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HOW TO CHOOSE A COUNTRY FOR RETIREMENT OR INVESTMENT
At some point in your life you may want to move overseas for retirement or to start a business or buy real estate. How do most people decide on which country to move to? The average person would probably weigh factors like weather, cost of living, proximity to the U.S., the experiences they had while a tourist in that country, and how they generally felt while visiting that country. In other words, they had a good tourist experience in a particular country, so they want to live there as a long term resident.
While this approach has its advantages – you really have to like a place if you are going to move there – it also has some drawbacks. What about the health care system? How about corruption – say you open a small business and your local competitors complain to the local corrupt officials, who fine and harass you? Or worse, maybe your landlord likes your restaurant and decides to get rid of you and keep your restaurant. This kind of thing happens all the time.
While there is no guarantee that you can avoid every problem you might run in to, at least you can try to educate yourself, to have a clear idea of what you are getting in to. There are a variety of sources available for you to gather information about any country you might consider moving to – information on corruption, development, health, crime, education, human rights, etc. It is also true that statistics cannot completely portray the full nature of a country, but at least you can get a relative idea of a place. If a country is rated as having a low level of corruption, chances are that you will have an easier time getting things done without having to bribe anyone than in a country with a high level of corruption.
One of the most interesting web sites for research is Nationmaster.com. On this site are hundreds of statistics about most countries – crime, education, health, economy, with countries ranked first to last in every category. One of the more enlightening statistics is the list of “firsts” – which categories a country ranks first in. For example, recently Uruguay ranked first for democratic transformation. It would pay someone to wander through this web site. You might find a country that you previously would not have considered.
An organization called Transparency International publishes a number of statistics and surveys pertaining to corruption in various countries. If you want to buy or build a house or start a business, corruption could become very important.
The UN Development Index (PDF) is a statistic that rates the level of development in a country, based on factors such as life expectancy, economy, availability and quality of health care, and education. In Latin America, the highest level of development is generally in southern South America – Chile, Argentina, and Uruguay.
The FinFacts financial web site provides an annual survey of cost of living in cities worldwide. This survey relates mostly to the cost of living of executives living in these cities, so your actual cost of living there may vary. The cost of living in many South American capital cities, Buenos Aires and Montevideo in particular, is at the bottom of the scale. These are not Third World backwaters. They have basically a first-world lifestyle, decent health system and so on. So in relative terms these cities would be a great bargain, since most of the other cities in that price range are in extremely poor countries.
Moving overseas is not something to be done on a lark, or because you are a little bored or have a vague idea that you might like life better somewhere else. It is a lot of work. It could literally save your life, take you from a dull monochrome life of routine and boredom, to a life of vitality and excitement. It is just that you should look at things objectively and with facts in your hand. It be a drag to sell everything, move to a country you thought you loved, only to find out after a few months that the crime rate is off the charts. Or that the local government is made up mostly of kleptocrats. Or that to get decent health care you have to go to a neighboring country.
By the way, the U.S. health care system is rated #37 in the world – just after Costa Rica. There are actually good doctors and facilities in most parts of the world. Even in a country with a so-so health care system you can usually find private facilities that are good, and even if you pay cash it will probably cost less than your deductible in the U.S. The World Health Organization’s rankings of health systems in the world can be found here. In most parts of the world the doctors seem to take their time more than they do in the U.S. They may or may not have the latest gee-whiz atom-smasher wazoo scanner, but they probably have patient and well-trained doctors who will take their time and do a thorough diagnosis that actually takes more than 3.7 minutes. The U.S. has the most expensive health care in the world, by far, so it will cost you less everywhere else. No exceptions. If you settle somewhere, check out the local health insurance deals. Although in some places it is so cheap that you might just decide to pay cash for everything as it comes up. Imagine not having to freak out about insurance, deductibles, co-pays.
Lies, Damned Lies and Statistics
Statistics do not tell the whole story, but it does give you a good idea of what to expect. If you settle in the country with the highest rate of violent crime in the world (South Africa) you might have to take a lot of precautions. If you settle in a country where over 30% of people get malaria each year (several countries in sub-Saharan Africa) you might need to worry about malaria prevention. If you move to the country with the highest gasoline prices (Uruguay) you will probably have to leave your SUV at home.
In stock investing, smart investors take advantage of unpopularity. A smart investor buys when a stock is unpopular – and cheap – and owns it until it becomes popular again, when he sells. Buy low, sell high. The same can be said for countries to some extent. The popular countries get expensive (Europe, Anglo-Saxon countries) the unpopular countries get really cheap (Argentina and Uruguay beginning in 2002, Southeast Asia after the 1997-8 crash). The world changes, countries climb back into prosperity, and all of a sudden everybody now wants to go there. Except that when “everybody” wants to go there it is no bargain. When “nobody” wanted to go there it was a huge bargain.
One of the most important issues is your rights as a foreigner. As a tourist you have much in few rights, in most countries. Generally you cannot work or own a business. If you want rights, normally you would have to apply for some sort of residency. Check out the residency requirements of the country you may want to relocate to. What rights do you acquire with the various forms of residency? To apply for residency many countries will require a notarized statement from your local police department, saying that you are not a bad person. Another common requirement is a notarized birth certificate. Some countries require an AIDS test.
You might have stars in your eyes about relocating to your new paradise, only to find out that it is almost impossible to get residency there (New Zealand, some European countries). Do your homework early and get the facts.
If your heart is set on owning a house or condo in your new home, be smart and do not buy immediately. Take a little time, get to know the market, and learn the local real estate laws. Of course, before you do anything, find out the rules about foreigners owning real estate. You may be surprised to find that foreigners are restricted to buying real estate only in certain areas (like in Thailand). Remember that it is easy to buy a house overseas, but often hard to sell.
Many countries have various sort of residency-work programs. Work visa, retiree visa, investor visa, banana boat operator visa, etc. You will probably lose some rights in any country – voting rights, rights to a local pension, etc. But you will gain other rights – the right not to be spied on by your government, the right to health care you can actually afford, etc.
More Information Sources
Books just cannot keep up with the flood of information in as timely a manner as the internet. However, you should still check out travel books relating to your country of interest. The best of these books are generally updated every year or two, and are very useful for finding your way in your new home. Lonely Planet, Rough Guide, and Let’s Go all publish tourist guidebooks for dozens of countries. My preference is Lonely Planet for some countries, Rough Guide for others. I have found they get me in to a place a lot more deeply than the other books. They cut the baloney and tell you like it is in most cases. If you plan to live in a place for months or years you want this kind of information. The quicker you get a handle on things the better.
Another option is to make local pen friends, particularly before you move to a place. If you are single you can find lots of members of the opposite sex on dating sites. Plentyoffish.com is a free site, and people from all over the world can be found there. If you are married, a good bet would be one of the pen-pal sites. For years I had pen-pals in many of the former-Soviet countries – I saw lots of things a tourist would never see, and learned a huge amount about life in Ukraine and Russia. It is nice to have some ready-made friends in a country before you actually move there, and with the internet it is almost too easy to make friends in other countries.
Teaching English is an old fall-back for those living in a non-English speaking country. Millions of people in the world are willing to pay for English lessons and practice. Whether in a classroom setting or private lessons, you can at least make some pocket money. The best jobs often require some sort of certificate (Celta, etc.) but in some countries they are not so picky. If you decide to make some money off the books, look for something low-profile, where the locals will not resent you too much – at least not enough to complain to the authorities. If you are not competing with the local businesspeople, chances are the locals will leave you alone.
If you have not decided on a country yet ...
If you would like to move overseas but have not made up your mind as to where, there are some things that might help you make up your mind. Let us say you wanted temperate climate, low level of corruption, low cost of living, easy-going lifestyle, First World amenities, Spanish language, and a decent standard of human rights. Based on the above factors I would consider Uruguay, which does have expensive gasoline, some crime (burglary mostly), and is distant from the U.S., but satisfies the other factors.
Or, say you wanted a tropical climate, English language, low cost of living, proximity to other countries with tourist attractions, First World amenities in the cities, tropical islands nearby, decent health care system, and great food. Based on these requirements, I might choose Malaysia, or possibly Belize. Malaysia is cheaper and the level of development is a lot higher, but it is a long way from the states. Decide what is most important and research which countries offer the best fit.
Just The Facts
I hope I have given you an idea of how to make your choice of country more methodical and a little bit less emotional. You might choose to overlook a lot of what you find out in your research if you really love a place, but at least get the facts. The worst thing would be to leave your job and home, move to a country you have fallen in love with, and over a period of time come to hate the place because you did not do your homework.
Once you decide on a country or countries, find out what kinds of residency programs they offer, how much it costs to apply, and how difficult it is to qualify and apply. In some countries (Malaysia is a notable example) private companies can assist you with the paperwork. Some countries charge a lot to file for residency. Some countries restrict where you can own real estate. New Zealand is a wonderful place, but it is very difficult to get year round residency unless you are a citizen of the Commonwealth already. Basically they favor the young, and those who have a lot of money (like $millions).
Some people choose to stay in a country illegally on a tourist visa on an indefinite basis. Sure you can try it, but you could risk losing your house (if you own one) as well as being deported and banned from the country if they catch you. If you like living dangerously, fine, but realize what could happen. There may be people who talk about all sorts of arcane ways of getting around certain laws in your country of choice, whether pertaining to real estate, residency, owning a business, etc. If the advice comes from a reputable local attorney, maybe it is worth listening to. Otherwise, take it with a grain of salt.Link here.
