Wealth International, Limited (trustprofessionals.com) : Where There’s W.I.L., There’s A Way

W.I.L. Offshore News Digest for Week of September 22, 2008

This Week’s Entries : This week’s W.I.L. Finance Digest is here.


This is overreach. This is bad.

As might be expected in the midst of a crisis where emotions run high and information is incomplete, there will a diversity of opinion -- intelligent opinion, even. At such a point looking to sound fundamental principles is often all one can do. No one today knows just how insolvent the major U.S. financial institutions are, and anyone who says they know how much the various bailouts are going to end up costing is blowing smoke.

So let us look at a few key elements of the current situation: (1) Paulson and Bernanke were key players in creating the mess, have been uniformly wrong in their predictions, and yet are the ones who are supposed to come up with a plan to get us out. (2) In states of real or perceived states emergency, as this article author points out, the tendency is for the legislative powers to delegate powers to the executive. These powers ultimately get used and are seldom taken back. (3) The solutions proposed run along the lines of arbitrary centrally promulgated diktats, as opposed to negotiated agreements among effected parties using whatever information they have at there disposal. The situation is incredibly complex and desperately calls for collective collaborative brainpower.

Three strikes. Next batter.

Okay. Let us leave no room for ambiguity here. The Treasury's draft plan for saving the world is breathtakingly awful. It would give the Secretary of the Treasury entirely unchecked discretion over up to $700 billion. Even that "limit" has a loophole big enough that you could drive a truck through it, so the Secretary could in effect spend up to $1.8 trillion dollars, right up to the newly raised Federal debt ceiling, without further Congressional action. This act would be such a wholesale delegation of the power of the purse that I wonder whether it is even constitutional. Of course, the act explicitly puts the Secretary's actions beyond any judicial review, so perhaps questions of legality or constitutionality are merely academic. (Paul Campos shares these concerns.)

As Paul Krugman has pointed out, for the plan to help insolvent institutions, the Treasury would have to overpay for these assets. Yves Smith unearths an account that Secretary Paulson has acknowledged this fact in private, although he will not cop to it on the Sunday talk shows. It is almost old-fashioned to raise questions about whether or not the former Wall Street banker will offer sweetheart deals to his industry (an industry that has harmed the American economy more deeply than most people realize). Just as big lies boldly asserted can trump plausible untruths nervously defended, overt corruption on a massive scale (but "in the public interest") might leave a lot of naysayers dumbstruck. It becomes the way we do business. Of course, none of Dean Baker's progressive conditions, none of Brad DeLong's dealbreakers, not even my plea for a little transparency are incorporated into the proposal.

The oldest technique for the usurpation of power by the executive from the legislative is the manufacture of a state of emergency. That is not to say the present financial crisis is not actually an emergency. But the how the crisis is understood by legislators and the range of options by which it might be addressed have been set by Messrs Paulson and Bernanke. They have presented a single option, one more radical than seemed reasonable even at the height of the depression. (See Brad DeLong.)

It is worth noting that Paulson and Bernanke have thus far proven themselves to be capable technocrats. (Although, as Dean Baker points out, they have been awful prognosticators.) There is a lot to disagree with in how the dynamic duo have handled the torrent of crises that began last August. But they have acted aggressively and creatively, and in their ad hoc interventions so far, they have gone to some lengths to create upside for taxpayers and to squeeze miscreants at least a bit.

Until reading the text of the Treasury's proposal and stewing on it overnight, I was inclined not to fight too hard. I saw things as I am sure legislators see things: Something must be done, a megabailout is disagreeable and imperfect, but it is something that we can do quickly, and it is what our experts, whom we trust, recommend. Let's fiddle at the margins to get it done as best we can.

But the proposed text flipped a switch in my brain. This is not, as Senator Schumer put it, "a good foundation of a plan that can stabilize markets quickly”. It is a raw arrogation of power. My trust, my willingness to extend the benefit of the doubt, has evaporated.

This is overreach. This is bad.

See also Glenn Greenwald, John Hempton, Sebastian Mallaby, David Merkel, Robert Reich, among many, many others, I am sure.

For a contrary view, check out the always thoughtful knzn. I disagree pretty strongly, but he is always worth reading.

