protection / Legal Structures||Privacy||Law||Opinion & Analysis|
WHY CHOOSE ARGENTINA?
At the moment Argentina is probably not on the radar of most second home seekers, but from what I have seen in the last two years of selling property there, this is beginning to change. When you compare it to a country like Spain 40 yeas ago, when Spain really was a bargain, it really took a while for attitudes to change – that it really was a legitimate place to invest in. Argentina is in this situation now. Slowly but surely it is being discovered by those seeking to buy second home, have a change of life style or simple as a serious country to invest in.
Let us start with probably the only negative. Argentina is a long way from Europe (it is a long way from most places). However, for those of us here, that distance is a big positive. Particularly if you are looking to get away from some of the holiday ghetto lands of Spain, Cyprus, and the like. You will not find any “Belly Busters” restaurants selling “full English breakfast” here, just the odd, vaguely-Irish Pub in the center of Buenos Aires. Move out to the countryside and it is tradition all the way, with friendly people, clear fresh air and some of the biggest blues skies in the world. Argentina is cheap to buy land or holiday homes in and that is a major attraction for those of us who have already invested. With most of properties being valued in US$ and the fact that most major currencies are strong against the US$ (particularly the pound) your (non-US$) money goes a long way there. For instance, I am buying a traditional Estancia (Estancias are the stately homes of Argentina) with a beautiful 8-bedroom house built in 1870, two further small houses, a swimming pool, outbuildings and spectacular park, and 120 acres of very fertile land for $360,000, and the house comes fully furnished!
When I came to Argentina in 2003 as a tourist, other tourists and those who were considering buying a home here were hard to find. Prior to the political turmoil at the end of 2001, and the financial collapse in early 2002, it was just too expensive to come here to visit, let buy property. Immediately after the crisis the country was getting too much bad publicity with daily mass protests, and unemployment running at around 50% (now down to less than 15% and improving daily). Three years later, stability has returned, the country’s financial affairs seem to be in order, and people are visiting. And many of those are deciding to buy a holiday home here, and even deciding to live there permanently.
The reasons why they are coming vary. Some cannot resist a bargain, and there is no doubt that land and property is cheap. Others say it is because it is a country where family values and good manners still matter. In Argentina they find this in abundance. Others come because they love the vastness and diversity of Argentina and its wide-open space where they can ski, swim in the sea, watch whales and seal colonies, go big game fishing go to see top class theatre and opera and ballet and eat in top restaurants at prices that have not existed in Europe for decades. Argentina is a country with room to breathe in. Argentina is the size of India, but with a population of only 38 million people. Others come because here they can live their dream. The can afford to own a beautiful property and live a lifestyle that they could never do in their home country.
Argentina has something for everyone. Some are lured by the thrill of dancing the tango and living in the center of one of the most spectacular cities in the world. Real estate is about a tenth the price of London and Paris. Others are more interested in the wine growing area of Mendoza with its proximity to the major ski areas of the Andes. You can find an up-an–running finca, for around $100,000, and make a living selling grapes to the local wineries. Some are attracted to the wide open spaces of the Pampa, which wraps around BA and stretches for 300-400 kilometers in all directions. It is an area of peace and tranquillity, where you will find the grain belts and cattle ranches that produce enough food to sustain the country 10 times over. Here you find the beautiful houses with land to buy where you can create your own world. And of course we cannot forget Patagonia – the lands to the south of BA with their mountains, lakes, glaciers and forests. It is probably the last place on earth where you can buy your dream, if this is the type of landscape you love.
With a strong economy (currently growing at 8-9% per annum) and a strong president the future looks bright for Argentina. Many foreign investors are now active in the property market here and the number is expected to grow. Further growth looks like a forgone conclusion. Most major airlines fly here so accessibility is no problem.Link here.
CON ARTISTS FOLLOW EXPATS AND THEIR MONEY TO PANAMA
Panama gets more than its share of scam artists, thieves and general criminals who are running from the law of another country. I have seen many of them over the years that have come here thinking that Panama would protect them from their crimes. We used to say that Panama is a shady place for shady people, but the numbers being picked up and hauled out by the FBI and other authorities is becoming pretty regular. Just in the last few months several people in Boquete have been taken out of the country and back to jurisdictions where they had committed offences. In all the cases I have heard of where the PTJ (Panama FBI) works with the foreign authorities, the persons are under indictment or have been convicted of a crime back in their home country and then skipped out before serving their sentence.
But many scammers have never been prosecuted in their home country. Fake stock promoters, shady real estate developers and get-rich-quick schemers top the list. A number of foreign gold bond deals, and 100% returns a year scams proliferate in Panama. Boquete is becoming a magnet for them as more elderly Americans come to retire here. The scammers follow right behind the furniture containers, knowing that in Panama the chances of them being prosecuted is slim to none and U.S. authorities have no jurisdiction to go after them for securities fraud in Panama. The U.S. embassy gets calls regularly but can only sympathize. Many foreigners do not report the crime as they are too embarrassed according to embassy sources.
I have seen the scammers come and go and usually it is after they have fleeced their prey for a lot of money. A friend told me the other day of a scammer who had taken millions of investment dollars from a number of Boquete retirees and then disappeared. For the life of me, I cannot understand how people who have worked so hard to build their retirement nest eggs can be so foolish as to believe someone they do not know, in a foreign country is going to take them to a higher financial level. The old adage that says, “If it sounds too good to be true it usually is,” seems to be forgotten by many of the good folks coming here.Link here.
LABOR LAWS IN PANAMA HURT BOTH WORKERS AND BUSINESSES
What is wrong with labor in Panama? Nothing! But, there is a lot wrong with the labor laws in Panama. Like workers everywhere, Panamanians want the opportunity to make a decent living and provide the basics of life for their families. It is the state and its antiquated labor laws that are hurting the workers and keeping them in a position of limited potential.
When people ask about the cost per hour of an employee in Panama, they are shocked to hear how low it is relative to the U.S. Although the payment per hour may be relatively low, the real cost of labor is relatively high. When all of the costs are taken into consideration the burden on labor is over 51% and getting higher each year. Even so, the cost of labor is not so high until you take into consideration the low productivity levels.
I honestly do not know how most of the people of Panama can survive on the income they receive. For example, our housekeepers at the resort make $275 a month and many are the sole parent of several children. Of course they have Social Security, which provides “free, but poor” health care and “free, but poor” public education. But just the costs of food, transport and housing mean they have to live in what we would consider to be poverty. Most people in the interior still live at home with their parents or other family members, which reduces the housing costs significantly, but try to have a decent diet and put cloths on you and your children’s backs for $275 a month before taxes.
Many look at this and blame the employer for not paying more, but the blame lies with the labor laws which keep people from advancing and becoming more productive and competitive in order to earn higher wages. A recent study by the IMF about labor and unemployment in Latin America shows that the high cost of termination of employees contribute directly to the high unemployment rates in Latin countries. This is only a part of the problem.
Panama fits into the IMF’s category of badly needed labor reform. The restrictive labor laws hurt the employee rather than help them to stay employed. We have a full time human resources department who deals only with labor issue. They have learned over the years how to structure contracts that help minimize the direct cost to the employer. The system keeps the opportunities for long-term employment to a minimum and eliminates the opportunity for an employee to learn higher-level skills and corresponding incomes. The longer a worker works for you the more it costs and harder it gets to terminate. Even if termination is for good reason the employee will almost always win the battle in the labor ministry dispute hearings.
Keeping contracts short-term is how most companies operate and these short-term contracts hurt the employee because it robs him of the opportunity for advancement through acquiring better skills. It hurts us too, because we need skilled labor and Panama has very few, especially in the interior. Of the over 200 people we currently employ directly in construction, we have only about 5% who are long-term employees. They have been with us over 5 years. To terminate them now would be very expensive, and if they quit they lose a lot of benefits accumulated over this time. Thus there is not much incentive for us to pay higher wages even to these dedicated long-term employees. There is little incentive to improve productivity and improve skill level by the employee and there is little incentive to provide additional training and higher wages by the employer. We are in a state of limbo where both parties are married to one another whether they really like it or not.
Because of this no-win situation imposed by the state everyone loses especially the people of Panama. The one bright spot in this dismal situation is entrepreneurs. For example, we have begun to use more private contractors who were previously employees. We pay about 20-25% more than an hourly employee, but we get significantly more production from the contractor. However, the detrimental labor laws infect the subcontractor too. If he hires additional labor, he has the same problems as any other employer, so most keep it small and in the family where they can apply more personal pressure if production is low. We need more entrepreneurs to get to be bigger contractors, but the labor laws make it just as burdensome on them as it does us.
Another productivity issue is the number of holidays and sick days in Panama. An employer has to pay for a 13th month even though there are only 12 months in a year. Moreover, every employee gets a month-long holiday after a year, no matter how long they have worked for you. In addition the employee gets 16 paid holidays and 18 paid sick days. He can accumulate up to two years worth of sick days and if they are unused in two years the employer must pay him for those days. Now we have cut productivity down by nearly 25% with the time away from the job or time paid for not working.
Now we must add Social Security at 11%, Education Insurance at 1.5%, Workers compensation at 5.6%, Liquidation at 6% and longevity payment of 1.92%. The actual burden gets to be over 50% when coupled with the vacations, sick leave and paid holidays. The worker also must pay into the system, starting with 7.25% to Social Security, 1.25% to education insurance and income tax starting with incomes over $801 a month of about 7.5%.