SURGE IN U.S. PASSPORT APPLICATIONS HAS CREATED A BUREAUCRATIC BOTTLENECK
Triggered by new regulations this year requiring passports for air travel to Mexico, Canada, the Caribbean and Bermuda, a massive spike in applications has caused a nail-biting backlog. In April and March, new records were set for passport production as the State Department issued more than 3 million passports. Between October and April, 8.6 million passports were issued, a 33% increase over the same period the prior year.
With demand at an all-time high, standard application processing is currently averaging 10 to 12 weeks, nearly twice the usual turnaround time. Travelers are now being advised to apply at least three months before expected trips.
Initially caught flat-footed, the agency in recent months has doubled staffing at the National Passport Information Center and expanded call center hours to include weekends. In addition, high-capacity phone lines have been installed and a new mega-processing center in Arkansas ramped up production in April. When it hits full capacity by year’s end, the facility is expected to process 10 million applications yearly.
In recent months, the U.S. Postal Service in the San Francisco district, which covers Oregon to San Jose, has seen the number of passport applications double to 3,500 a month. The Postal Service charges a $30 processing fee plus $15 for photos, in addition to the $67 government fee. In response to the mushrooming demand, nearly 50 passport fairs have been held throughout the three postal districts of Northern California over the past few months. “We are used to procrastinators, so we’ve been holding the fairs as frequently as possible,” said spokesman Augustine Ruiz. “The amount of time to process at the post office has not changed – you are in and out. But it now takes longer to get your passport back. People who are thinking of taking summer vacations might consider a fall vacation instead.”
The delay is creating a bonanza for private passport “fixers”. One mobile notary company in San Bruno expanded into passport expediting a few months ago, charging $50 to $125 in addition to government fees. “We are seeing that some people aren’t going to Mexico or Canada this year because of the passport hassles,” said Wendy Li of ANS 24/7 Mobile Notary Service. At the San Francisco Passport Agency, numerous travelers describe scenes of chaos, with scanty signage and extensive queues, even people lining up luggage in tow, hoping to still catch flights.
“It’s a true mess,” said San Francisco resident David Hochschild. While he was trying to renew his passport for a trip to China last month, a fire alarm went off and the office was evacuated. After the alarm ended, Hochschild wound up at the front of the line. When he left the building, passport in hand, he was stunned to see hundreds of people still milling around outside. “No one had told the crowd that the fire alarm was over – no one had unlocked the doors to let them back in,” he said. “It struck me as being a Third World situation. The passport itself is beautiful, but I am glad I don’t have to renew it again for 10 years.”Link here.
CARIBBEAN ISLANDS INDEMNIFY AGAINST FUTURE HURRICANE DAMAGE
The pioneering new Caribbean Catastrophe Risk Insurance Facility (CCRIF) was set up on June 1 and is designed to provide participating governments from the region with immediate access to liquidity if hit by a hurricane or earthquake. The institution is the first regional disaster insurance facility in the world. Its reserves come from participating countries and donors. Funds from Canada, the U.K. and the World Bank have already been received, and contributions from Bermuda, France and the Caribbean Development Bank have been pledged.
The brokerage firm Benfield Ltd. secured CCRIF’s reinsurance capacity from international reinsurers Munich Re as the lead reinsurer, with Paris Re as the main following market, and Hiscox (Lloyd’s Syndicate 33) also participating. The World Bank Treasury has arranged for CCRIF to transfer a portion of the catastrophe risk to the capital markets through a swap transaction. The CCRIF’s capacity to service claims is based on its own reserves combined with the financial capacity of the international financial markets. This will allow CCRIF to respond to events that may occur only once every 1,000 years or more, achieving a higher level of resiliency than international standards. CCRIF was able to secure $110 million of claims paying capacity on the international reinsurance and capital markets.
Caribbean States are highly vulnerable to natural disasters – on average, one major hurricane affects a country in the region every 2 years – and they have only limited options available to respond. Work is also being considered to expand the scope of the coverage provided by CCRIF to other natural hazards such as floods and tsunamis, and to other Caribbean territories. CCRIF participating governments are Anguilla, Antigua & Barbuda, Bahamas, Barbados, Belize, Bermuda, Cayman Islands, Dominica, Grenada, Haiti, Jamaica, St. Kitts & Nevis, St. Lucia, St. Vincent & the Grenadines, Trinidad & Tobago, Turks and Caicos Islands.Link here.
DIGICEL SCOFFS AT CABLE & WIRELESS’S CARIBBEAN MARKET SHARE CLAIMS
Digicel, which claims to be the Caribbean’s fastest-growing telecom firm, has raised concerns over competitor C&W’s recent end of financial year results, and its claims with regard to its market share in the region. “We are very proud of taking and growing the market in the Caribbean and, as a result, cannot understand how the former monopolist in those markets has recently made claims of achieving the number one market position in Grenada and being only 1 percent behind us in St. Vincent & the Grenadines,” commented Colm Delves, Digicel Group CEO. “All of our own data and third-party research refutes this. I challenge C&W to substantiate these claims.”
In Grenada, where Digicel launched in 2003, the company claims to have achieved a 21% market share lead over its main competitor and an equally impressive 26% lead over that same competitor in St. Vincent & Grenadines, where the company also launched in 2003. Digicel Group’s subscriber growth over the 12 months to March 31, 2007 was 144%, and the company has 4.7 million customers across 22 markets. Digicel said that it has 700,000 customers more than its main competitor, which has operated in the region for more than 100 years.Link here.
FOR A CUTTING-EDGE CURRENCY INDICATOR ... TRY A SHANGHAI STREET VENDOR
I recently had chat with a friend of mine just back from a trip to China. My friend is a currency trader for a hedge fund based out of New York. He spent some time talking and haggling with the street vendors in China – looking for deals of course. In the process, he learned something surprising. Almost every vendor he haggled with wanted to be paid in U.S. dollars instead of their own currency, the yuan. That is a bit odd because everybody knows the Chinese yuan is going higher against the dollar. It makes one question whether the black market in China knows something the rest of the world’s currency traders do not.
My currency trader friend also told me that the Chinese vendors wanted 10 yuan for items priced at a single U.S. dollar. That is about a 25% premium above the official rate. The rate on the street, to exchange dollars for yuan is substantially higher than the official exchange rate. Apparently local citizens do not value their currency as highly as their own government does.
The Chinese are happy to let the money come into the country. This massive wave of assets is arriving just in time for the 2008 Olympics in Beijing. Not to mention, this wave of investment capital puts China in the perfect position for a slam-dunk revaluation of the currency. But when a particular region is sailing along with that kind of capital, you always have to be mindful of hidden risks. Anything could happen. China could have a little stock market crash that needs to be cleaned up. Investors could ditch the Chinese markets, if they decide the risk is too great. International investors could decide to bolt back out of the country just as fast as they came in.
Maybe these are some reasons why the Chinese government will not let the average citizen invest money offshore. (They have to go through a qualified intermediary, like an insurance company or bank.) Just think of the implications if hundreds of millions of loyal Chinese serfs started draining local bank accounts to send yuan to distant lands. Such a scenario could lead to a massive disruption to the Chinese economy.
Although the People’s Bank moved recently to loosen their draconian currency controls on citizens, China is still a long way from having a truly open financial system. But for now at least, “disruption” is not a word your average Chinese communist block captain uses in his everyday language. This seemingly risk-free existence must continue or hundreds of millions of migrant workers, and another billion or so in the countryside eking out a meager existence, might expect more.
I know it sounds odd to suggest the yuan is overvalued. But when it comes to real-life economics, I would take a street vendor’s opinion any day over the average economist sitting in his air-conditioned office at the International Monetary Fund. I am using my friend’s firsthand experience as a warning to keep my eyes glued to Chinese policy for any sign that these vendors might indeed know more than your average currency trader.Link here.
Chinese investors wary following market cooling move.
It appears that measures put in place last week by the Chinese authorities to cool the stock market may have worked a little too well, as stocks fell more than 8% on Monday, over concerns that further action may be taken by Beijing. Last week, the Chinese government announced a tripling of the stamp duty tax charged on share dealings, in a bid to take some of the speculative excess out of the country’s stock markets.
The stamp tax was increased to 0.3% from 0.1% after a surprise announcement by the Ministry of Finance. However, the government stopped short of restoring the stamp tax to its 1997 level of 0.5%, imposed the last time it attempted to cool the market, fearing a loss of confidence among traders and investors.
Reports have revealed that in attempt to calm panic-selling, which saw around $340 billion wiped off market value, editorials in official newspapers have been seeking to reassure investors that the measures were merely aimed at dampening rampant speculation on the stock market. Investors are reportedly concerned that the government may consider the imposition of capital gains tax on share profits, although this latter measure has been touted only as a last resort. Analysts, meanwhile, appear unconcerned regarding what is being viewed by many as a temporary slide on an otherwise still upwardly-mobile market.Link here.
China to reap $40 billion from share tax hike.