E Pluribus Hokum or when the Gamblers Bail Out the Casino

An invitation to abuse of power unparalleled in American history, in which ill-paid civil servants will set prices on the portfolios of the banking system with no oversight and no threat of legal penalty.

The mysterious writer "Spengler," named after German historian and philosopher Oswald Spengler (1880-1936) whose best known work is the book The Decline of the West, is an extremely erudite fellow whose articles regularly show up in Asia Times. His ruminations range from economics to politics, from international affairs to religion, from philosphy to (appropriately) the decline and fall of Western Civilization. A la Ghandi, one presumes he thinks the later would be a good idea.

In this piece Spengler fixes in his gunsight on the vital but largely ignored party to the ongoing financial fiasco, the American taxpayer -- who consequently emerges bullet-ridden from the encounter. Americans have been so feckless with regard to managing their personal financial affairs, he maintains, that they figure they may as well gamble on the fixes proposed by Paulson et al, however much of a longshot it is. Like Kris Kristofferson and Janis Joplin's Bobby McGee, they are free because they have nothing left to lose. Collectively it cannot possibly work; but for some individuals it might. That, and the inherent incomprehensibility of the situation, is why Americans are offering so little resistance to sacrificing their children to the fat cats.

A theory of what drives this double-or-nothing mentality has recently been codified in a book Spengler cites, A World of Chance, which he thinks highly enough of to recommend -- seriously, we think -- that the authors receive the economics Nobel Prize. He concludes with this telling but intriguing question: Where is America's Vladimir Putin equivalent, who will drive out the oligarchs who stolen the country's wealth and debased its currency?

Why should American taxpayers give U.S. Treasury Secretary "Hank" Paulson a blank check to bail out the shareholders of busted banks? Why should the Treasury turn itself into a toxic waste dump for their bad loans? Why not let other banks join the unlamented Brothers Lehman in bankruptcy court, and start a new bank with taxpayers' money? Or have the Treasury pay interest on delinquent mortgages, and make them whole? Even better, why not let the Chinese, or the Saudis or other foreign investors take control of failed American banks? They have got the money, and they gladly would pay a premium for an inside seat at the American table.

None of the above will occur. America will give between $700-$800 billion to the Treasury to buy any bank assets it wants, on any terms, with no possible legal recourse. It is an invitation to abuse of power unparalleled in American history, in which ill-paid civil servants will set prices on the portfolios of the banking system with no oversight and no threat of legal penalty.

Why are the voices raised in protest so shrill and few? Why will Americans fall on their fountain-pens for their bankers? If America is to adopt socialism, why not have socialism for the poor, rather than for the rich? Why should American households that earn $50,000 a year subsidize Goldman Sachs partners who earn $5 million a year?

Believe it or not, there is a rational explanation, and quite in keeping with America's national motto, E pluribus hokum. Part of the problem is that Wall Street, like the ethnic godfather in the old joke, has made America an offer it cannot understand. The collapsing the mortgage-backed securities market embodies a degree of complexity that mystifies the average policy wonk. But that is a lesser, superficial side of the story.

Paulson's dreadful scheme will become law, because Americans love their bankers. The bankers enable their collective gambling habit. Think of America as a town with one casino, in which the only economic activity is gambling. Most people lose, but the casino keeps lending them more money to play. Eventually, of course, the casino must go bankrupt. At this point, the townspeople people vote to tax themselves in order to bail out the casino. Collectively, the gamblers cannot help but lose. Individually they nonetheless hope to win their way out of the hole.

Americans are so deep in the hole that they might as well keep putting borrowed quarters into the one-armed bandit. They have hardly saved anything for the past 10 years. Instead, they counted on capital gains to replace the retirement savings they never put aside, first in tech stocks, then in houses. That has not worked out. The S&P 500 Index of American equities today is worth what it was in 1997, after adjusting for inflation (and a pensioner who sells stock purchased in 1997 will pay a 20% capital gains tax on an illusory inflationary gain of 40%). Home prices doubled between 1997 and 2007 before falling by more than 20%, with no floor in sight.

As it is, many of the baby boomers now on the verge of retirement will spend their declining years working at Wal-Mart or McDonalds rather than cruising the Caribbean. Some of them still have time to tighten their belts and save 10% of their income (by consuming 10% less), plus a good deal more to compensate for the missing savings of the 1990s. ...