There are a few more nuances to be aware of such as the four-month maternity leave, which is paid by Social Security. Upon return from maternity leave the employer must provide employment for at least one year. This is one of the reasons a pregnancy test is usually implemented for female employees before offering them a job. I have heard it said that you never want to employ someone longer than 2 years because on that anniversary they become one of your children for the rest of their lives. The truth is that it gets significantly more difficult and expensive to dismiss an employee after two years. The Labor Ministry puts all proof on the employer and to fight a claim nearly always goes in favor of the employee. Attorneys usually work with no up-front fee for workers claims because they get about 50% of what is collected and rarely lose a case.
It is not the fault of the employee for taking advantage of a legal system that provides him with the opportunity to suppress productivity. Human nature will always take the path of least resistance. It is unfortunate that Panamanians are being fooled into believing that the laws protect them from unscrupulous employers and minimum wage laws help them to have better incomes. Nothing could be further from the truth. Panama is a country where incomes are at low levels commensurate with productivity levels and the demand for skilled labor is on the rise.Link here.
FITCH RATES COSTA RICA’S #2 BANK
Ratings helped by Costa Rica’s improving fiscal situation.
Fitch Ratings Service has given a long-term foreign currency Issuer Default Rating of BB to Panama-based Banco Internacional de Costa Rica (BICSA), the country’s 2nd-largest bank in terms of deposits. Since 2005, BICSA has been 51% owned by Costa Rica’s state-owned Banco de Costa Rica (BCR), and Fitch believes that the bigger bank would support BICSA in case of need, although there might be legal or political impediments. The explicit sovereign guarantee that Costa Rican state-owned banks have is not available to BICSA. Fitch gives BICSA a stable outlook.
Fitch says that BICSA’s individual rating and IDRs are underpinned by recent improvements in profitability, capitalization, and asset quality, following a corporate reorganization that resulted in a dramatic reduction in the bank’s cost base. BICSA was established in 1976 to serve as a trade financing house. It has offices in Miami, Guatemala, Nicaragua and El Salvador in addition to Panama and Costa Rica itself.
Fitch’s ratings reflect the country’s own sovereign ratings. High tax inflows have continued to eat away at the government’s deficit, which fell to only $66.8 million for the first eight months of 2006, representing less than 1% of GDP, compared with 1.3% a year earlier. Revenues rose 22% over 2005, partly due to higher import tariffs. Last year’s tax collections were themselves 20.5% higher than in 2004, reducing the 2004 budget deficit of 2.5%. Government spending has however continued to increase, by 14% for the first eight months of 2006, and debt interest of $560 million more than wiped out a primary surplus of $493 million for the period.
Still, the economy is doing well. In 2005 there was an increase in exports by 12.8% and a 19% increase in the number of visiting tourists, reaching 1.5 million. Successive governments have been trying for years to push a fiscal reform bill through the legislature, which would replace the existing territorial basis of taxation with world-wide taxation of income. The good news from the economy will not encourage legislators to allow the government its planned tax increases.Link here.
GIBRALTAR VOTES “YES” TO NEW CONSTITUTION
Voters in Gibraltar have accepted a new constitution for the jurisdiction which the government says will give it more autonomy from the U.K. over its own internal affairs. In a referendum held last week, 60.2% of those who turned out voted “yes” to the new constitution, while 37.8% voted to reject it. 60.4% of Gibraltar’s 20,061 registered voters turned out to vote.
The constitution, agreed in April by then UK Foreign Secretary Jack Straw and Gibraltar’s Chief Minister Peter Caruana, and between Gibraltar’s two main political parties later in the year, will see the UK retaining international responsibility for Gibraltar. However, the new constitution cedes certain powers previously in the possession of the British government to Gibraltar, and allows the jurisdiction to have its own independent judiciary.
Caruana had urged Gibraltarians to vote for the new constitution, arguing that a “Yes” vote would be “a vote for political progress, for dignity and self-government for Gibraltar”. Caruana also rejected the “No” campaign's assertions that the constitution would weaken the jurisdiction’s links with the UK and allow for greater Spanish influence in its affairs as “scaremongering”. “There is absolutely no Spanish dimension here. It is absurd for people to be raising this usual old chestnut of last resort,” he stated. “The new constitution gives us what we want, namely, a British Gibraltar in which our right to self determination is recognized and which is governed by Gibraltarians. That is dignity. That is real democracy. That is a non-colonial relationship with Britain.”
The overwhelming majority of Gibraltarians are opposed to Spanish sovereignty over the jurisdiction. In a referendum held by the Gibraltar government in November, 2002, nearly 99% of votes were cast against a plan for sovereignty to be shared between Britain and Spain.Link here.
SOUTH ASIAN NATIONS WORK TOWARDS COMMON STOCK EXCHANGE
The stock exchanges of South East Asian Association for Regional Cooperation (SAARC) countries have moved a step closer to forming a regional stock exchange as part of a wider strategy aimed at integrating the region’s financial markets. According to a report in India’s Economic Times, the South Asian Federation of Exchanges (SAFE) has proposed the launch of a new SAFE index which could include a number of blue chip stocks from the region, and begin trading as early as next year. A team of leading global consultants is currently working to construct the index.
This could be followed by in mid-2007 by the launch of an exchange traded fund (ETF). ETFs give investors low cost access to a basket of stocks through one tradeable share and these vehicles have become very popular across the globe in recent years. However, analysts have cautioned that the early development of a harmonized South Asian capital market could be hampered by the need for unified clearing and settlement systems, and exchange rate disparities. Nonetheless, India, Pakistan, Sri Lanka, Bangladesh and the Maldives are all said to be keen to launch such an index. Other members of the SAFE group include Bhutan, Mauritius and Nepal. The members of SAFE have also agreed to work towards common standards including international accounting standards and best business practices in capital markets.Link here.
ANTIGUA WANTS TO CONTROL BETONSPORTS ASSETS
In order to ensure the assets are applied to reimbursing its customers vs. some other purpose.
Following recent U.S. court approval of the agreement between the U.S. Justice Department and Antigua-based gaming firm Betonsports settling civil litigation against the company, the Antiguan Financial Services Regulatory Commission has filed an application for a restraining order against the company to prevent it from disposing of its assets without permission. The FSRC says it wants to ensure that such assets as Betonsports still has are applied to reimbursing its customers rather than for any other purpose.
The U.S. court order banned Betonsports from operating in the U.S. However, the agreement permits the company to refund stakes placed by U.S. players. Originally the Justice Department had wanted to seize those funds. Kaye McDonald, the Director of Gaming for the FSRC, observed, “While the jurisdiction of the United States government over Betonsports is questionable, by virtue of being the holder of an Interactive Gaming and Interactive Wagering license issued by the Antiguan and Barbudan authorities, ... the company ... has acquiesced to our international jurisdiction over the company and its assets.”
Lebrecht Hesse, the Chairman of the FSRC, said, “We believe that the United States should step aside and ensure that our regulators can enforce and oversee the application of the laws of Antigua and Barbuda to the orderly dissolution of BETonSPORTS. We are disappointed that the United States efforts to prohibit cross-border competition in gambling and betting services have led to the disruption of a once-healthy and robust service provider, but we are just as adamant that our jurisdiction be respected in the interests of consumers and others.”
Betonsports and 12 individuals still face criminal charges including racketeering, mail fraud and facilitation of gambling across state and national boundaries. Trading of Betonsports stock in London was suspended on July 18th at the company’s request. The company ran its U.S. Internet business from Costa Rica and Antigua. Founder Gary Kaplan and British CEO David Carruthers are among those indicted. Carruthers, 48, was arrested in July as he changed planes in a Dallas airport and is currently under house arrest in the vicinity of St Louis. An arrest warrant has been issued for Gary Kaplan. The indictments seek forfeiture of $4.5 billion from Kaplan and the other defendants.
In Geneva last week a three-man dispute resolution panel established by the WTO heard submissions by Antigua and the U.S. over Antigua’s claim that the U.S. has failed to implement a previous WTO ruling that the U.S. should adjust its legislation to allow a level playing field for internet gaming for foreign companies. Antigua and Barbuda’s Minister of Finance and the Economy, Dr. Errol Cort, expressed shock and dismay at the passage by Congress of the Unlawful Internet Gambling Enforcement Act of 2006 in September. While expanding domestic opportunities for legal gaming, the legislation effectively bans all international and inter-state online gaming, by making it illegal for banks and credit card firms to make payments to such internet operations. Antigua-based operators are thought to have accounted for 25% of the estimated $12 billion wagered online by American punters every year prior to the legislation. “This baldly protectionist legislation, tacked on to a major security bill at the last possible minute, is as contrary to the decision of the WTO in our case as can possibly be imagined,” said lawyer Mark Mendel, who leads Antigua’s WTO legal team. “Expanding domestic remote gambling while at the same time further impeding our operators the right to provide these services – which the United States committed to do under the WTO agreements – is almost impossible to comprehend.”Link here.
THE GOVERNMENT (AND LIFE) CAN ALWAYS CHANGE RULES IN MID-GAME
The idea that so many Canadians were oblivious that changes in the tax treatment of income trusts might occur should lead investors to question what other blows to their portfolios might be on the horizon. Things ranging from government intervention to hurricanes to wars to elections can all derail the best laid plans of women and men. Some problems can be averted better than others. A good place to start is by being aware of what issues security regulators and governments are investigating.