China’s decision to triple the tax on share trading could reportedly earn the government an additional $40 billion in tax revenues. The tax windfall would come about as a result of the increase on share stamp duty to 0.3% from 0.1%, announced last week in order to take some steam out the country’s surging stock markets, and avert a sharp and potentially damaging correction in share prices. The amount raised by the tax would be equal to about 7% of the central government’s annual budget. Much of the windfall could be ploughed into infrastructure development in rural areas.Link here.
ESTONIA INTERNET SIEGE THE FIRST WAR IN CYBERSPACE?
When Estonian authorities began removing a bronze statue of a World War II-era Soviet soldier from a park in Tallinn last month, they expected violent street protests by Estonians of Russian descent. They also knew from experience that “if there are fights on the street, there are going to be fights on the Internet,” said Hillar Aarelaid, the director of Estonia’s Computer Emergency Response Team. After all, for people there the Internet is almost as vital as running water. It is used routinely to vote, file their taxes, and, with their cellphones, to shop or pay for parking.
What followed was what some describe as the first war in cyberspace, a monthlong campaign that has forced Estonian authorities to defend their pint-size Baltic nation from a data flood that they say was set off by orders from Russia or ethnic Russian sources. The Estonians assert that an Internet address involved in the attacks belonged to an official who works in the administration of Vladimir V. Putin.
The Russian government has denied any involvement in the attacks, which came close to shutting down the country’s digital infrastructure, clogging the Web sites of the president, the prime minister, Parliament and other government agencies, staggering Estonia’s biggest bank and overwhelming the sites of several daily newspapers. “It turned out to be a national security situation,” Estonia’s defense minister, Jaak Aaviksoo, said in an interview. “It can effectively be compared to when your ports are shut to the sea.”
Computer security experts from NATO, the E.U., the U.S. and Israel have since converged on Tallinn to offer help and to learn what they can about cyberwar in the digital age. “This may well turn out to be a watershed in terms of widespread awareness of the vulnerability of modern society,” said Linton Wells II, the principal deputy assistant secretary of defense for networks and information integration at the Pentagon. “It has gotten the attention of a lot of people.”
When the first digital intruders slipped into Estonian cyberspace at 10 p.m. on April 26, Mr. Aarelaid figured he was ready. He had erected firewalls around government Web sites, set up extra computer servers and put his staff on call for a busy week. By April 29, Tallinn’s streets were calm again after two nights of riots caused by the statue’s removal, but Estonia’s electronic Maginot Line was crumbling. In one of the first strikes, a flood of junk messages was thrown at the e-mail server of the Parliament, shutting it down. In another, hackers broke into the Web site of the Reform Party, posting a fake letter of apology from the prime minister, Andrus Ansip, for ordering the removal of the highly symbolic statue.
At that point, Mr. Aarelaid, gathered security experts from Estonia’s Internet service providers, banks, government agencies and the police. He also drew on contacts in Finland, Germany, Slovenia and other countries to help him track down and block suspicious Internet addresses and halt traffic from computers as far away as Peru and China. The bulk of the cyberassaults used a technique known as a distributed denial-of-service attack. By bombarding the country’s Web sites with data, attackers can clog not only the country’s servers, but also its routers and switches, the specialized devices that direct traffic on the network.
To magnify the assault, the hackers infiltrated computers around the world with software known as bots, and banded them together in networks to perform these incursions. The computers become unwitting foot soldiers, or “zombies”, in a cyberattack. In one case, the attackers sent a single huge burst of data to measure the capacity of the network. Then, hours later, data from multiple sources flowed into the system, rapidly reaching the upper limit of the routers and switches.
By the end of the first week, the Estonians, with the help of authorities in other countries, had become reasonably adept at filtering out malicious data. Still, Mr. Aarelaid knew the worst was yet to come. May 9 was Victory Day, the Russian holiday that marks the Soviet Union’s defeat of Nazi Germany and honors fallen Red Army soldiers. Mr. Aarelaid huddled with security chiefs at the banks, urging them to keep their services running. He was also under orders to protect an important government briefing site. Other sites, like that of the Estonian president, were sacrificed as low priorities.
The attackers used a giant network of bots – perhaps as many as one million computers in places as far away as the U.S. and Vietnam – to amplify the impact of their assault. In a sign of their financial resources, there is evidence that they rented time on other so-called botnets. In the early hours of May 9, traffic spiked to thousands of times the normal flow. May 10 was heavier still, forcing Estonia’s biggest bank to shut down its online service for more than an hour. Even now, the bank, Hansabank, is under assault and continues to block access to 300 suspect Internet addresses. It has had losses of at least $1 million. Finally, on the afternoon of May 10, the attackers’ time on the rented servers expired, and the botnet attacks fell off abruptly.
“Hillar and his guys are good,” said Bill Woodcock, an American Internet security expert who was also on hand to observe the response. “There are not a lot of other countries that could combat that on his level of calm professionalism.” Estonia’s defense was not flawless. To block hostile data, it had to close off large parts of its network to people outside the country.
In recent years, cyberattacks have been associated with Middle East and Serbian-Croatian conflicts. But computer systems at the Pentagon, NASA, universities and research labs have been compromised in the past. Though Estonia cannot be sure of the attackers’ identities, their plans were posted on the Internet even before the attack began. On Russian-language forums and chat groups, the investigators found detailed instructions on how to send disruptive messages, and which Estonian Web sites to use as targets.
Because of the murkiness of the Internet, where attackers can mask their identities by using the Internet addresses of others, or remotely program distant computers to send data without their owners even knowing it, several experts said that the attackers would probably never be caught. American government officials said that the nature of the attacks suggested they were initiated by “hacktivists”, technical experts who act independently from governments.
The attacks on Estonia’s systems are not over, but they have dropped in volume and intensity, and are aimed mainly at banks. The last major wave of attacks was on May 18. Now that the onslaught has ebbed, Mr. Aarelaid is mopping up. “I’m a simple I.T. guy,” he said. “I know a lot about bits and packets of data. I don’t know about the bigger questions. But somebody orchestrated this thing.”Link here.
U.S. CONGRESS CLOSES “KIDDIE TAX” LOOPHOLE
Age raised on which children still pay parents’ tax rate on unearned income.
Consider this another step in the “tax accountants full employment act”: The latest change in the tax law applies the “Kiddie Tax” to much older kids than before. The change targets wealthy parents who gift assets to their children to avoid paying their own, higher tax rate.
Until 2005, the tax on a child’s unearned income, such as dividends, interest and capital gains, was paid at the parents’ marginal rate if the child was under age 14. Last year, the age limit was raised, requiring children under age 18 to be taxed at the parents’ rate. Now, starting in tax year 2008, the age limit will apply to children under age 19 – or to “kiddies” who are full-time students under the age of 24. The kiddie tax only applies to unearned income in excess of $1,700. The first $850 is tax free and the next $850 is still taxed at the child’s rate. (This rule does not apply to “earned income” such as from a summer job, or even to a baby who earns modeling fees. That earned income can still be reported on a child’s separate return and taxed at the child’s lower rate.)
The ability to gift appreciated stock to children who would pay lower tax rates was considered a “loophole”. By closing that opportunity, the government expects to collect as much as $1.5 billion in extra tax revenues over the next 10 years. This “loophole” has been a particularly enticing opportunity in recent years because of capital gains rates that have been dropping for those in the lowest two brackets, between 10% and 15%. The maximum capital gains tax rate on assets held for at least one year, and sold for a profit, is 15% – no matter what your ordinary income tax bracket (with a few exceptions for collectibles and some other assets). But for those in the lowest two brackets, for tax year 2007, the maximum tax on capital gains is only 5%.
In 2008, it would have been an even better deal, because next year the capital gains tax rates will drop to zero – yes, you read correctly, 0% – for those in the lowest two tax brackets! This zero rate will be particularly helpful to low-income senior citizens who may have to sell long-held stocks to pay living expenses. Now parents who want to transfer appreciated stocks to low-income kids – who would be able to cash in at the lowest or zero capital gains rates – will find themselves locked out of this deal. Starting in tax year 2008, children under 19, or still in school, can file their own return but will still have to pay tax on unearned income at their parents’ rate.
Mark Luscombe, principal tax analyst at CCH, points out, “This has really frustrated efforts to transfer assets to children to fund college tuition expenses. But it is still useful for parents who want to transfer assets that their children can hold until the first year after graduation – before they are earning a big salary. Then the grad can sell at his own lower tax rate – and use the proceeds to pay off student loans.”Link here.
IRS TO STUDY TAX RETURNS IN BID TO CLOSE “TAX GAP”
IRS officials have announced plans to launch a new National Research Program (NRP) reporting compliance study for individual taxpayers that will provide updated and more accurate audit selection tools, and support efforts to reduce the nation’s tax gap. The study will start in October 2007 and examine about 13,000 randomly selected tax year 2006 individual returns. Similar sample sizes will be used in subsequent tax years.
The tax gap is the difference between what taxpayers should have paid and what they actually paid on a timely basis. Based in part on the prior NRP reporting compliance study of individual income tax returns, IRS officials estimate that the net tax gap for tax year 2001 was $290 billion. Using research from the prior NRP study, the IRS updated its audit selection system. Updated statistics enable the IRS to audit more efficiently and improve the detection of underreported income and overstated deductions and credits. The data also enables the IRS to audit fewer taxpayers with accurate tax returns, which lessens the burden on compliant taxpayers.