The homeowners of America hope against hope that somehow, sometime, the price of their one only asset will bounce back. ... Sadly, there is no reason to expect the bailout of bank shareholders to have any effect at all on American home prices, which will continue to sink into the sand. ...

For the Paulson bailout to be helpful to the banks, it must buy their securities at much higher prices than the private market is willing to pay. Otherwise it makes no sense at all, for the banks could sell at any moment to the hedge funds. But that is a subsidy to private banks, administered at the whim of the Treasury Secretary, without oversight and without the possibility of legal recourse. ... Opposition to the Treasury plan is disturbingly thin. ...

Why the taxpayers of America would allow their pockets to be picked in this fashion requires a different sort of explanation than one finds in economics textbooks. My analogy of gamblers taxing themselves to bail out the casino is inspired, in part, by a remarkable new book by the Canadian economists Reuven and Gabrielle Brenner (with Aaron Brown), A World of Chance. In effect, the Brenners reinterpret economic theory in terms of gambling, showing how profoundly gambling figures into human behavior, especially in such matters as so-called life-cycle investing. The 50-ish householder who has not made enough to retire may take outsized chances, considering that as matters stand, he will work until he drops dead in any case. ...

A World of Chance undermines our usual view of "economic man" and substitutes the angst-ridden, uncertain denizen of a world that offers no certainties and requires risk-taking as a matter of survival. I hope to offer a proper review of the work in the near future. As my marker, though, permit me to leave the thought that for providing a theoretical foundation for the counter-intuitive behavior of American taxpayers, the Brenners deserve the Nobel Prize in economics.

Alas for the gamblers of America: they will tax themselves to keep the casino in operation, but it will not profit them. Where, oh where, is America's Vladimir Putin, who will drive out the oligarchs who have stolen the country's treasure and debased its currency?

The Dumbest Man in America

The masters of the universe began to believe their own grotesque guff, sewing the seeds of their downfall.

Pride goeth before the fall, the age-old proverb informs (informeth?) us. Once the fall actually commences we might expect, or hope, that the pride that preceded and facilitated it might departeth through the nearest door. No sign of that so far, we regret to inform you. The U.S. empire is in a decline that is obvious to all but the most deluded -- which comprises 80% of the U.S. population and 99% of the politicians, but we digress -- yet the chest-puffing coming out of Washington has never been higher. The U.S. has had almost 20 years, since the fall of the Iron Curtain, to cultivate the art of humility from a position of strength. Having missed that chance, and cultivated the art of hubris instead, it is about to have humility thrust upon it.

The U.S. investment banks (Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers, and Bear Stearns) -- the masters of the universe, this cycle's "smartest guys in the room" -- made buckets of money creating and selling toxic financial sludge which made "high yield" scams look prudent by comparison. At least with HYIPs you can surmise you are dealing with a Ponzi scam and try to get out before the scheme folds. The investment banks succeeded in hiding this fact from themselves. In the equivalent of Charles Ponzi invested his and his wife's cash into his own scam, they reinvested their profits in the very crap they created. We are well-warned about the dangers of believing our own press clippings, but, pace Will Rogers and Charlie Munger, some people learn by reading, a few learn learn by observation, and some people just have to piss on the electric fence.

The U.S. investment banking industry bull market in humility has been dynamic indeed. Two of the five (Bear, Lehman) are kuput. Merrill sold itself while the going was still half good. Morgan and Goldman were transformed into bank holding companies this past weekend. Their swinging bachelor days have ended. Meanwhile, some strange "conservation of hubris" law seems to be in effect. Ben Bernanke and Hank Paulson act as if they can actually save the system from its past malfeasances. This is about as likely as Wile E. Coyote finally catching the Road Runner. Yes, this time my Acme whatchamacallit will catch the critter. He won't get away this time!

Amidst this mess, who wins the award for dumbest man in America? Bill Bonner has trouble choosing a winner. We would vote for the whole United States. If we were forced to choose just one, then Paulson, who led Goldman down the derivatives garden path and now believes he is the man to clean up the mess, gets our vote. Extra points for being dangerously stupid, having not been humbled yet.