For instance, a little-known group called the Senate Committee on Banking, Trade and Commerce has recently conducted hearings into the hedge fund industry. There has long been a call for more transparency and regulation of hedge funds, and the cry increased after Portus in Canada and Amaranth Advisers in the U.S. both went belly up. Many Canadians were unaware they were shareholders in Portus through Manulife until the fund collapsed. And many pension plans turned money over to Amaranth that disappeared when natural gas prices took a pratfall. Even Eric Sprott, whose Sprott Asset Management handles $4 billion in assets, including $1.5 billion in hedge funds, said he worries that the Canadian financial system could collapse because banks are offering huge loans to hedge funds. He wants more regulation. So if new restrictions are announced that turn the hedge fund industry upside down, people should not claim they came out of left field.
Another issue people should be aware of is offshore tax havens. The furor had just started over federal Finance Minister Jim Flaherty’s income trust announcement when he said that he is looking into significant tax avoidance by some Canadians through the use of offshore accounts in Barbados, Ireland, Bermuda, the Cayman Islands and the Bahamas.
Along similar lines, for three years now Canada Revenue Agency has been coming out with annual warnings about tax shelters. The most recent one stated, weTaxpayers should be aware of the risks associated with participating in certain tax shelter gifting and donation arrangements, including gifting trust arrangements, leveraged cash donations and buy-low, donate-high arrangements.” Particularly popular are gifting trust arrangements, whereby the taxpayer makes a cash donation to a charity and becomes a beneficiary of a trust, which gives the taxpayer property that is donated to a charity. The taxpayer receives donation receipts for the cash (roughly 30% of the total) plus the purported fair market value of the property. But after being audited, the taxpayer usually has his or her donation reduced to only the cash amount. Some $916 million in donations claimed through 2003 have been disallowed.
Related to government and security regulation intervention is geopolitical risk that can affect investments positively or negatively at a moment’s notice. The recent Democrat surge in the U.S. had been greatly anticipated by stock markets in terms of how it would affect business in that country and Canada. However, what the election results would do to U.S. foreign policy was mostly overlooked. If the 70,000 U.S. troops in Iraq are withdrawn soon, the prospect of some stability coming to the region – if civil war is averted or the war ends quickly – could cause oil prices to fall significantly. That would boost U.S. stock markets but shrink energy-laden Canadian portfolios.
Investors should realize that few portfolios are bulletproof. Know what you are getting into, and be aware of circumstances that could adversely affect your assets. Buy and hold does not mean buy and forget.Link here.
U.S. EXPATS LOOK TO HOME AS TAX CHANGES BITE
A substantial number of U.S. expats living in Singapore are considering returning home as a result of changes to income tax laws passed by the U.S. Congress earlier this year, according to a survey conducted by the American Chamber of Commerce in Singapore. The survey found that almost 40% were thinking about returning home to avoid being hit by increased tax. Half of the sample also believed that the tax changes would prompt employers to hire less U.S. workers abroad.
The Tax Increase Prevention and Reconciliation Act (TIPRA), signed by President Bush in May 2006 increased the amount that can be earned free from U.S. taxes to $82,400 from the previous level of $80,000. However, income earned by expats above this threshold is now typically subject to higher tax rates. Furthermore, high housing costs, much of which previously could be excluded from the computation of U.S. tax, will now be treated as a taxable benefit and taxed often at 30% to 35%, making many individuals worse off, or leaving the employer to pick up the extra bill. The legislation is retroactive to January 1, 2006.
“These tax changes are disastrous for Americans abroad and for American business. No other developed country imposes such onerous taxation on the earnings of its workers abroad and our members are seriously concerned about the financial impact on them and whether it is worth remaining overseas selling American goods and services,” stated AmCham Executive Director, Nicholas de Boursac. “For many the true impact of the tax changes has not yet even begun to sink in. Some will only realize the full impact as 2006 personal tax returns are completed in March and April 2007. Many companies possibly do not yet realize the impact either as over 90% of our surveyed members indicated that their companies had not yet issued any guidance to them on the tax changes.”
AmCham says that the financial impact will be felt most by those American expatriates who are not tax-equalized and whose employers do not absorb the additional tax impost. 66% of those surveyed are not tax-equalized, and of this group, 30% expect a tax increase of between $5-15,000, while a third expect increases of more than $15,000. AmCham warned that even those U.S. expats who are not directly financially impacted by the changes will still be affected because companies will hire less expensive employees. “Basically, employers will hire Australians, Canadians or Europeans who do not cost as much as Americans,” noted de Boursac.Link here.
THE U.S. TAX RESIDENCY TRAP
If you are a non-U.S. person who happens to spend a lot of time in the United States you are secure in the fact that you will not become liable for U.S. taxes on your worldwide income so long as you do not spend 183 days or more in the U.S. during any tax year. RIGHT?
WRONG! To avoid a very dangerous pitfall you must be careful to read all of the fine print in the rules that determine U.S. tax residency for non-U.S. persons. First, if you spend even one minute of one 24 hour day in the U.S., that counts as a day towards tax residency. If you are flying through a U.S. hub airport and land at 11:59 p.m. and then quickly change planes and leave again at 12:15 a.m., you will still have spent two tax days in the U.S. – even though one of them was only one minute long, and the other was just 15 minutes long.
Second, you have to learn how to count all over again. Under the law, the way the number of tax residency days is determined is to count: all of the days present in the U.S. during the current tax year, plus 1/3 of the days present in the U.S. during the previous tax year, plus 1/6 of the days present in the U.S. during the year before that. If you spend a lot of time in the U.S., this will eventually mean that in any given year you will be limited to about 121 days – anything beyond that, when calculated as above could make you tax resident.
Many unsuspecting people have been caught in this trap, and end up negotiating a tax payment to the IRS that was entirely unplanned and unexpected.Link here.
IRS ISSUES GUIDANCE ON REPORTING AND WITHHOLDING
The U.S. Treasury and the IRS last week issued Notice 2006-100, providing guidance to employers and payers on their reporting and wage withholding requirements for calendar years 2005 and 2006, with respect to deferrals of compensation and amounts includible in gross income under IRC §409A and relief from reporting deferrals that are not includible in income during those years. According to the IRS, under the relief in the notice, employers and other payers need not report annual deferrals of compensation that are not includible in income under § 409A on Form W-2 or Form 1009-MISC for 2005 or 2006. However, amounts includible in income under § 409A for 2005 and 2006 must be reported on Form W-2 or Form 1099-MISC, as appropriate.Link here.
SWITZERLAND REMAINS DEFIANT OVER TAX SYSTEM
Members of the Swiss government have reiterated their determination not to give an inch to the EU regarding the country’s tax system. According to the European Commission, the Swiss tax system is “incompatible” with the 1972 free trade agreement between Switzerland and the EU because it distorts trade within the bloc. The EC takes issue with laws that allow local cantonal governments considerable freedom to set their own levels of taxation in a bid to attract international holding companies and high-net-worth individuals to relocate in Switzerland.
However, speaking earlier this week, Michael Ambuhl, a senior official of the Swiss Foreign Ministry, repeated the government’s long-held view that the Swiss tax system has no bearing on the trade agreement with the EU. “Our position is absolutely clear,” he stated, according to Swiss Radio. “The cantonal taxes do not constitute a subsidy – indirect or direct – to the exchange of goods, and as such do not affect the free-trade agreement.”
Ambuhl’s statement follows closely in the wake of comments made by Swiss Foreign Minister Micheline Calmy-Rey in a Sunday newspaper interview, where she stated that there is “absolutely no room for negotiation,” regarding Swiss tax laws, highlighting a growing impasse between Berne and Brussels on the issue.Link here.
AUSTRALIAN SENATORS APPROVE CAPITAL GAINS TAX EXEMPTION FOR FOREIGN INVESTORS
Australia’s Senate has approved a tax bill that would give foreign investors exemption from capital gains tax on the sale of domestic assets. The government says that the bill, which will excuse foreign investors from capital gains tax on the sale of assets other than land, is needed to boost investment in the Australian economy and bring the country into line with laws in other OECD countries.
While business and investment groups have naturally supported the bill, the proposal has drawn fire from other quarters, particularly from within the governing National/Liberal coalition party. One notable dissenter is National Party Senator Bill Joyce, who crossed the floor to vote against the government. He argues that it is unfair to expect Australians to continue to pay capital gains tax while foreigners can get away with a significant tax break on the sale of their investments, and he criticized the opposition Labor Party for supporting the bill. Joyce went on to express concern that the measure would lead to the raiding and break-up of Australian firms by foreign private equity groups, and deprive the Treasury of much more than the estimated A$300 million (US$236 million) in tax revenues. He also argued that the measure would encourage tax avoidance by prompting firms to set up offshore to take advantage of the tax break.Link here.
PRICEWATERHOUSECOOPERS CRITICAL OF AMENDMENTS TO NEW ZEALAND’S OFFSHORE TAX BILL
Accounting firm PricewaterhouseCoopers has expressed disappointment with the findings of a parliamentary report concerning the New Zealand government’s proposed changes to the taxation of managed funds and offshore portfolio investments. The report proposes revisions to the bill containing radical changes to the taxation of New Zealand managed funds and, more controversially, the taxation of offshore portfolio investments.