As time passes, patterns of noncompliance change. The sample for the latest individual NRP is constructed to ensure that it contains sub-samples of individuals at different income levels, as well as those engaged in farm and sole proprietor business activities. The initial group of taxpayers whose returns are selected for audit under the new NRP study will start receiving official letters in October informing them that they are part of the research study. The majority of individuals will have specific lines of their returns confirmed through in-person audits with an IRS examiner. Some of the individuals whose returns are selected for inclusion will not be contacted if the IRS can obtain matching and third-party data that confirms the accuracy of their return. The targeted research design of the new individual NRP avoids the need for IRS agents to routinely check all the lines of a taxpayer’s return.
In addition to the NRP for individuals, the IRS is in the final stages of a compliance research project examining the reporting compliance of S corporations. This research encompasses approximately 5,000 returns filed for tax years 2003 and 2004. Since the income and expense items for S corporations flow through to individual shareholders, this study will also help refine the tax gap estimates for individual income tax.Link here.
HEINZ TAX CLAIM RULING SAYS TRANSACTION FAILED ECONOMIC SUBSTANCE TEST
U.S.-based food company H.J. Heinz lost its bid for a $42.6 million tax refund after the Federal judge presiding over the case branded the transaction used by the company to generate a tax loss as an illegal tax shelter. Judge Francis M. Allegra of the U.S. Court of Federal Claims wrote in his opinion that the company’s claim for a tax refund could not be permitted because the underlying transaction was designed purely to generate an artificial loss and avoid taxation, and therefore lacked any economic substance.
At issue was whether H.J. Heinz Credit Company (HCC), a subsidiary of the H.J. Heinz Company (Heinz), could deduct a capital loss of $124.1 million on a sale of shares of Heinz stock in May 1995. In 1994, HCC purchased 3.5 million shares of Heinz stock, 3.325 million of which were transferred to Heinz in January of 1995 in exchange for a convertible note issued by Heinz. In 1995, Heinz sold the stock and in the process realised a loss which the company asserted should have been carried back to reduce their taxes in their 1994, 1993 and 1992 taxable years.
However, according to judge Allegra, “Stripped of its veneer, the acquisition by HCC of the Heinz stock had one purpose, and one purpose alone – producing capital losses that could be carried back to wipe out prior capital gains. There was no other genuine business purpose. As such, under the prevailing standard, the transaction in question must be viewed as a sham – a transaction imbued with no significant tax-independent considerations, but rather characterized, at least in terms of HCC’s participation, solely by tax-avoidance features.”
The decision was welcomed by the U.S. government which congratulated judge Allegra for aiding its campaign against aggressive corporate tax sheltering. Assistance Attorney General Eileen J. O’Connor said the decision “is another in a series that have concluded that regardless what labels are used, or how complicated are the transactions, courts will look at what really happened when deciding if a taxpayer has actually incurred the losses claimed on a tax return. ... Judge Allegra rejected the company’s attempt to claim losses of $124 million on transactions that actually produced more than $6 million in profit.”Link here.
IRS LOCKS STABLE DOOR AFTER IBM’S TAX HORSE BOLTS
The IRS’s move to close a loophole used by U.S. multinationals with significant foreign income to avoid U.S. taxes has reportedly come too late to prevent IBM from saving $1.6 billion in taxes. On May 31, the IRS issued a notice banning a technique whereby companies buy back their stock using a foreign subsidiary to avoid domestic corporate taxes. The notice said it would disallow any transactions beginning on that day.
The move was prompted after IBM structured a $12.5 billion stock repurchase to benefit from funds it earned overseas without making them subject to U.S. corporate tax rates in a transaction known to tax lawyers as “Killer B”, which circumvents IRS section 367 B covering U.S. taxes on repatriated earnings. This transaction involved the forming of a new subsidiary in the Netherlands, which used $1 billion in cash and $11.5 billion in borrowed funds to buy 118.8 million shares from institutional investors. This allowed IBM to buy back stock without repatriating retained earnings from its foreign units to the U.S.
To repay the loans, IBM will use future earnings from overseas subsidiaries with an average tax rate of 22% after tax credits, thus saving it $1.6 billion in U.S. taxes. While IBM is by no means the only large U.S. multinational to use this technique, it is thought to be one of the only companies to have publicly disclosed that it undertook such a transaction.
Under current U.S. tax law, companies can defer taxation on certain types of foreign profit as long as the income is held overseas. Corporate tax at 35% becomes due when the money is repatriated. The IRS has said that such transactions raise “significant policy concerns”, but has declined to comment on the specific transaction in question.Link here.
U.S. SENATE TO SEND INVESTIGATORS TO THE CAYMAN ISLANDS
Senate Finance Committee leaders have asked the Government Accountability Office (GAO) to investigate the 5-storey Ugland House building in the Cayman Islands, which acts as the registered office for thousands of companies, and to evaluate the associated U.S. tax compliance implications. The Finance Committee said that it hopes to use the GAO’s findings to gain a greater perspective on the problem of offshore tax evasion as a whole, which was the subject of a May 3rd Committee hearing.
“As the global economy grows, so do its complexities, and that makes it increasingly difficult to track transactions that are legally subject to taxation. I want the GAO to go looking in one of the most likely places shady tax transactions could be sheltered, and that’s this building in the Caymans,” commented Sen. Max Baucus (D-Montana), committee chairman. “We need to make sure American companies have access to healthy foreign trade, and at the same time make sure honest American taxpayers are not footing the bill for corporations that aren’t paying their fair share. If American companies are setting up shop at the beach just to avoid their tax obligations, we can’t keep our heads in the sand.” Chuck Grassley, the committee's ranking member, observed that, “Americans benefit from a global economy. We need to strike the right balance between allowing Americans to benefit from the global economy and policing the evasion of U.S. taxes. ... The Ugland House office building in the Cayman Islands has been the source of much debate on the Senate floor over the past few years. It is time the Finance Committee found out what is really going on there.”
Ugland House is home to an international law firm and is listed as the registered office for a number of entities that are organized in the Cayman Islands. According to a 2004 Bloomberg investigation, 12,748 companies are registered there, including the subsidiaries of more than 150 U.S. corporations. U.S. companies can accumulate their foreign earnings in the Caymans and delay or avoid the 35% U.S. corporate tax rate on those profits.
In a letter to David M. Walker, U.S. Comptroller General, Baucus and Grassley wrote, “In order to help this Committee understand the significance of the offshore corporations, we would like to learn more about what is happening in this particular location – the Ugland House. Specifically, we request that GAO travel to the Cayman Islands and visit the Ugland House to determine what sorts of transactions are being conducted in that building.
“We are concerned that U.S. taxpayers are creating offshore business entities solely to evade their U.S. tax obligations, seeking to confound IRS collection efforts by obscuring the true ownership of American assets or income,” the Senators told Walker. The GAO has been authorized by Baucus and Grassley to have access to “the necessary taxpayer information” under the Internal Revenue Code, but conceded that the GAO “may be limited in its ability to obtain information in the Cayman Islands.”
Ted Bravakis, a spokesman for the Cayman Islands government, said “the law enforcement, regulatory and tax information exchange channels between the Cayman Islands and U.S. – some dating back more than 20 years – offer no protection for Americans who are seeking to evade their tax obligations.”Links here and here.
IRS WARNS TAXPAYERS ABOUT NEW E-MAIL SCAM
Scam tries to entice recipient into installing Trojan Horse on their PC.
The IRS has alerted taxpayers to the latest versions of an e-mail scam intended to fool people into believing they are under investigation by the agency’s Criminal Investigation Division. The e-mail, purporting to be from IRS CID, falsely states that the person is under a criminal probe for submitting a false tax return to the California Franchise Tax Board. The e-mail seeks to entice people to click on a link or open an attachment to learn about the complaint against them.
The IRS warned people that the e-mail link and attachment is a Trojan Horse that can take over the person’s computer hard drive and allow remote access to their computer. Similar e-mail variations suggest a customer has filed a complaint against a company and the IRS can act as an arbitrator. The latest versions appear aimed at business taxpayers as well as individual taxpayers.
The IRS reiterated last week that it does not send out unsolicited e-mails or ask for detailed personal and financial information. Additionally, the IRS stressed it never asks people for the PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts. The IRS is urging recipients of questionable e-mails to forward them to the agency, using the address firstname.lastname@example.org. The IRS also sees many other e-mail scams that involve tricking victims into revealing private personal and financial information over the Internet, a practice that is known as “phishing” for information.
Since the establishment of the mailbox last year, the IRS has received more than 17,700 e-mails from taxpayers reporting more than 240 separate phishing incidents. To date, investigations have identified host sites in at least 27 different countries, as well as in the U.S. Other fraudulent e-mail scams try to entice taxpayers to click their way to a fake IRS website, and then ask for bank account numbers. Another widespread e-mail tells taxpayers the IRS is holding a refund (often $63.80) for them and seeks financial account information. Still another email claims that the IRS’s “anti-fraud commission” is investigating their tax returns.Link here.