Where did he go wrong? The question probably crossed his mind ... perhaps even when he mounted the scaffold on January 21, 1793. The Bourbons had been the most successful family in Europe. They had ruled Europe's biggest and richest country since Henry IV. And now they were on thrones all over Europe. But in the language of the City, Louis 16th blew himself up. He was supposed to be an absolute monarch. Ah ... there was the dynamite! He believed it. He had surrounded the Parliament with troops and turned the country against him. And now, he had absolutely no control over anything. Not even the power to save his own skin.

"Sire, you have committed something worse than a crime; you have committed an error," Talleyrand might have told him. Poor Louis! He already had the bag over his head. And the blade at his neck. He must have felt like the dumbest man in France.

Dick Fuld must have felt pretty dumb too. His firm had survived the Civil War, the Railroad Bankruptcies of the late 19th century, the Bankers' Panic of 1907, the Crash of 1929, the Great Depression, WWII, the Cold War. Lehman Bros. had outlasted spats, prohibition and disco music. But it could not keep its head through the biggest financial boom in history.

John Edwards, recently claimed the title of the "dumbest man in America," when the press got wind that he was two-timing his wife and running for president at the same time. But Edwards has more competition every day. By Monday of this week (last week), Fuld had completely destroyed Lehman Bros. In January of 2007, the financial industry put a value on the firm -- a company it knew well -- of $48 billion. This week, the bid went to zero. And then, on Wednesday, came more disquieting news: the world's largest insurance company, AIG, was failing. Martin Sullivan had run it into the ground, said the analysts. Now, it needed an $85 billion bailout.

There was no one there to bail out Louis when he needed it. France was not too big to fail; it was too big to bail out. And everything had been going so well! When Jacques Turgot was Controller-General, he was getting rid of the internal customs barriers, lifting price controls, abolishing the trade guilds and the corvee (the system of forced labor used to build roads). The political system was being reformed too -- evolving towards a parliamentary democracy.

But along came those plucky Americans to stir up trouble. They sucked France into war with Britain. France supplied money, materiel and troops -- landing 5,000 soldiers in Rhode Island and ultimately winning the war by blockading Lord Cornwallis at Yorktown.

"The first shot will drive the state to bankruptcy," Turgot warned the king. He was right. By 1786, the French were in desperate straits, with half the population of Paris unemployed and a national debt equal to 80% of GDP. The French were counting on the Americans to begin repaying their $7 million in loans, but the United States was broke too. And soon, French credit was so bad, the king could no longer borrow from the moneylenders in Amsterdam nor even from his own creditors in Paris. Having borrowed too much, Louis no longer had any room to maneuver. All he could do was to march up the scaffold steps like a real monarch.

And now the heads roll on Wall Street. James Cayne at Bear Stearns. Stanley O'Neal at Merrill Lynch. Charles Prince of Citigroup. But who is the dumbest? Surely Dan Mudd and Dick Syron at Fannie and Freddie are still in the running. Even with the deck stacked in their favor, they could not stay in the game. And let us not forget the rescuers -- Ben Bernanke and Hank Paulson. They have practically nationalized not only America's mortgage industry, but, taking an 80% stake in AIG, the insurance industry too! Where does the money come from? It is borrowed too -- hundreds of billions worth. Surely, there is a guillotine waiting for them somewhere.

The last 15 years have been too kind to finance. Wall Street and the City are essentially debt mongers; and in the boom, nobody did not want to borrow. Financial profits soared. Since 1980 the profits of the U.S. financial sector as a portion of GDP have gone up 200%. Industry owners and managers could have taken their money off the table and retired to Greenwich. But on the back of this outsize success grew a monstrous hump of self-delusion. The masters of the universe began to believe their own grotesque guff. The financial markets were perfect, said the academics. All-knowing and all-seeing, they would not make a mistake. And the chiefs at the big financial firm must have thought they supped with the gods themselves. They had the paychecks to prove it.

Of course, some Wall Street bosses were more cunning than others. In selling itself to Bank of America, for example, Merrill Lynch dodges the scaffold; but it becomes a ward of the state, almost like Fannie and Freddie before they were kidnapped outright. Bank of America has easy access to Fed funds. Merrill figures it might need more money too.

The old regime on Wall Street was dominated by just five large investment companies. But the more they talked their own books, they more they came to think it was true -- they were all too big, too smart and too rich to fail. Not only did they package and sell explosive packages of debt, they put the stuff in their own vaults too. Now, Lehman, Bear, and Merrill have blown themselves up. Only two more to go.