While Paul Mersi, financial services partner at PwC, said that the bill could go a long way to reducing long-standing distortions in the tax treatment of investors in relation to share and unit trust investments, the committee has missed a trick by failing to deal with unpopular items in the offshore part of the bill. “While the change to the way New Zealand managed funds will be taxed is a hugely positive one that has been 20 years in the making, the proposed taxation of offshore portfolio investments is still too harsh. It is surprising and disappointing that the Select Committee did not go further in the changes it has proposed to the bill,” he noted.
For New Zealand managed funds, the bill will make the tax outcomes of New Zealanders investing in unit trusts and super funds more consistent with direct investment in shares. However, the proposed changes to the taxation treatment of offshore portfolio equity investments have generated more controversy. The bill had originally proposed to tax investors on 85% of the unrealized market value movement of their offshore investments (with a couple of concessions). But a record number of submissions in opposition to these proposals has resulted in proposed changes to the bill which would result in New Zealand investors paying tax on an assumed income of 5% of the value of their investments each year (or the actual gain if lower in any year).
“We sensed a palpable and very strong consensus forming during the ... hearings around a simple, flat rate of tax at around 3% – not the so-called ‘Fair Dividend Rate’ of 5% ...” Mesri observed. “Experts who made submissions were unanimous that 5% was well above the actual dividend yield on international shares.” Mesri said that if taxpayers perceive that the tax is too high, it will lead to “less-than-full” compliance, placing significant pressure on Inland Revenue in terms of enforcement.Link here.
U.K. TAX RULES INVOLVING OFFSHORE PROFITS CHANGED
The government announced changes to corporate tax rules on how British companies handle profits from their offshore businesses. A number of firms have been involved in legal disputes over how their controlled foreign companies (CFCs) should be taxed. The changes, which take effect immediately, relax rules relating to CFCs by enabling companies to have their profits disregarded if they come from “genuine economic activity”.
The ruling, which reflects a drive to close tax avoidance schemes, applies to UK firms doing business in EU member states and certain other states in the European Economic Area. “The government is determined to maintain the overall competitiveness of the UK and, since the budget, has held a productive dialogue with stakeholders on the taxation of foreign profits,” the Treasury said in a statement.
In September, the government won a partial victory in a high-profile case when the EU’s top court ruled that Britain could stop companies from avoiding tax by using “wholly artificial” arrangements to create foreign units. The ruling by the European Court of Justice followed a complaint by Cadbury Schweppes Plc, the world’s largest confectionary group, that Britain’s CFC tax rules discouraged firms from setting up shop abroad. After the ruling, the EC said a common method of calculating a cross-border company’s tax base would help resolve such issues. However, Britain and Ireland oppose harmonizing Europe’s tax base, which they fear could be a first step to common EU tax rates. Cadbury has units in Ireland, an EU member state with low corporate taxes.Link here.
IMMIGRATION AND OVER-50’S BOOSTING U.K. TAX TAKE
According to a report complied by Ernst and Young’s economic forecasting group, the ITEM Club, UK Chancellor Gordon Brown has plenty of reasons to thank immigrants and the over-50s. The ITEM Club has estimated that the combined effect of net immigration and increased participation by the over-50s during 2004 and 2005 added £1 billion to the Treasury’s coffers in 2004/5 and an additional £2 billion in 2005/6, contributing significantly to the buoyancy of the UK economy. It suggested that the Chancellor is now well on track to achieve his growth target of 2.25% to 2.75% for 2006, as set out in the Budget in March – and may even be able to raise his forecasts for future years.
Peter Spencer, chief economic advisor to the ITEM Club, said, “Net immigration has touched record levels since Gordon moved into Number 11 nearly a decade ago with unforeseen and wholly positive implications for the UK economy.” Even if immigration levels fall off in the next few years, ITEM suggested that the trend of older workers delaying their retirement and pensioners returning to part-time work is a permanent feature of the workplace, with implications for longer term economic planning by Government.
However, Mr. Spencer concluded, “Although the Treasury will meet its revenue targets this year, this Chancellor and any likely successor are not out of the woods yet. Public spending and borrowing are likely to exceed forecasts for the foreseeable future and both will be hard to restrain in the run up to the next election. Unless Treasury spending is reined in, the current account deficit will remain in double figures for 2006/07 – at around £11 billion. The economy is moving into uncharted waters in terms of that tax burden and it is difficult to predict how the excellent economic performance of recent years can be sustained against this deteriorating background.”Link here.
Rising house prices a cash cow for UK Treasury.
New research released by Halifax has shown that the combined revenue raised from inheritance tax (IHT) and the higher rates of stamp duty on residential property reached a record £6.7 billion in the last financial year. According to Halifax, the figure underlines the effects of the failure to increase the thresholds for IHT and the higher rates of stamp duty in line with house price inflation over the past decade.
The study shows that the amount of stamp duty revenue raised from sales of properties valued at more than £250,000 has risen by 175% to £3.4 billion from 2000-1 to 2005-6. The majority (80%) of the rise in the total residential stamp duty tax take over the past five years has been due to an increase in the amount raised at the higher 3-4% rates. Last financial year (2005-6) the government collected £3.3 billion in inheritance tax revenue and projects £3.6 billion in revenue in 2006-7.
Halifax estimates that the number of properties in the UK valued at more than the 2006-7 IHT threshold of £285,000 now stands at 1.5 million, or 8% of all owner-occupied properties. Halifax is calling on the government to reform IHT and raise the threshold to £430,000 to allow for house price inflation over the past 10 years and to make a commitment to link the threshold to house price inflation in the future. The bank estimates that this change would cost the Exchequer approximately £1 billion per annum in lost revenue.Link here.
GERMAN VALUE-ADDED TAX HIKE WILL BE NEGATIVE FOR ECONOMY, STUDY FINDS
The introduction of a 3% increase in the rate of Germany’s VAT rate on January 1, 2007, is likely to have a significant impact on the German economy, with the net effect on demand likely to be negative, according to the conclusions of a new study. The Royal Bank of Scotland (RBS) with Bloomberg and NTC Economics have surveyed retailers and service providers across Germany to gauge their expectations of the impact the VAT hike will have. It is thought to be the first comprehensive study to date quantifying the little-known effects on demand and prices.
The research suggested that nearly 80% of the increase will be passed on to consumers, with most of the impact being felt in January. However, a significant proportion of price rises will also be implemented in advance, with over 20% of respondents having either already increased prices or planning to do so before the end of the year. “[S]urvey results clearly show that it will be a significant macro economic event for the German economy,” observed Jacques Cailloux, RBS, Chief Euro Area Economist. “They point towards a spike in inflation in January, and indicate that while the probability of a subsequent collapse in domestic demand is relatively low, the net effect on demand will be negative.”Link here.
IRISH BUDGET FURTHER RESTRICTS HIGH INCOME TAX RELIEFS
Irish Finance Minister Brian Cowen has announced further restrictions on controversial tax breaks which can be used by wealthy taxpayers and businesses to substantially reduce their tax bills. The new measures, announced as part of the 2007 budget, are being introduced with effect from 1 January 2007. The measures are based on restricting the amount of specified reliefs which a person can use to reduce their tax bill in any one year to 50% of the person’s income.
Under the new system, taxpayers will add up the total amount of specified reliefs being claimed, which will be added back to the taxpayer’s taxable income to give a “recomputed gross income” figure. Where the recomputed gross income is greater than a high income threshold of €250,000, then the aggregate deduction for specified reliefs in the year will be restricted to 50% of recomputed gross income, Cowen said. The new taxable income figure will be taxed at the ordinary income tax rates. Since the top rate of 42% will generally apply, an effective rate of close to 20% will be achieved. The system will contain a taper to avoid a sudden jump in tax at the threshold, and any relief denied in a particular year will be carried forward to the following year.Link here.
HONG KONG DROPS GOODS AND SERVICES TAX PROPOSAL IN A SURPRISING MOVE
Government wanted it, the people did not.
In a surprising about turn, the Hong Kong government said that it will abandon plans for a GST in the face of widespread public hostility to the idea. “We have heard clearly a strong opposition to the GST from the public,” said Financial Secretary Henry Tang Ying-yen. He said that the government would still put forward other ideas for widening the tax base, something that has been strongly urged on Hong Kong by the IMF and other bodies. Public consultation has showed that people have concerns that a GST would be inflationary, would be regressive and would discourage tourists.
Mr. Tang said, “[T]here was a lot of discussion today regarding various different types of taxes. New taxes, for example capital gain tax, progressive tax or dividend tax and indeed they have raised a number of questions as well as concern about the GST. ... One of the most talked-about subjects is income disparity that GST might bring. I think this is a very superficial argument and indeed it may be intentionally misguided. Because when we launched the GST debate, together we have a large basket of other compensation and measures to mitigate the effect on lower income families.”
Earlier in October, Director-General of Investment Promotion, Mike Rowse, observed, “As regards the consultation on the possibility of introducing a goods and services tax, it is worth pointing out that the cities and economies with whom we are most usually seen to be in competition all have a goods and services tax already.” He pointed to Singapore and Sydney, Australia as examples of competing cities that have a GST already, as well as China’s national tax on goods.
In August, thousands of demonstrators took to the streets of Hong Kong to protest against the planned tax. Miriam Lau, deputy chairwoman of the Liberal Party argued at the time that, “This march indicates that a GST would seriously impact trades and businesses and they are very anxious to tell the government that they do not wish it to implement it.”Link here.