GUERNSEY RESIDENTS’ FINANCES DISCLOSED TO UK TAX MAN
Guernsey’s Data Protection Commissioner has learned that a number of Guernsey residents have received letters from their bank or credit card company informing them that details of their financial affairs may have been disclosed to HM Revenue and Customs. The letters appear to relate to an initiative by HMRC to crack down on tax evasion by UK residents through the use of offshore accounts. However, local residents who have complained feel that the UK tax authorities seem to have unfairly obtained access to their private financial affairs and that the disclosures by the banks and credit card companies may have breached their duty of confidentiality.
In April, HMRC announced arrangements enabling investors with offshore accounts to disclose to HMRC any income and gains not previously included in their tax returns. HMRC said it has recently obtained information about holders of offshore accounts from a number of banks and has obtained similar details through the European Savings Directive.
Guernsey’s Data Protection Commissioner is urging other residents of the island who may have received similar letters to contact his office on a confidential basis in order that he may assess the scale of this issue and determine whether or not any further action may be required.Link here.
UK OFFSHORE ACCOUNT HOLDERS IGNORING HMRC’S AMNESTY, SO FAR
It has emerged that only 1% of the estimated 400,000 bank accounts identified by HM Revenue and Customs as part of its offshore tax avoidance crackdown have been declared to the tax man under HMRC’s offshore disclosure scheme. According to the Financial Times, only about 4,300 offshore account holders have come forward under the amnesty. But HMRC chief David Harnett reportedly denied being disappointed by the low take-up, and expects a last-minute rush of declarations as the June 22 disclosure deadline approaches.
Disclosures made under the amnesty include a retired professional with an Isle of Man account who owed £350,000 in tax, and a landlady who kept her takings in a Channel Islands account and faces a £10,000 bill, the FT report claimed.
Tax advisors are urging those with undisclosed offshore income and assets to take advantage of the disclosure scheme and have warned taxpayers that HMRC will begin a “July offensive” against those suspected of offshore tax evasion who do not inform the tax man of their accounts. “If additional tax is found to be due as a result of these enquiries, HMRC will seek considerably higher penalties than the 10% on offer under the amnesty and may even launch criminal investigations,” Steve Besford, head of tax investigations at tax advisory firm, Chiltern has said.
Those with undisclosed tax liabilities connected with an offshore account who do not notify by 22 June could well find themselves under investigation any time after 9 July, according to Besford. By contrast, people who notify their intention to make a disclosure before the deadline of 22 June can be assured that HMRC will not raise any enquiry into their affairs prior to the 26 November disclosure deadline, by which time those seeking amnesty must have handed over all documentation to the tax department. HMRC said it has recently obtained information about holders of offshore accounts from a number of banks, and has obtained similar details through the European Savings Directive.Link here.
ANOTHER TEN PENCE ON THE POUND IS BROWN’S TAX LEGACY
The average Briton is effectively paying 10 pence more on the pound in income tax as a result of Gordon Brown’s 10 years in charge of the nation’s purse strings, according to a new report. The study by business advisers Grant Thornton attributes about 70% of this increase in the tax burden to so-called “bracket creep”, whereby the government fails to adjust marginal income tax brackets in line with wage inflation – meaning more taxpayers have been dragged into the higher income tax bands during Brown’s tenure at the Treasury. This effect also applies in other areas of taxation, such as inheritance tax, where house prices have rocketed during the last ten years, while the threshold at which IHT becomes payable has barely moved.
The government’s own figures show that 3.5 million taxpayers now pay tax at the higher rate of 40% – a 58% rise since the Labour government came to power in 1997. Grant Thornton also said that the government’s cash haul from taxation has increased by £29 billion more than if it had just increased in line with economic growth. Furthermore, the report points out that income tax regulations have effectively doubled in the last 10 years, from 4,555 pages to 9,973 pages.
“An increase in the tax burden equivalent to 10p on basic rate income tax equals an increase in tax revenue of around £40 billion a year, or £1,600 per UK household on average. ... For some mortgage-holders this would be more than their mortgage,” Maurice Fitzpatrick of Grant Thornton observed.
And despite Brown’s decision to decrease the rates of corporate and personal income tax by 2% in his last budget before succeeding Tony Blair as Prime Minister, tax advisers say that lost revenue will be clawed back and more through less-publicized tax changes elsewhere.
The Grant Thornton report was published on the eve of “Tax Freedom Day” which fell on June 1 this year. Tax Freedom Day is a measure of just how much of the year a British citizen spends working for the Treasury. Overall, the the Adam Smith Institute says that the government takes more than 40% of national income.Link here.
FINANCE CHIEFS “PAY LESS TAX THAN CLEANERS” SAYS LEADING FIGURE IN U.K. PRIVATE EQUITY
A leading figure in Britain’s private equity industry has criticized rules on capital gains tax that mean some City executives can pay “less tax than a cleaning lady”. Nicholas Ferguson, chairman of SVG Capital, was speaking out about rules that allow executives at private equity firms and hedge funds to enjoy lower tax rates than others, often of just 10%. Private equity general partners are paid a base salary but earn most of their income from profits made from selling companies.
Current rules allow tax paid on this income to be reduced from the top capital gains rate of 40% to 10% as long as the firm holds the company for two years before selling it. The tax rate can be reduced further by offsetting investment losses against the income. Mr. Ferguson said, “I have not heard anyone give a clear explanation of why it is justified.” The rates were also attacked by a recent trades union campaign against buy-out firms. But fellow private equity chiefs were baffled today by Mr. Ferguson’s comments, which come just weeks before five of Europe’s top buy-out executives are due to be questioned by MPs on the Commons Treasury select committee inquiry into the sector.
Mr. Ferguson built Schroder Ventures Europe almost from scratch before it became Permira, which is now Europe’s biggest private equity fund. “Any commonsense person would say that a highly paid private equity executive paying less tax than a cleaning lady or other low-paid workers ... can’t be right,” he said. Mr Ferguson dismissed fears that any attempt to make the tax rules fairer would drive private equity firms offshore, as scaremongering. However, he also warned that any changes to the rules should not put the role of private equity in the economy at risk.
Mr. Ferguson’s comments were criticised by other private equity chiefs. Peter Taylor, managing partner of Duke Street Capital said, “I just can’t understand what is the problem. The tax relief on our borrowing is available to anybody. It is not unique to private equity. All businesses have it – big or small.” Nigel McConnell, managing director of Electra Partners said, “He has come up with a snappy soundbite that bears no relation the underlying truth. The amount of tax being paid by private equity firms is huge.”Link here.
LUXEMBOURG DELAYS NEW EU E-COMMERCE VAT RULES
Luxembourg has thwarted a proposal by EU Finance Ministers (Ecofin) to change EU-wide rules relating to the charging of value-added tax on internet purchases. Ecofin is seeking support for a change in the VAT charging rules so that consumers who buy items from e-commerce firms pay VAT at the rate of the country in which they are resident instead of the rate charged in the jurisdiction where the vendor is registered.
VAT in Luxembourg is charged at 15% – the lowest rate permitted in the EU – and the current rules have led dozens of major e-commerce firms such as eBay, Skype and iTunes to set up in the Duchy. Portugal is another member state with a low rate of VAT, which has helped to create a flourishing e-commerce industry in the Portuguese island of Madeira.
The proposals are designed to simplify the tax system for businesses in the EU, as well as make it easier for governments to crackdown on fraud. But any change in EU tax legislation requires the unanimous support of all 27 member states and Germany, which currently holds the six month rotating presidency of the EU, has been forced to put the plan on the backburner while Luxembourg is persuaded to come on board.
Speaking after the Ecofin meeting, EU Tax Commissioner said that Luxembourg feared losing “a considerable proportion” of its national wealth should the proposal become reality. “Here, an essential interest of Luxembourg was at stake and therefore today I had no other possibility than to say no,” Luxembourg finance minister, Jean-Claude Juncker later told reporters. Luxembourg stands to lose an estimated €20 million ($300 million) annually in tax revenues if the new VAT system goes into place.Link here.
Your mortgage has been flipped, sliced and diced – and now no one knows who holds it.
In 2006 Michelle Tucker, a 35-year-old UPS package processor and mother of two, was hit by a one-two punch. Her husband had surgery on his shoulder and was forced to stop taking construction jobs around town that helped pay the bills. And the adjustable mortgage with the low teaser rate she took out on her 3-bedroom home adjusted to 10%, nearly double her old rate. She defaulted. Soon after, the lender filed suit to foreclose.
Then a stroke of luck. A Legal Aid lawyer, April Charney, got the foreclosure withdrawn after discovering that the company that filed to foreclose did not own the Tuckers’ loan. The owner was actually a securitized pool of loans overseen by Deutsche Bank. And Charney has documents showing the pool bought the loan after the Tuckers defaulted – an illegal purchase for most pools, including this one. That means a court might refuse to recognize it owns the loan. Charney is arguing it should do just that. “I buy time, then get lenders to cut interest rates and fees,” says Charney, who claims she has stopped dozens of foreclosures over ownership issues. Other lawyers are making similar moves – often forcing sloppy lenders to offer generous terms to avoid litigation.
Talk about shooting yourself in the foot. These days just about every mortgage is flipped by a lender to another one or sliced up into pools of securitized packages that are sold on Wall Street. The financial engineering helped oil the housing boom by making credit more available. But stalled housing prices and rising defaults have revealed a mess. In the rush to flip paper, lots of the new lenders or pools do not have the proper paperwork to show they even hold the mortgage. This sloppiness offers glorious reprieves for some defaulted homeowners but just headaches for lenders. One Maryland man, holding documents suggesting his loan was held simultaneously by a pool of loans and a bank, is still in his home – five years after foreclosure was filed.