And now they have gone, in all but name.


The upheaval shaking Wall Street will hurt privileged enclaves as well as working-class neighborhoods from coast to coast.

Which metropolitan areas will feel the brunt most directly from Wall Steet's woes? One way to guess and rank the possibilities is to find out which cities are have the highest percentage of people employed in finance, insurance, real estate, and leasing areas.

How many former Lehman Brothers bankers or AIG executives are likely to be buying a Park Avenue apartment or a home in Darien, Connecticut this year? Most likely answer: not many at all.

As anyone who works on Wall Street, invests in the stock market, or just reads the newspapers knows, the past few weeks for the financials sector have been as ugly as Frankenstein's sister. People have seen their net worth eviscerated, if not obliterated completely.

But Wall Street's woes are going to have a direct impact on communities around the U.S. -- and not just because the proposed $700 billion bailout will result in higher taxes for most Americans. The pain will spread beyond the banks themselves to their back-office and IT operations, accountants, lawyers, and other professional service employees who depend on work from finance companies. It will also reach regional banks across the country. Credit-card companies and firms that deal with auto loans are also vulnerable as the credit market tightens. Even insurance companies, which have remained relatively strong, could be hurt if the economy worsens and workers drop existing policies and decide not to take on new ones. From CEOs to security guards, the financial, insurance, and real estate sectors employ approximately 9.8 million people in the U.S. alone, nearly 7% of the entire American workforce, and their spending potential is even greater.

New York's Ripple Effect

Moreover, many of these jobs often tend to cluster around certain towns -- bankers in one community and tech support in another. And while Manhattan is at the center of the turmoil, the fallout will be nationwide. Already the financial sector alone has lost 10,000 jobs through July, or about 2% of finance jobs. Moody's Economy.com projects that New York City and its suburbs will lose 65,000 finance jobs by the middle of 2010, or 11% of the total.

Economists are projecting that Manhattan real estate prices will finally sink under the pressure of financial-sector layoffs and shrinking Wall Street bonuses. Wall Street accounts for about 12% of jobs in the city of New York, and a quarter of salaries. "New York is the stone in the puddle that ripples across the country," said Scott Simmons, vice-president and founding partner of Crist/Kolder Associates, an executive recruiting firm in Chicago.

In other words, smaller financial centers and their suburbs could also see trouble ahead. BusinessWeek.com worked with PolicyMap.com, a Philadelphia-based online data and demographics site, to rank the communities with the largest percentage of residents working in finance, real estate, insurance, and leasing. Topping the list is Darien, an affluent New York suburb where the median salary is $168,000 and 27% of residents work in those industries. Bloomington, Illinois, home of State Farm Insurance, came in second, followed by Hoboken, New Jersey, which is across the Hudson River from Wall Street.

But the impact of a downturn could be more serious in smaller cities that are less diversified. Wilmington, Delaware, where many of the nation's credit-card companies are headquartered; Charlotte, North Carolina, home of Bank of America and Wachovia; and Sioux Falls, South Dakota, where many back-office jobs are located, each have about 15% of residents working in finance, real estate, and insurance.

Jeremy Nowak, president of The Reinvestment Fund, a nonprofit group in Philadelphia that operates PolicyMap.com, and a board member of the Philadelphia Federal Reserve, said the towns on the list are not necessarily in trouble yet. Much depends on the health of the local employers and the mix of businesses. Not all banks, for example, are doing badly, he said. And the insurance industry is, so far, relatively healthy, despite the troubles besieging industry giant American Insurance Group. "These are places to watch," Nowak said. "This will be the starting point for investigation, and not the answer."

John Tirinzonie, Connecticut's state labor economist, was not surprised to see that Darien topped the list. The Wall Street crisis puts stress on commuters in affluent Fairfield County, which includes Darien, Westport, New Canaan, Stamford, and Greenwich (home of former Lehman CEO Dick Fuld), he said. It remains unclear how the merger of Bank of America and Merrill Lynch will impact the thousands of employees who work at both banks in Hartford.

What seems clear is that the financial turmoil is already hurting the local economy. Connecticut's unemployment rate jumped from 5.8% in July to 6.5% in August, he said.