ANALYZE YOUR ASSETS, THEN DECIDE
The first step is to analyze each of your assets and categorize them according to both their volatility and their exposure. Volatility denotes the amount of legal risk associated with each asset. Exposure denotes how easily the asset can be attacked.
The volatility classification of every asset you own is either Dangerous or Safe. Dangerous assets include businesses, professional practices, rental houses, apartment buildings, office buildings, hotels, restaurants, nightclubs, or any other building where many people work or gather. They can also include high-ticket vehicles such as super-luxury automobiles, yachts and airplanes. Safe assets include bank and brokerage accounts, collectibles, and passive investments in publicly traded or offered stocks, bonds, etc.
The exposure classification of every asset you own is either Exposed or Covered. Exposed assets include businesses or professional practices, all U.S. real estate, bank or investment accounts in your own name or the name of your business, business accounts receivable, IRAs and many other retirement funds, collectibles, and virtually any other assets insured or registered in your name or that of your company. Covered assets include bank and investment accounts, and passive investments in publicly traded or offered stocks, bonds, etc. when these assets either are held outside the U.S. or in the name of a non-U.S. owner. Most exposed assets can be converted into covered assets by utilizing advanced equity stripping techniques.
Having done this, you will be in a position to decide how badly you need an asset protection structure. Once you have made that decision, you can decide which structure or structures are best for you. These can range from simple incorporation, to family limited partnerships, to more complex domestic trust and/or LLC structures, to extremely advanced international structures. My advice is to choose that structure that makes the most sense to you, and with which you are most comfortable, provided it is not some crackpot solution sold by a snake oil salesman based on a novel constitutional theory. Above all, avoid cheap quick fixes like Nevada Bearer Share Companies – they simply do not work and require you to commit perjury for them to afford much asset protection at all.Link here.
CAN YOU TRUST A TRUST?
The trust is the oldest of all of the entities currently used in international financial planning. Some say it dates back to Roman times, but it certainly dates back at least to the time of the Crusades, when it was used to protect the estate of the knight or Lord who went to fight in the holy land at a time when wives were considered legally incompetent to manage such an estate. In its simplest form a trust is a contract among three parties – the settlor or grantor, the trustee and one or more beneficiaries. Under common law the trust does not have a separate persona from the trustee; however, in some jurisdictions, especially the newer international financial centers (IFC) statutory provision has been made creating the trust as a separate persona. In a simple trust the settlor or grantor places assets in the trust fund in the name of or under the control of the trustee who is required to manage those assets on behalf of one or more named beneficiaries.
Modern trusts usually include another fiduciary known as a protector, who at the very least, has the power to remove the trustee and appoint a new one in his stead. In many jurisdictions trusts can also be established on behalf of purposes rather than stated beneficiaries, e.g., for the advancement of religion. Almost all modern trusts include strong asset protection provisions which would effectively prevent the creditors of a beneficiary from gaining access or enjoyment of the assets within the trust held on behalf of the beneficiary. Another layer of asset protection is provided by a flight clause, which allows or requires the trustee or protector to remove the situs of the trust to another jurisdiction. In many cases this movement can be done secretly, which by itself adds another element of asset protection.
The big problem with the trust, is that for it to be effective, the grantor must genuinely give up control of the assets to the trustee. This causes two problems: (1) is the trustee trustworthy and, (2) will the trust survive the scrutiny of the courts. The trustee should have enough money that he is not interested in stealing yours. As such, a big bank or trust Company is perfect. A second consideration is that the trustee, which is presumably a corporate trustee, has no offices, branches or subsidiaries in the home country of the settlor. This is necessary in order to protect the trustee from undue legal pressure being brought against it. For example, a foreign bank with U.S. offices could be pressured into compromising a trust under its trusteeship by huge daily fines levied against its U.S. subsidiary.
In order to survive the scrutiny of U.S. courts the establishment and independence of the trust in question must be believable! This means that the settlor must still have substantial assets under his control and outside the trust. No judge will find it easy to believe that someone has given away all their assets to a foreign trustee without retaining some control. However, if the trust sets aside a substantial portion of the settlor’s estate in order to preserve it for his or her heirs, such a trust becomes substantially more believable. Many thought that the famous Anderson case was the death knell of trusts – but the courage and perspicacity of the courts of the Cook Islands ultimately upheld their integrity even in the face of a massive onslaught by the U.S. government.
In my opinion, the biggest downside to foreign asset protection trusts for U.S. persons is that they are highly suspect, and their reporting requirements exacting and extensive. In some cases, the creation of such a trust can even require the payment of gift tax. Nevertheless, a foreign trust established by a well qualified professional with in-depth understanding of both trust law and U.S. tax law can be a powerful asset protection and estate planning tool. But, under no circumstances is it a tool for tax reduction! If anyone tells you that it is, run from this fast as you can. If they will lie to you they will steal your money too!Link here.
THE ABC’S OF IBC’S
The international business company or IBC is the second oldest entity in the offshore practitioners’ bag of tools. It is from that venerable creation that virtually all other non-trust entities are derived. It was originally called an IBC to distinguish it from a domestic company. In the early days of offshore companies an IBC could only be owned by persons who were neither citizens nor residents of the country in which the IBC was incorporated.
There are two basic families of IBCs, British and American. During the last decade a whole new generation of corporate vehicles have come into existence based upon the IBC. These include protected cell companies, limited liability companies, and series limited liability companies, to name a few of the most popular. Each one of these new innovations has been driven by a particular need, either to suit the development of specific industry or in response to outside pressures against IFCs by high tax countries.
Another very important development has been the use of domestic companies as tax-free vehicles for foreign operations or investments. For example, a Panamanian Corporation, or a Marshall Islands LLC are both taxable for any domestic business, but are entirely tax-free for any income solely from foreign sources. This approach is becoming increasingly common as a means by which IFCs blunt the “unfair tax competition” attack of high tax countries. It has been so effective in blunting the attack, specifically because it exactly parallels the tax status of a single-member U.S. LLC which is owned by a foreign person and has no U.S. income.
This leads us to the most interesting of all offshore vehicles, the onshore entity in a high tax country which can be used by non-residents or non-citizens as a tax-free business structure. This genre includes trusts, corporations, LLCs, and limited partnerships in various major countries.Link here.
THE PANAMA PRIVATE INTEREST FOUNDATION
The Panama PIF is considered by many to be one of the best asset protection vehicles in the world. As such it is highly promoted as an effective alternative to an asset protection trust. In most circumstances those claims are true. But, Panama foundations have also been promoted as providing tax benefits for their users as well. This certainly may be true for non-U.S. persons, but is highly doubtful for U.S. taxpayers.
One of the ways in which these foundations are sold to Americans is to point out that U.S. tax law makes no specific provision for such entities, and as such, they are outside the rules. Nothing could be further from the truth! Under U.S. entity classification laws every non-governmental legal entity in the world is classified for tax purposes as a trust, a corporation, a partnership, or a disregarded entity. The tax regulations go on to say that in the case of entities that do not easily admit of classification, they are to be classified according to the way in which they operate.
The example given is that if an otherwise unclassified entity is primarily used as an asset holding vehicle it will be considered a trust. However, if such an entity is used to actively operate a business or make investments it will be considered a corporation. Ergo, a Panama private interest foundation will be considered by U.S. tax law as either a trust or a corporation depending upon how it is used. The same tax treatment will apply to all civil law foundations including stichtings, stiftungs, and anstalts.
All of these vehicles can be used effectively in the situations for which they are best suited. However, too many people seem to almost fall in love with the idea of using one of these civil law foundations. Perhaps it is because they sound exotic. But in so doing, they may end up with a vehicle ill-suited for their needs ... and perhaps even dangerous.Link here.
MIRROR, MIRROR ON THE WALL, WHO IS THE BIGGEST TAX HAVEN OF THEM ALL?
The Cayman Islands? Switzerland? The Channel Islands? “No,” “Nein,” and “Not bloody likely,” said the mirror. “It is me of course,” barked the U.S.! And the mirror said, “YES! But only for non-U.S. Persons!”
Imagine an offshore jurisdiction where a person can form a tax-free company over the phone in minutes using a credit card. Imagine in that same country that non-residents could receive bank and insurance company interest tax free. Imagine in that country that non-residents could buy and sell securities with tax free profits? How could such a wild place be allowed to exist these days?
It gets more egregious. Tax-free companies who have no U.S. owners can conduct business everywhere else in the world tax-free. They can even have a U.S. corporate tax ID number, and they do not have to ever identify their beneficial owners. Such a place ought to be sanctioned by the OECD and black listed for “unfair tax competition”!
But that will not happen because that place is the United States of America – the world”s largest tax haven! Delaware and Nevada alone have more companies organized there than all the top foreign tax havens combined. This is great news if you are a non-U.S. citizen who wants to take advantage of such enlightened laws, but less great when you are in a tiny international financial center trying to better the lives of the people in your small nation and the U.S. attacks you for doing exactly what it does in its own offshore sector!Link here.
And let us not forget Britain’s tax haven credentials.
On December 4, Martin Laing reported (not entirely accurately) on a fact that has been well-known internationally for many decades. The fact that the British public have been misled about it for the same length of time is an indictment on the ignorance of financial journalists on the subject of international taxation. In short, the U.K. does not tax non-domiciled residents on their foreign but unremitted income or gains or on their overseas assets. Laing stated, “The UK’s tax laws contain provisions that enable non-British individuals who live in London for some but not all of the time to be taxed only on their U.K. earnings.”