Ms. Charney stumbled upon the industry’s paperwork problem two years ago after noticing that nearly all lenders seeking to foreclose against clients were filing “affidavits of lost notes” – essentially requests that a judge assume they own the loan since no proof is at hand. She eventually took on a prominent foreclosure filer, which represented banks and pools in at least 20,000 foreclosure filings in Florida since 2001. It suspended lenders from filing in its name, but says that with recent court decisions in its favor it may lift the moratorium soon.
For the lenders, a possibly bigger threat on the horizon is that homeowners’ lawyers will bust up the “holder in due course” doctrine that makes it easier for subsequent owners of an IOU to collect. This doctrine says that certain defenses the evictee can use against the original lender (such as predatory lending) cannot be used against an innocent purchaser of the mortgage. The rule is enshrined in many federal and state statutes, but a judge could nonetheless find a way to side with the homeowner, particularly if a loan is purchased after it goes into default. Ohio Attorney General Marc Dann recently announced he will amend his suit against defunct lender New Century to possibly list as defendants the banks overseeing pools that bought its loans. “These pools are more than innocent holders.”Link here.
SIX WAYS TO SHIELD YOURSELF FROM FRIVOLOUS LAWSUITS
“There is no such thing as a frivolous lawsuit.” I heard a classmate say this at my last high school reunion. This particular classmate had spent his adult years as a trial lawyer. He made his very comfortable multi-million dollar living suing physicians. Ever since, I have made a hobby out of collecting the most insane, outrageous, or simply silly lawsuits I can find – just to prove this statement wrong. And, despite the “tort reform” efforts in many states, I add to my collection of stupid lawsuits almost daily.
One recent study estimates that 50,000 new lawsuits are filed every day in U.S. state and federal courts. At that rate, the odds are that every one of the more than 300 million residents of the U.S. will be sued sometime in the next 16 1/2 years! A study published in March 2007, entitled “Jackpot Justice”, estimates that lawsuits cost the U.S. economy $865 billion annually. This figure represents a yearly “lawsuit tax” of $9,827 for a family of four. To put this figure in perspective, the average American household pays more annually in “lawsuit taxes” than in federal income taxes!
Unlike most other countries, U.S. lawyers can take cases on contingency. That means attorneys receive no fees unless money is recovered from the defendant. As a result, there is very little to prevent individuals with a chip on their shoulder from suing you – even if they do not have the money to hire an attorney. For an attorney to take a case, he or she just has to believe there is a good chance that the case will be settled in their favor. And most importantly, the attorney must ensure you are “worth” suing – meaning you have sufficient assets to collect.
To encourage still more lawsuits, companies have now been formed to invest in selected personal injury lawsuits by buying a share of the settlement. A recent search on Google revealed a total of 1.6 million hits under the term “lawsuit funding”. A few of my favorite frivolous lawsuit stories are:
These examples are just the tip of the iceberg. You have surely heard of the woman who sued McDonald’s for serving her hot coffee, which she spilled on herself. But you may not have heard about the sue-happy high school baton twirlers, who were cut from the majorettes program at their high school. These baton hopefuls are now suing the coach, the athletic director and the high school principal, for violating their civil rights.
So, could you be the target of such a jackass lawsuit? It is hard to say. But I can tell you high income individuals are prime targets. Those who display their wealth openly are often subject to unwanted litigation. Also, professionals – doctors, lawyers, engineers, etc. – are frequent targets. Disputes among relatives also often lead to unwanted litigation, particularly after the death of a wealthy family member.
If you are sued, any information that is revealed about you during the legal process is usually a matter of public record. That means information that was once private is now available over the Internet to private investigators, tax authorities and anyone else who is curious and has some free time on their hands. Throughout the judicial process, a plaintiff can subpoena your your books, records and other documents – including your records held by accountants, banks, brokers, etc. This process is called discovery. If you refuse to cooperate, the court can compel discovery with fines and even arrest. If you lie, and are later found out, you may be charged with perjury, a criminal offense. You may not refuse to answer the questions, unless there is a possibility of criminal prosecution.
Six remedies to protect your wealth and privacy from stupid lawsuits.
The most important element of this game plan is to make yourself look like an unattractive lawsuit target. Here are a few ideas:
SWITZERLAND JUST SAYS “NO!” TO EU TAX COLLECTORS
Switzerland has relatively low taxes, traditionally strong bank secrecy enforced by law, and financial and banking professionals that set the world standard. The Swiss levy lower corporate taxes compared to EU nations. Each Swiss canton sets its own tax levels. So of course, envious EU tax collectors have attacked Switzerland – politicians from EU high tax nations are upset that companies, and tax revenues, are escaping to non-EU member Switzerland to benefit from far better tax laws. But rather than fix their own bad tax policies, they stupidly want the Swiss to raise the tax burden on economic activity in Switzerland.
Not surprisingly, as the Neue Zuricher Zeitung reports, Swiss leaders repeatedly have said “no” to the EU: “The Swiss government has rejected formal negotiations with the European Union in a bid to resolve a controversy over the country’s corporate tax system ... Finance Minister Hans Rudolf Merz and Foreign Minister Micheline Calmy Rey said ... that Switzerland would not surrender its sovereignty on tax matters.
“The statement came in the wake of a decision earlier this week by EU ministers to open official negotiations with Switzerland. ... Over the past few weeks several ministers have come out against holding formal negotiations with Brussels in the tax row. Merz said the cabinet and the cantons, which have wide-ranging autonomy in fiscal matters, wanted to ensure that Switzerland remains competitive.”
Too bad that the Brussels bureaucrats fail to understand basic economics. Even a cursory look at the Swiss economic record would prompt the logical conclusion that lower taxes mean more business, more jobs and more prosperity.Link here (scroll down).
CARRY YOUR ENCRYPTED PC ON YOUR KEYCHAIN
The huge expansion in storage capabilities is the driving force behind major privacy breakthroughs for PCs. Today, you can purchase a USB drive that fits in your pocket or your keychain and that stores 8 or more gigabytes of data. That is plenty of capacity for most users’ data.
USB “sticks” are particularly useful when you are traveling, especially if you are using a PC in an Internet café or other public location. They are also useful to preserve your privacy if you are traveling internationally with your laptop. Customs officials in the U.S., and other countries as well, can legally seize and copy the contents of any laptop carried across a U.S. border.
However, even when you use a USB thumb drive to hold your data, your privacy could be compromised in other ways. Any PC you use with your USB drive will still contain traces of the files you access. Your PC also has your Web search history and much more. It is possible to minimize this trail using software such as Window Washer, but eliminating it altogether is an exacting process.
To deal with this problem, you can install copies of your browser and email client directly on the USB drive. All your transactional records are then stored exclusively on that USB stick. That includes your browser’s history and cached Web pages, and changes made to your email client’s configuration and downloaded emails. One product with this capability is StealthSurfer. Armorware has similar capabilities, and it provides an encrypted data channel to avoid surveillance by your Internet Service Provider. PortableApps provides versions of browser Mozilla Firefox and email client Mozilla Thunderbird whose activities can be confined to your USB thumb drive.Link here (scroll down).
COMPUTER HACKERS STEAL CALIFORNIA CITY’S FUNDS
Used keystroke logger to obtain bank passwords. $450,000 loss narrowly averted.
If Carson Treasurer Karen Avilla had had a nagging feeling she was being watched whenever she got on her laptop computer, she would have been right. Cyber-thieves were able to shift nearly $450,000 from the city’s general fund by using a program that was able to steal her computer keystrokes. Each time Avilla logged on, someone was – virtually – looking over her shoulder.
Armed with the spyware program, the hackers obtained bank passwords. They wired $90,000 to a “Diego Smith” in North Carolina. One day later, the thieves got bolder and wired $358,000 from the city’s bank account to a bank in Kalamazoo, Michigan. Avilla and her deputy discovered the theft just in time to have all but $45,000 of the funds frozen. But the experience left city leaders rattled. “As I sat there with the detectives and the forensic folks from the bank, I thought, ‘I don’t even want to touch a computer,’” Avilla said. “It made me think, ‘Who’s out there?’”
The crime raised concerns about the security of municipal coffers, especially when wireless networks are used. Although such city hacking cases have been isolated, some experts said many municipalities lack the large information technology staffs and large budgets for computer security. Avilla said she still does not know how her computer was targeted. She said she doubts it had the latest security software patch protections. She said that as soon as word got out, Carson fielded calls from officials in other cities, asking how they could protect themselves.
South Gate City Manager Gary Milliman said he has seen all sorts of fraud perpetrated against cities in 32 years, but nothing like this. Earlier this year, the finance director of the Northern California city of Willows discovered that a hacker had taken $4,000 from a city fund. Avilla said cities may not always notice smaller thefts. “It’s not an inexpensive enterprise to have a full team that goes around checking every laptop ever used,” she said.
Experts said that without up-to-date security software, such a computer could be especially vulnerable if people who use it visit websites that contain spyware. But hackers also send mass e-mails which, if opened on vulnerable computers, can allow installation of “keystroke loggers”. “It automatically sends all keystrokes logged to a hacker, via e-mail or another form of communication,” said Eric Schultze, chief security architect for Shavlik Technologies and a widely cited expert in anti-hacking circles. “So a hacker sitting halfway around the world can log into your bank account, enter your user name and do what they want to do.”
Kevin Overcash, vice president of product management for Breach Security in Carlsbad, California, said that when organizations started installing a lot of wireless networks, hackers devised ways to breach them through what is called “drive-by hacking”. In trying to provide a service to their residents, municipalities sometimes make themselves vulnerable, he said. “That kind of access opens you up to hackers. It opens the door for people to have access to data if you do not have good security.”
Avilla said she noticed a problem when she found she was unable to log on to the city’s bank account. She thought she must have been typing the password incorrectly. The bank gave her a new password. But unbeknownst to her, the cyber thieves got that password as soon as she tapped it into her computer. She and her deputy checked bank balances and discovered the previous day’s $90,000 wire transfer to someone in Wilson, N.C. Avilla checked with the bank and discovered the $358,000 transfer that day through National City Bank in Kalamazoo. “I thought, ‘We got a problem,’” Avilla said. She called the bank and filed a police report, leading to the freezing of the city’s funds. No one has been arrested, authorities said.Link here.
NOISE ENCRYPTION TECHNIQUE KEEPS SPOOKS OUT OF THE LOOP
Spying is big business, and avoiding being spied on an even bigger one. So imagine if someone came up with a simple, cheap way of encrypting messages that is almost impossible to hack into? American computer engineer Laszlo Kish at Texas A&M University claims to have done just that. He says the thermal properties of a simple wire can be exploited to create a secure communications channel, one that outperforms quantum cryptography keys.
Thermal noise is generated by the natural agitation of electrons within a conductor, which happens regardless of any voltage passed through it. But it does change depending on the conductor’s resistance. Kish and his collaborators at the University of Szeged in Hungary say this can be used to securely pass information, or an encryption key, down any wire, including a telephone line or network cable.
In their device, both the sender Alice and the receiver Bob have an identical pair of resistors, one producing high resistance, the other low resistance. The higher the total resistance on the line, the greater the thermal noise. Both Alice and Bob randomly choose which resistor to use. A quarter of the time they will both choose the high resistor, producing a lot of noise on the line, while a quarter of the time they will both choose the low resistor, producing little noise. If either detect a high or a low amount of noise in the line, they ignore any communication. Half the time, however, they will choose differently, producing an intermediate level of thermal noise, and it is now that a message can be sent. If Bob turns on his high resistor, and records an intermediate level of noise, he instantly knows that Alice has chosen her low resistor, in essence sending a bit of information such as 1 or 0. Kish’s cipher does this many times, sending a random series of 1s and 0s that can form the basis of an encryption key.
That message is also secure. For a start, as Kish notes, it takes an “educated eavesdropper” to even realize information is being sent when there seems to be just low-level noise on the line. If they do try to eavesdrop, they can only tell a message is being sent, not what it is, because it is impossible to tell whether Alice has a high or low resistor turned on, and whether the bit of information is a 1 or a 0. Moreover, eavesdropping on the line will naturally alter the level of thermal noise, so Alice and Bob will know that someone is listening in.
Kish and his team have now successfully built a device that can send a secure message down a wire 2000 kilometres long, much further than the best quantum key distribution (QKD) devices tried so far. Tests show a signal sent via Kish’s device is received with 99.98% accuracy, and that a maximum of just 0.19% of the bits sent are vulnerable to eavesdropping. The error rate is down to the inherent resistance of the wire, and choosing a larger wire in future models should help reduce it further. And the system works with fixed lines, rather than the optical fibres used to carry photons of light at the heart of quantum encryption devices. It is much cheaper. “I guess it’s around a hundred dollars, at most,” Kish says.
“This is a system that should be taken seriously,” says security specialist Bruce Schneier, who founded network security firm BT Counterpane. He says he was seduced by the simplicity of the idea when it was first proposed by Kish, and now wants to see independent tests of the working model. “Assuming it works, it’s way better than quantum.”Link here.
GOOGLE CHAIRMAN DISMISSES PRIVACY ISSUE ASSOCIATED WITH PROPOSED DOUBLECLICK ACQUISITION
Google Chairman Eric Schmidt said that U.S. regulatory approval of his company’s proposed acquisition of DoubleClick will not be hindered by concerns over privacy. Analysts tend to agree. Several analysts said the deal would likely win regulatory approval despite advocacy groups’ complaints about the two companies’ privacy policies and efforts by rivals such as Microsoft to raise antitrust concerns.
Google announced its plan to buy DoubleClick last month in a $3.1 billion acquisition that privacy advocates have urged the Federal Trade Commission to investigate. DoubleClick helps its customers place and track online advertising, including search ads, which Google – more than its nearest search competitors Yahoo and Microsoft – has turned into an extremely lucrative business. Google confirmed that the FTC is conducting an antitrust review of the deal. Typically, antitrust reviews focus on monopoly concerns. But there is precedent for them to address privacy issues, analysts say.
Google dominates the text-based online advertising market while DoubleClick is the leading provider of graphical display ads. Several consumer advocacy groups, led by the Electronic Privacy Information Center, urged the FTC to investigate the privacy implications of the acquisition. The groups said in a April 20 complaint that the two companies, when combined, would have access to an unprecedented amount of data on consumers’ Web usage and Internet search habits. DoubleClick had been the target of a fierce bidding war between Google and Microsoft.Link here.
SLOUCHING TOWARD A POLICE STATE
As if we need another indication that we are slouching toward a police state, a couple of incidents in my home state of Oklahoma give us further reason to shudder at the predations of our increasingly militarized local law enforcement.
On the evening of May 19th, in the course of a purported investigation into drug trafficking at a local homeless shelter, two Oklahoma City police officers handcuffed a woman and tasered her to death because, as a police spokesman said, “the officers felt that she was not under control.” The victim, a 35-year-old homeless woman, resided in the shelter with her husband while recovering from a drug addiction. She was not involved in the initial drug investigation, yet apparently began to scream and attacked one of the officers. After attacking a second officer, she was “taken to the ground and handcuffed.” At this point, this 35-year-old female crack addict, handcuffed and on the concrete, still represented a great enough danger to two heavily armed male police officers that they deemed it necessary to electrocute her fatally. This murder earned the two officers paid administrative leave.
Who really believes that the State’s interest lies in saving us from ourselves? Law number one should be “no victim, no crime.” Increasingly obvious is the fact that, far from protecting and serving the people, the police exist everywhere and always to protect the State and its ill-gotten gains from the people, and we pay them to do it. In the course of “protecting the people” from free and private transactions between consenting adults, these two officers murdered a woman guilty of what amounts to a lack of control.
Another incident even closer to me occurred around Thanksgiving last year. A friend left a bar late one night, admittedly a little less than sober, but driving slowly and safely. After traveling several blocks, a patrolman stopped him, called for backup and, based on his car’s missing front grill, arrested him for allegedly running down an officer earlier in the evening. Ignore the many inconsistencies and outright fallacies in the accusation. What happened next simply cannot be excused.
Cops tend to be a pretty tightly-knit group. Injure or kill one of them and they tend to get a little vengeful, it seems. Once they had handcuffed and effectively subdued my friend, these protectors of the public morality proceeded to, as we say here in Oklahoma, beat the tar out of him, bruising his ribs, arms and legs and causing a loss of hearing in one of his ears. That they might have been mistaken never occurred to them. On the advice of his attorney, he pled guilty to the DUI and the hit-and-run was dropped. Due to this travesty, my friend spent several days locked up for a crime he did not commit, losing valuable days at work. In addition, he lost his license and will be paying for the privilege of visiting some weekend lockup for the next six to nine months.
These are but two local examples of what amounts to a major problem with state-subsidized “law enforcement”. Where may innocent victims of this rampant abuse of power turn for justice in this day and age? The courts seem complicit in the corruption and lawmakers see only the apparent “successes” of their various wars against potential crime. The media maintains the status quo by coloring their reports of these incidents with the State’s very own brush. As a result, few view the abuse as it really is. Indeed, most seem to applaud the work of the nanny state as it strips us all of the right to do as we see fit absent the trespass of others’ rights to do the same. On this march toward our own undoing, will we watch wordlessly as our fellows are overrun by the massed machinery of the State?Link here.
U.S. SPAM KING FACES UP TO 65 YEARS IN CLINK
Spam king Robert Alan Soloway was indicted by a grand jury in Seattle, charged with fraud, money laundering, and identity theft.Soloway has long been known to the authorities and has been pursued by the Feds, the taxman and various agencies for years.
The alleged scoudrel of the ether has for years stuffed in-boxes worldwide with junk. He has been sued by various parties including Microsoft over the years. Microsoft won millions of dollars in damages to be paid by Soloway but he never paid up.
UK Spam-busting outfit Spamhaus first put Soloway on its blacklist in 2001. He was promoted to Spamhaus’s list of the worst of the worst spammers in 2003. After previous court appearances, he has either ignored the judgments or failed to turn up. The court has tagged him as a serious flight risk. If convicted he faces up to 65 years in the slammer.Link here.