The situation is actually far more dramatic than that. First, citizenship is irrelevant. For anyone non-domiciled, irrespective of their citizenship or passport, taxes are entirely optional. Secondly, the length of stay in the U.K. is irrelevant, until after 17 years of continuous residence. After 17 years, inheritance tax bites, but that is so easy to avoid that it is largely meaningless. Avoidance of income and capital gains taxes is eternal. Thirdly, it is not just a handful of billionaires who are affected. Anybody whose family roots are from outside the U.K., and whose intention is not to make the U.K. his or her permanent home, is non-domiciled. The U.K. is a blatant tax haven in a way that few places are.
In my homeland, the Isle of Man, we have a low tax system but no one could live in the Isle of Man tax-free. Which is why we have so few millionaires. Which is the tax haven?Link here.
THE BAHAMAS: AN ADVANTAGEOUS ENVIRONMENT FOR PRIVATE TRUST COMPANIES
The Bahamas has introduced a comprehensive approach to Private Trust Companies (PTCs) that fully and appropriately incorporates PTCs into the country’s financial system. Under the legislation, a Bahamian PTC – like other structures such as foundations – will not require regulatory approval. The PTC need only arrange its affairs with a regulated Bahamian service provider or registered representative. This feature distinguishes the Bahamian PTC from those that are available in other jurisdictions and allows for exclusive interaction between the client and its Registered Representative without additional regulatory involvement. As a result, client information need only be delivered to the offices of the client’s service provider. Further, the legislation clearly sets out the role and responsibility of the Registered Representative.
Wendy Warren, CEO and Executive Director of the Bahamas Financial Services Board (BFSB), notes that the PTC legislation was designed with a long term view and approach. She further states, “As much as possible we wanted to establish PTC legislation that could stand the test of time, and provide a stable platform for decision-making. In other words, we did not take any short cuts. We carefully considered a number of factors such as what the PTC legislation intends to accomplish, our clients’ needs and the regulatory themes that may emerge in the future. In summary, the legislation provides clarity for clients and their advisors and a light regulatory touch”.
Jan Mezulanik, Chairman of the Association of International Trust Companies in the Bahamas (AIBT), said the legislation makes The Bahamas a highly attractive jurisdiction for PTCs. “Private Trust Companies have become a preferred tool in the structuring of the estate and inheritance planning needs of the very high and ultra high net worth families, and can provide the families with a greater level of involvement over the investment of the trust assets. The legislation enables service providers in The Bahamas to offer this estate planning option to clients” he said.
In addition to its light regulatory touch and providing access to a broad range of service providers, The Bahamas’ PTC legislation has a number of other distinguishing features. From the family with operating companies and charitable foundations, to the wealthy client from a civil law country, the PTC may be the ideal solution on a number of different levels, including providing control, influence, privacy, continuity, flexibility, education and empowerment of beneficiaries, and cost efficiency.Link here.
THE DOLLAR DAM IS BREAKING
Treasury Secretary, Henry M. Paulson, is rushing off to China next month and will lead a delegation to Beijing for the inaugural meeting of the U.S.-China Strategic Economic Dialogue. He will be taking high-ranking Administration officials with him, including Federal Reserve Chairman, Ben S. Bernanke. Because Hank and Ben are responsible for stabilizing the financial markets and need to work together to try and stabilize the dollar, their activities in China will undoubtedly be closely watched worldwide. Hank and Ben are also part of what is commonly referred to on Wall Street as the “Plunge Protection Team” (PPI). This Team has the entire U.S. Treasury at their disposal and this trip to China could undermine faith in the Administration’s ability to fix the massive trade deficit problem in an orderly manner. Preventing another 1987 “Black Monday” is on the Agenda, but the investing public will never be told that it is.
The China trip means that the ticking time bomb at the bottom of the dollar dam needs to be defused before it blows up, and the value of the dollar is swept away. Both the Republican Administration and the Democratic Congress want China, and the rest of Asia, to end their policies of manipulating their currencies down, by building up massive foreign exchange holdings. The new Congress is tuned into the fact that China has tariffs of 25% on imports such as autos, and is very tired of seeing American labor slaughtered. To make trade “fair” again, Congress is willing to take the action of imposing tariffs if China and Asia do not revalue. In turn, China may threaten to dump their dollars, unless the Fed keeps interest rates high. If China starts selling dollars, the dam will break.
Foreigners hold $13 trillion in dollar assets – about equal to the U.S. GDP – that are at immediate and painful risk to any dollar weakness. A 30% drop in the dollar, could cost foreign investors an easy $3 trillion in lost purchasing power, not to mention the loss to U.S. citizens who have a net worth of over $46 trillion in dollar assets. Our leaders must find a way to lower the U.S. trade deficit, or risk the dollar losing its unique position as the world’s reserve currency. This fact alone warrants the trip to China.
America’s currency problem is a very sad day for the Republic. Because of our country’s profligate fiscal and over-easy monetary policies, the dollar has been undermined so much so that, sadly, it may be no more secure as a store of value than the citizens of Baghdad are, walking the streets. The Federal Reserve must now be aware that the dollar has held its value on the world exchanges for two reasons: (1) Compared to the euro, yen, or yuan, America has the highest interest rates by far. We pay carry traders to borrow in yen at less than 1% and invest in U.S. assets, creating an artificial financial demand. (2) We have winked and have done nothing but talk as the Chinese, Japanese – and the rest of Asia – have manipulated their currencies down to rob America of its factories and keep consumers dumb and happy with artificially low interest rates, and excess consumption. All the while, the Asians have ended up with America’s money.
Since Ben Bernanke is a student of history, it is likely he remembers when Alan Greenspan was put to the test during the stock market crash of 1987. You may recall this crash was triggered by the dollar taking a nosedive. What if those foreign investors – who are holding $13 trillion in U.S. cash, stocks and bonds – lost 20% on the price of their stocks as the stock market sold off, and another 30% as the dollar value plunged? The financial market sell-off would be accelerated by the carry traders who borrow cheap foreign currencies, and could quickly be forced to sell at a really big loss, as the foreign currency moves up against them. The smart investors will dump when they realize the dollar is spiraling downward.
Hank and Ben may not talk openly with Chinese officials about this crash possibility, but you can be sure it’s on their minds. The possibility of a panic and crash from foreigners fleeing the dollar will be with us for quite some time. Therefore, it is highly unlikely in my view that interest rates will be cut until the recession is self-evident. So, with the U.S. stock markets up smartly the second half of this year, now is a wonderful time to cash in your chips at the stock market casino and head for the exit door before the mad rush. Only those who invest in foreign financial assets or real assets (such as commodities, gold and silver) are likely to be safe and not swept away when the dollar dam breaks.Link here.
ONLINE SCAMS COME WEARING HOLIDAY DISGUISES
Growth of social networking sites helps cybercriminals personalize messages to targets.
It is greeting card season, and a growing number of the cards, conveniently, will come via the Internet. There is only one problem. Some of the e-mails saying that you have an e-greeting card from a friend or family member may instead be from a scam artist intent on obtaining your Social Security number, credit card data, or even brokerage account information. “There is more cybercrime because peoples’ defenses are down. They are in a more trusting mood, thanks to the holidays, and they are looking online for bargains,” said Stu Elefant, senior product manager for McAfee.
That is an irresistible mix for increasingly clever cybercrooks as they realize more people than ever will shop online this holiday season, as well as seek to save postage and time by e-mailing holiday greeting cards. The average loss per “phishing” scam grew from $257 in 2005 to $1,244 in 2006, according to Internet research firm Gartner. Total losses stemming from such attacks reached more than $2.8 billion this year, Gartner found.
In Australia, a scam was uncovered in late October by Exploit Prevention Labs. According to a TechNewsWorld story, accounts at nearly every Australian bank were affected when a major cybercrime group used fake Yahoo greeting cards to infect computers with malicious software that tracked keystrokes on PCs. This so-called “keylogger” software was used to steal credit card numbers, bank account user names and passwords.
Researchers with Exploit Prevention Labs added that the e-card spammers were also targeting computer users in North America. Since early fall, numerous computer users across the U.S. have noted a marked increase in e-card-based spam e-mail. The subject line typically reads, “You’ve received a greeting from a family member” or “You’ve received an animated postcard.” The text inside these phishing e-mail messages asks people to “click here” to see the card. If they click on these links, they could unwittingly be downloading malicious software. McAfee’s Elefant warns people to exercise caution when e-greeting cards enter your inbox and to open messages only from people you know. If you have any doubt, he warned, do not open the message.
People also are helping the crooks more than before. The growth of social networking sites like Facebook, MySpace and even YouTube are helping cybercriminals target computer users because there is more personal information about people on those sites, Elefant said.Link here.
U.S. DATA SPYING EXTENDS TO MUTUAL FUNDS
The mutual fund industry was required by federal law to begin reporting the suspicious activities of customers last month - five years after passage of the Patriot Act. Banks have been required to file the confidential suspicious activity reports, or SARs, since the mid-1990s. More recently, casinos, brokers, money transmitters and insurance companies also have been charged with keeping an eye out for dubious transactions. As a result, the number of these reports rose by a third in each of the past two years to nearly 1 million in 2005. In the first six months of this year, more than 550,000 reports were filed, according to FinCEN.