EU LAW REQUIRING TRAVELERS TO DECLARE CASH COMES INTO FORCE ON JUNE 15TH
It seems the busybody EU bureaucrats have finally aped the U.S. money-grabbing police. Travelers either entering or leaving the EU, who carry the equivalent of €10,000 ($13,461) or more will be required to declare the cash. Travelers could face a penalty of up to £5,000 ($6,730) if they fail to comply with the obligation to declare, or provide incorrect or incomplete information. Dave Humphries, head of the U.K.’s Criminal and Enforcement Policy claimed, “The declaration system is one means of providing information to assist in targeting movements of criminal cash more effectively.” Cash not only means currency notes and coins, but also bankers’ drafts and checks of any kind, including travelers’ checks and negotiable instruments.
EU officials say they will not detain properly declared cash if they have no reason to doubt its legitimacy. However, cash may be seized if an officer has “reasonable grounds” to suspect that it is either the proceeds of, or is intended for use in, unlawful conduct. In the U.S., this has given the money police the right to seize a large amount of declared cash ($10,000 or more). The owner then has to spend thousands in legal fees and months trying to get his or her money back – if he ever does. Under U.S. civil forfeiture laws, the police get to keep the cash if its hapless owner cannot prove it to be legal money. In other words, money police have a special incentive to grab as much cash as they can.Link here (scroll down).
PEACE, FREEDOM, AND INTEGRITY
With Ron Paul’s break into the limelight, it is a critical time for LewRockwell.com.
It all started with the presidential debates in South Carolina. Ever since, I have been skittish. My nights are sleepless and days restless. I am euphoric one minute, and worried sick the next. I blame it all on Ron Paul. He came closer, in a few moments on TV, to exposing the warfare-welfare state than any of us could have ever dreamed, and as a result, the entire internet is aflame for our ideas.
And this is just the beginning. What will be the clamor for libertarian ideas one month from now? Three? Six? Twelve? In a revolutionary situation, not to speak of an online revolution, history moves at lightning speed. If only Murray Rothbard, who was Ron’s dear friend and a definite non-admirer of Rudy Giuliani’s, were here to witness it. Of course, the site Murray inspired – LewRockwell.com – is at the center of the fun, and the storm. But this hurricane has, needless to say, its scary side.
The neocon nazis are rolling out their weapons of mass character assassination to smear everyone who believes in free markets and sound money, who opposes income taxes and imperial wars. Giuliani’s scurrilous rant was only the beginning. Giuliani does not like LewRockwell.com – so one of his acquaintances (and an old friend of mine) tells me. It is not just my LRC attacks on him immediately after 9-11, when he took his Mussolini act to the national stage. It is LRC’s fervent stand for peace, freedom, and integrity, concepts which run counter to everything the Rudys of the world live and breathe.
Peace freedom, and integrity? Those are concepts that the warmongering police-statists cannot live with, and why LRC drives them crazy. You should see the ugly e-mails I have received from Giuliani’s well-connected pals over the past six years. LRC is their worst nightmare, and they want to see us gone. LRC has always been the neocons’ favorite whipping boy. Now they have an extra reason to hate us. To those folks, if someone says “Ron Paul”, they hear “LRC” and vice versa. They see us as enabling the Ron Paul Web Phenom, so every sucker punch they aim at Ron is directed at LRC as well.
So, we have much to do. Never has LRC had so many readers, and we are growing every day. And never has libertarianism created such excitement. And now that we find ourselves under siege, we must fight back. We must step up our 24/7 internet presence, and form a truth squad to counter the lies and smears aimed at our ideas. I am also determined to hire at least a part-time editorial assistant for Lew. Now that our readership has exploded, we must say more, do more, advertise more, reach more, and cover more. We want to data-base the site, and utilize every innovation the great hi-tech firms make available.
We can do so much that is exciting and important. But here is the rub. Now, of all times, our financial gas tank is close to operating on fumes. You know the value of Lew’s work. There is no better investment you can make for our freedom and our future. And there is no better or more important time to do it.
What an exciting and dangerous moment this is. It is our job to be there, to man the barricades, to repel the attacks, to take the fight into the enemy camp. Already the neocons are smearing us in their publications and on their websites. They want us silenced. They want LRC off the air for good. Here come more of the tired old charges. We are “anti-Semites” because we do not want to fight Middle Eastern wars (or any other kind). We are “racists” because we do not believe in group rights. We are “traitors” because we believe in the foreign policy of “peace, commerce, and honest friendship with all nations, entangling alliances with none,” as Jefferson (and Ron) put it.
And what does it mean when they call us “anti-American”? Not that we dislike our country, our history, our people, our companies, or our culture – but because we dissent on the spying, killing, torturing, and looting of the U.S. presidency, which has made us so hated all over the world. And if you need another reason why they hate us, for the best in opinion and news on Ron, LRC has become the place to go. Of course, we cannot be and are not involved in electoral politics, but we have a duty to promote our ideas outside of the political system, where the real work gets done, and we will not be dissuaded. Nothing will stop us.
Of course, the neocons do not use facts and reason. They cannot answer our arguments, and they do not even try. Imagine tossing mud at a man like Ron Paul? But no lie or underhanded tactic is beyond these creeps. They have good reason to be worried. The young are flocking to our banner, from all over the world. We must reach everyone else too – rich, poor, middle-aged, elderly, from every American state and foreign country. Everyone. So many hunger for what you and I stand for. Please, make your most generous contribution.Link here.
U.S. MAY COLLAPSE AS A SUPERPOWER, SAYS ANALYST
A Canadian military analyst who has served in the armed forces and has written on international affairs for more than two decades, has issuing a warning about the collapse of the U.S. as a superpower. In his latest book, The Mess they Made: the Middle East after Iraq, Gwynne Dyer says there is no doubt that the U.S. will withdraw its troops from Iraq once President George W. Bush leaves office.
But he also predicts that already that war has set in motion events that will radically transform not only the Middle East but the role of the U.S. in the world. Gwynne Dyer joined me earlier in the World Today studio. There have been a series of conflicts in the Middle East over the last 40 years, why do you see this latest war in Iraq as likely to be so transformative for the region?
Gwynne Dyer: “Well the Americans actually have never committed troops in the Middle East, never actually fought a war in the Middle East ... before. I think this is having an impact on the American public, comparable to the impact on the American public in the Vietnam War though the casualties are far lower this time. So now, there is developing, a Middle Eastern allergy in American public opinion, rather similar to the South East Asian allergy that you had by the end of the 1960s.
“That is transformative because if America is not there enforcing the status quo, the status quo probably collapses. It is very old and shoddy. The regimes of the Arab world, with zero exceptions, except for Iraq, where the Americans overthrew Saddam, have all been in power for at least forty years. They are all dictatorships or absolute monarchies, most of them are corrupt beyond imagining. So this is a very unstable status quo, maintained by American subsidies, American troops, American guarantees, and when those are withdrawn, I think that there will be very large changes in the Middle East.”
You are certain that all of those will be withdrawn, not just the U.S. troops, but the U.S. subsidies as well?
Gwynne Dyer: Not all and not right away, but enough to create a momentum, in which Congress will be reluctant to vote new funds, Congress will be very suspicious about new commitments to support Arab regimes, and meanwhile the momentum in the streets in the Arab world will be moving very rapidly in the favor of the revolutionaries. And that is what they are, after all, the Islamists, after all, are political revolutionaries, they are not just religious fanatics.”
So what will be the shape of the Middle East at that point?
Gwynne Dyer: “I think that you are going to see some, I cannot tell you which ones, but some Arab regimes fall in the next five years, fall to Islamists of various variety. Some of them perhaps very radical, some of them less so.”
You suggest that the Iraq war could also transform the role of the U.S. in the world, that it has actually done far more damage to U.S. power and prestige than the Vietnam War. What are you predicting for the U.S.?
Gwynne Dyer: “Well, think about the Vietnam War for a moment. The United States suffered a humiliating defeat and frankly the U.S. armed forces were a complete shambles for 10 years after that. And yet, within five years, it was all forgiven and forgotten. And in the world at large by the end of the 1970s, the U.S. was back as the leader of the free world ... That could happen again, if the U.S. pulls out of Iraq, as soon as Mr Bush leaves power.
“Which is what I think will happen. ... However, there is the possibility that the U.S. before Mr Bush leaves will attack Iran. And if that happens, I think we have a very different outcome. ... Zbigniew Brzezinski is on record as saying if the United States attacks Iran, it will lose its place in the world. And I think he is right. ...
“[I]t is imaginable that the Bush administration decides to roll the dice one last time. If they attacked Iran, they would lose, and of course, the Iranians would close the Gulf to the tanker traffic, and so suddenly there is a global economic crisis, and then in two or three months we get America off the hook, somehow and get the Gulf reopened. But by that time, frankly, I think NATO will have broken up, I think the Russians will have decided they had better make a deal with the Chinese, it would change the look of the chessboard very dramatically. ...
“A senior Japanese diplomat said to me, last year, he said ‘You know the United States is a twelve year old with a shotgun.’ And what he meant was that as the U.S. begins to suspect that it is past the apogee of its trajectory, it is on the way down, as a great power no longer on the way up or at the top securely, that it is becoming extremely erratic, that is lashing out in all sorts of ways to try and slow or stop what it perceives as incipient decline.
“So there is concern that we are getting into rather deep water here, that we may be going into an era where the Americans become highly unpredictable and quite dangerous.”Link here.
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