Federal investigators say the reports are invaluable. The information has been instrumental in recent cases exposing investment and real estate fraud and in busting an under-the-table payroll scheme and a sports-gambling ring. But the reports also have fostered concerns about invasions of privacy and increased compliance expenses being passed on to consumers, who are not told if a company files an SAR about them. And there are worries about businesses being deputized as “citizen cops” and filing more reports, possibly in situations that turn out to be innocent, to avoid liability. So-called defensive filing, industry officials contend, likely inundates investigators with useless information.
“The American people do not want gratuitous fishing expeditions into their financial records,” said former Georgia Rep. Bob Barr, who is chairman of Patriots to Restore Checks and Balances. The group was formed last year to seek changes in the Patriot Act.
The widening universe of companies filing the reports has transformed a program which was used primarily as a way for investigators to construct a paper trail in money-laundering cases after the crime. The reports took on a new significance after revelations that all of the 9-11 hijackers had opened bank accounts in their own names and received thousands of dollars in wire transfers. Steve Hudak, chief of public affairs at FinCEN, said that with all of the banking and law enforcement officials looking at the reports, “most of them are read or at least have a cursory review.” Reports of suspected terrorist financing are “absolutely read,” he said. “Even if we were to collect 2 million SARs a year, with our technology, it wouldn't make a difference. Think of Google and how quickly it’s able to process through millions of records.”
In fact, the suspicious activity report regime might be expanded again. The Treasury Department is considering a requirement that travel agencies, car dealers, and real estate professionals have anti-money laundering programs in place. Those rules were proposed more than three years ago, and final rules could require they also file the reports. “We have not moved forward on those industries, and I can’t give a timeline,” Hudak said, adding that the agency is researching those businesses and assessing the risks.
The terrorist attacks changed the dialogue in Washington. Just two years earlier, federal regulators had withdrawn a proposal that banks keep closer tabs on customers and more routinely report financial activity to authorities. The idea drew protests from civil liberties and privacy advocates, and regulators received more than 250,000 letters, mostly negative, from the public. In contrast, the proposal that mutual funds file suspicious activity reports got five comment letters. One from the Investment Company Institute, the industry’s trade group, expressed support for the rule and suggested only a few technical changes.
The three-page SAR forms includes the subject’s name, address and other identifying information as well as the suspected wrongdoing, such as fraud, market manipulation, theft and terrorist financing. In general, mutual funds must report transactions of at least $5,000 if they are out of the norm for the customer or if there is reason to suspect that money has been derived from illegal activity. Some “red flags” might be that a customer refuses to provide identifying information or gives false information, or that fund transfers appear to be designed to hide the country of origin. Many mutual funds, including two Baltimore firms, Legg Mason Inc. and T. Rowe Price Group Inc., have been voluntarily reporting dubious transactions for several years. Laura H. Chasney, associate legal counsel at Price, said suspicious activity reports are rare, perhaps because the company does not accept cash. She said two committees review potentially dubious transactions before a report is filed with FinCEN. “It’s a judgment call, but from our perspective when we see the activity, we file,” she said.
Separately, financial institutions have long had to report cash transactions of more than $10,000. About 13 million of those currency transaction reports are filed annually. Many companies have chafed under the regulatory burden. The American Bankers Association lobbied Congress this year to exempt longtime customers, such as restaurants, retailers and gas stations that frequently deal in large amounts of cash, from currency transaction reports. Congress instead directed the Government Accountability Office, its investigative arm, to study the issue. Bankers also have been clamoring for more guidance on when suspicious activity reports need to be filed. Federal Reserve Chairman Ben S. Bernanke, in remarks to an industry convention recently, said more feedback should be given on the usefulness of the reports and how to better identify the most significant risks.
Companies, by law, cannot tell the target of an SAR that one has been filed. Industry insiders say they have heard about innocent customers being refused an account or having an account frozen, actions that are typically at a bank’s discretion, because of suspicious activity. But they say those incidents are rare. “Sometimes, unfortunately, it weighs against the customer,” said Richard M. Whiting, general counsel at the Financial Services Roundtable, a trade group. Hudak said that “routine transactions that any consumer would go through would likely not draw attention. ... If for some reason a SAR was filed and law enforcement didn’t have an interest in that person, it would likely never come up.”Link here.
EC CALLS FOR MORE ACTION ON SPAM, SPYWARE
The EC called on all regulatory authorities and stakeholders in Europe to step up the fight against spam, spyware and malicious software. Despite existing EU legislation to outlaw spam in Europe, European internet users continue to suffer from illegal online activities from inside the EU and from third countries, the Commission underlined in a new Communication. It stressed that although internet safety has been on the political agenda for some time, national authorities should step up their actions to prosecute illegal online activities.
According to the EC, massive volumes of unsolicited email are still being sent. Security firms Symantec and MessageLabs estimate that spam constitutes between 54% and 85% of all email. From being a nuisance, unsolicited email has become increasingly fraudulent and criminal. Criminals are luring users into revealing their sensitive data and finances via so-called “phishing” emails. Privacy is at risk because spyware, spread by email or software, tracks and reports on users’ behavior. In turn concern about these risks is seriously restricting the growth of legitimate online services. The new Communication on Spam acknowledged that legislative tools to fight these threats already exist, in particular the EU-wide “ban on spam” adopted in 2002 as part of the ePrivacy Directive.
However, implementation is still a problem in most EU Member States. To improve, they should now lay down clear lines of responsibility to use the tools available under EU law effectively. Because of the criminal trend in spam and its cross border aspects, good cooperation between enforcement authorities is paramount. The Communication called on industry to cooperate fully, by applying proper filtering policies and assuring good online commercial practices in line with data protection law. The Commission will reinforce further its dialogue and cooperation with third countries, high on the list of spam sending countries.Link here.
China new spam source leader. Latest viruses have some new tricks up their sleaves.
The politics of unwanted email is changing with China set to overtake the U.S. any day now as the originator of most inbox clutter. Figures for November from Irish email monitoring firm IE Internet show that although the U.S. is still the world leader with 27% of dodgy emails originating there, this is a huge drop on October’s figure of 48%. Meanwhile, China is now pumping out nearly 26% of all spam filtered by IE Internet – an increase on the previous month’s figure of just under 10%. China is now second in the monthly world rankings of spam-producing countries, followed by Britain (21%), France (15%), India (7%), and Turkey (4%).
“The United States is continuing to decline as a source of spam emails,” said Ken O’Driscoll of IE Internet. “We’ve been predicting this for some time as U.S.-based spammers are actively offshoring their operations to avoid tough U.S. anti-spam laws. I would predict that the U.S. will not be the top source of spam next year.”
Meanwhile, as the world’s spam merchants have been getting ready for their Christmas onslaught, virus writers have been busy too. The overall rate of emails carrying a virus increased to over 11% for November, vs. almost 10% in October. W32/Warezov was the main offender at 25% of all viruses detected, followed fellow-newcomer W32/Tricky-Malware at just over 15%.
“For the past number of months, the rate of virus infections has been declining as home users continue to buy brand new PCs which have virus protection installed as standard,” said O’Driscoll. “New viruses – which appear all the time – were not good enough or well written to be able to rapidly infect large numbers of PCs.” However, O’Driscoll warned that the two new viruses on the block were worth watching out for. “Basically, they are both worms which spread via email. The home user still has to click on an attachment and open it. They pose as security updates to the operating system, so perhaps as a social engineering tool this fools people. The viruses allow your computer to be remotely controlled - possibly to send spam out anonymously but for anything really - even accessing your personal files.
“The really interesting thing about the W32/Warezov virus is that it actually connects to the internet periodically and updates itself to the latest version. This is what legitimate software such as operating systems have been doing for years.”Link here.
BILL KAUFFMAN: AMERICAN ANARCHIST
“I am an American patriot. A Jeffersonian decentralist. A fanatical localist. And I am an anarchist.” ~~ Bill Kauffman
I first became acquainted with Bill Kauffman’s writings when I came across his America First! Its History, Culture, and Politics (Prometheus Books, 1995). It was a riveting account of the men (and women) who failed to find virtue in U.S. interventionism and imperialism in the 20th century – including that “good” war, World War II. Kauffman’s skewering of Lincoln, Wilson, and FDR while recounting the life and times of those horrible American “isolationists” was not too popular with mainstream reviewers. What piqued my interest in Kauffman’s new book, Look Homeward, America: In Search of Reactionary Radicals and Front-Porch Anarchists (ISI Books, 2006), are brief references to pacifism I read in reviews of his book.
Kauffman’s book is a radical anti-state, anti-war declaration. These twin themes are not just mentioned on a few pages. They are found throughout the book. And because they are combined with a fair amount of American history and biography (including more about President Millard Fillmore than one would ever care to know) that will not be found in the typical American history book, it is both an interesting and informative read. Kauffman introduces his readers to people like social activist Dorothy Day (“The anarchist Day practiced her Christianity so consistently that she smilingly explained to impatient socialists that she was ‘a pacifist even in the class war.’”) and the poet and novelist Wendell Berry (“I have come to the realization that I can no longer imagine a war that I would believe to be either useful or necessary.”).
It is hard to place Bill Kauffman on the political spectrum. In addition to the quote above, Kauffman states:
My wanderings had taken me from the populist flank of liberalism to the agrarian wing of Don’t Tread on Me Libertarianism to the peace-and-love left wing of paleoconservatism, which is to say that I had been always on the outside – an outsider even among outsiders – attracted to the spirit of these movements but never really comfortable within them, never willing even to call myself by their names. When asked, I was simply an Independent. A Jeffersonian. An anarchist. A (cheerful!) enemy of the state, a reactionary Friend of the Library, a peace-loving football fan. And here, as Gerry and the Pacemakers once sang, is where I’ll stay.
Kauffman’s politics is “a blend of Catholic Worker, Old Right libertarian, Yorker transcendentalist, and delirious localist.”
It is just a few pages into the introduction, while reflecting on the days he spent as an editor at Reason magazine, that we see Kauffman’s opinion of the state:
I cannot think of the libertarians without laughing, and yet, on the great issue of the day, they were dead right. They diagnosed the twentieth century’s homicidal malady: the all-powerful state, which in the name of the workers of the world, the master race, and even making the world safe for democracy had slaughtered tens, nay hundreds, of millions of human beings whose misfortune it had been to run afoul of ideologues wielding state power.
He says of the new Department of Homeland Security, “Today that department is charged with the defense of the ‘homeland,’ a Nazi-Soviet term never used to denote the United States prior to the Age of Bush.” Those who deny the right of secession “set the tyrant’s plate.” Kauffman does not advocate violence against the government, believing that we should “leave murder as an instrument of policy to the governments of the world.”
Kauffman is an admirer of Wendell Berry, “the rural anarchist, the reactionary radical, the lover of his country and the contemner of its government” who “abhors militarism and foreign wars.” “The state,” according to Berry, “is deified, and men are its worshippers, obeying as compulsively and blindly as ants.” Berry says of his best moments:
I wish to testify that in my best moments I am not aware of the existence of the government. Though I respect and feel myself dignified by the principles of the Declaration and the Constitution, I do not remember a day when the thought of the government made me happy, and I never think of it without the wish that it might become wiser and truer and smaller than it is.
The opinion of the American state in 1951 by the editor of the Catholic Worker, Robert Ludlow, is also mentioned by Kauffman:
We are headed in this country towards a totalitarianism every bit as dangerous towards freedom as the other more forthright forms. We have our secret police, our thought control agencies, our over-powering bureaucracy. ... The American State, like every other State, is governed by those who have a compulsion to power, to centralization, to the preservation of their gains.
Kauffman is no fan of the state-worship that is nowadays misidentified as patriotism. He holds to an “un-imperial patriotism” – a patriotism that “is not the sham patriotism of the couch-sitter who sings ‘God Bless America’ as the bombs light up his television, or the chickenhawk who loves little of his country beyond its military might.” His patriotism is a “fresh-air patriotism whose opposition to war and empire is based in simple love of country.”
Kauffman is not very kind to U.S. presidents – living or dead. He stands the usual ranking of great presidents on its head, remarking that “the bloodletters are great, the wagers of smaller wars are near-great, the fitful bombers are average, and the men of peace are below average or poor.” LBJ was “the homicidal Texan in the White House.” Kauffman has no use for “Nagasaki Harry” Truman either. He “ranks right down there with Woodrow Wilson and LBJ as a presidential enemy of liberty.” And then there is Lincoln. Kauffman honors “the antiwar Democrats of the North, the execrated Copperheads who have long since been consigned to the snakepit of American history.” Kauffman introduces us to Ohio congressman Clement L. Vallandigham, who “publicly denounced the ‘wicked and cruel’ war by which ‘King Lincoln’ was ‘crushing out liberty and erecting a despotism,’” and to Lieutenant Governor Sanford Church, who “vilified the Lincoln administration for seeking to ‘absorb, centralize and consolidate the rights and powers of the loyal States in the general government.’”
Kauffman has no use for elites: “The most dangerous people – the ones who will kill you for your own good – are those who subordinate the individual to abstractions: the class, the master race, the efficient economy. They gain power because they are willing to perform the sleazy and degrading acts necessary to its achievement.”
Kauffman does not offer criticism without proposing solutions. Here are two of them:
No statesman’s coercive power should ever extend over people he does not know. If Bush and Hillary, Lieberman and Rumsfeld, and the Democracy Geeks of M Street want to pull their brats our of Sidwell and ship then overseas to kill whatever dusky primitives are our enemy of the week, so be it, but they have no claim upon my kin or my neighbors (or yours).
Stay with your family. Your tribe. Your neighborhood. Your town. As Joe Strummer of The Clash hummed, “It’s up to you not to heed the call-up.” Don’t feed the war machine. You are not expendable, in your family’s eyes or in God’s. The soft young men in three-piece suits who write their little pamphlets proving that whatever slaughter our government is currently engaged in is a “just war” should be laughed back to the seminaries they quit. Thou shalt not kill means us, too.
There is no excuse for reviewers ignoring the anti-state, anti-war themes that pervade Kauffman’s book – a fast-paced, informative, and enjoyable read that shows us the madness that is the state, its politicians, and its wars.Link here.
Authority is the problem.
It occurred to me just recently that I have done some pretty amazing things in my life. That may well be said of many human lives. I did not plan or anticipate most of those things, though a couple of them I did. What is more important, however, is that I pursued those things because I wanted to, and not for any other reason.
And it would likely be impossible to recount all of the petty rules, regulations, moral edicts, et al, I have transgressed which Establishment types try to impose upon us with their arrogant presumption of a Right To Govern. The main difference of this second set of actions from the first is that I never wanted to do any of them. I did them because I had to. I quit “public school” because I saw a better alternative. For example, had the “public schools” I went to actually been educational institutions instead of socialistic indoctrination centers where rules and discipline are held paramount above any form of real learning, I might have stayed and graduated with my friends.
What amazes me is that from the time I first began questioning authority as a teenager, people of all stripes – from screaming apoplectic high school “teachers” to arrogant power-mad cops, from lying snake IRS employees to, on occasion, my own parents – have regarded me as “having a problem with authority.” I have a problem with authority?!?! Actually, okay, you are damned right I do. But that is only because I rather think it is those who place themselves in that very position who have a really big problem with it. To the extent, in fact, that none of them should or ever can be entrusted with it, period.
Oh, how Establishment goons hate people like myself for holding such an eminently logical view! We are The Enemy. So be it. We scare them, you see. We are the biggest threat to the survival of tyranny’s hydra-head from which they both draw paychecks (from other people’s stolen wealth, no less), and get a big, sick boost to their fragile egos. And they know our numbers are growing. With every further injustice they foist upon us, they ensure that.
What is important at this juncture – in particular for the uninitiated – is setting the record straight in terms of this simple truth. Yes, people like myself (Anarchist, Libertarian, Voluntaryist ... take your pick. All apply.) do have a problem with authority, all right. Authority itself – whenever it extends beyond the ability of each individual to run his or her life as they see fit – is the problem. It is time we dumped it into history’s ashcan.Link here.
AN ERA OF UNINTENDED CONSEQUENCES
Over the past decade, lenders dramatically loosened underwriting standards and aggressively marketed an assortment of exotic mortgage products designed to make home ownership more “affordable”. In the end, they helped to create a now-bursting real estate bubble that increased the costs of shelter for most Americans and left many of those who should not have taken the plunge in the first place unable to afford rising mortgage payments – or anything else.
By communicating more openly and adopting a measured pace of interest rate rises in the 2-year period that began in June 2004, the Federal Reserve sought to restore a measure of economic equilibrium while reducing market uncertainty. In reality, their approach helped bolster a quantum leap in risk-taking on Wall Street and elsewhere and added to ever-growing imbalances that have destabilized the U.S. economy and made the outlook as uncertain as ever.
Designed to facilitate risk-sharing and mitigate the cyclical downside of traditional banking practices, the widespread use of securitization in recent years has been seen as a boon. Instead, it has transformed plain-vanilla credit exposure into a dangerous concoction of credit, interest rate, prepayment, counterparty, timing, and operational risk. The gold rush of modern financial alchemy virtually ensures that all facets of the economy will be adversely affected when circumstances take a turn for the worse.
Historically, policymakers have viewed over-the-counter derivatives as the province of sophisticated financial operators who are capable of looking after their own interests. Yet by seemingly encouraging those who are actively involved with these often highly-leveraged securities to focus on profitability without any real oversight or incentives to take stock of the bigger picture, it is likely that the eventual violent unraveling will be in no one’s interests. Similarly, by allowing hedge funds relatively free rein, regulatory overseers in Washington and elsewhere have essentially facilitated the spectacular growth of an industry with a voracious appetite for taking on risk. It will not just be sophisticated investors who feel the pain.
In theory stock options ensure that the interests of investors and managers of publicly-traded companies are aligned. In practice, inadequate accounting rules, poor regulatory oversight, a distorted tax code, and the lopsidedly pro-business government policy orientation of recent years has meant otherwise. One result has been a growing scandal involving executives at more than 150 companies who allegedly manipulated options prices for personal gain, while another has been a ramp-up in borrowing to fund stock buybacks at inflated prices.
“Sooner or later,” Robert Louis Stevenson once remarked, “everyone sits down to a banquet of consequences.” Unfortunately, the cumulative effect of a wide range of unintended consequences such as these means that Americans as a group will be forced to take the Scottish author’s words to heart in the not too distant future. It will not be a pretty sight.Link here.
|Previous||News Digest Home||Next|
|Back to top|