"The problem is when you start to have people making good money who are commuting to New York and lose their job, they are going to be in a very competitive market now with people in the same position. If they are able to get a job ... it may not be the same level and income they a're used to. And that affects the state in terms of tax revenue."

In New Jersey, home prices in the wealthy towns of Madison, Summit, Chatham, and Millburn, which have direct train service to midtown Manhattan, had been holding up better than much of the state, said Rutgers University economist James Hughes. But that could now start to change.

One possible benefit for New Jersey: Manhattan companies that are coming to the end of their leases might consider moving to New Jersey where office rents are much lower, he said. "You are going to see a smaller Wall Street," Hughes said. "Salaries will be less generous, bonus payments will be less. It's going to ripple through the residential market."

The New York suburbs in Westchester, New Jersey, Long Island, and Connecticut could get hit harder than Manhattan itself, which has a relatively tight supply of housing. Jonathan Miller, chief executive of real estate appraisal firm Miller Samuel Inc. said the market for Manhattan units selling for more than $8 million is less vulnerable because many of the buyers come from overseas and are wealthy enough to survive an economic downturn, he said. Miller said the market for homes of $3 million to $8 million could get hurt more because many of the buyers work on Wall Street. "The abruptness of all that has happened has caused many people to step back and wait and see whatever bad news will come along next," Miller said.

Steve Spinola, president of the Real Estate Board of New York, said he expects prices to remain flat. He also said that many Wall Street employees who were laid off will be hired by new boutique investment banks that might be formed by executives from the former investment houses, and plenty of talent will be needed to implement the $700 billion bailout plan.

The Manhattan co-op market is tight. Spinola said the condo market might have more supply problems because builders, rushing to meet a June 30 tax abatement deadline, filed for about 17,000 new construction permits, he said.

"In two and a half years when these projects are done and open, will the market be back to buy them?," Spinola said. "I think the answer is 'yes.'"


U.S. territories like Guam and American Samoa may not be high on your list of retirement havens, but they are well worth a look. Finding oceanfront bargains.

If you want to emmigrate to a tropical island but leaving the U.S. legal jurisdiction is not an absolute priority, the U.S. territories -- the U.S. Virgin Islands, Puerto Rico, Guam, American Samoa, and the formidably named Commonwealth of Northern Mariana Islands -- offer intriguing possibilities. In particular, real estate prices on the Pacific Ocean territories are cheap when compared to their Caribbean counterparts.

It is reported that Guam and Saipan, of the Northern Marianas, "are beautiful islands with endless beaches, lush lagoons, mountainous interiors and wondrous reefs for diving," while American Samoa is perhaps the prettiest of all. Guam's brown snake problem is downplayed, but a look at its Wikipedia entry indicates some nontrivial problems with various introduced pests.

There is no doubt about it: A villa in Naples, Italy, offers a more exotic retirement than a condo in Naples, Florida. And who would not prefer an oceanfront home in Roatan, Honduras, to a time-share on the Jersey shore?

Alas, buying retirement havens overseas also raises a litany of issues -- from personal safety and the quality of medical care to currency risk and political stability.

One good way to steer clear of trouble is to invest in exotic real estate in places where the Stars and Stripes still fly. For those of you who have not spun a globe recently, the U.S. maintains political oversight over five inhabited island groups -- mostly lush, tropical and idyllic.

Two are popular Caribbean retreats -- the U.S. Virgin Islands and Puerto Rico. But there are also American Samoa, Guam and the Commonwealth of Northern Mariana Islands, all in the far Pacific. With the exception of American Samoa, these are "organized territories," in that the U.S. Constitution applies to all local governments and inhabitants, just as it would in the 50 States. American Samoa is an "unorganized territory," which means Congress determines which parts of the Constitution apply to the local government and citizens.

The Caribbean markets, for all their appeal, have not offered much protection from one particular force: slowing home sales. These markets surged from 2001 to 2006, as the 9/11 terrorist attacks led Americans to vacation closer to home, but the boom ended in 2006 as nervousness about residential real estate in the continental U.S. affected buyers who needed to sell property to buy elsewhere. In fact, 2006 "was one of the worst years I have seen," notes Merry Nash, owner of Islandia Real Estate in St. John, Virgin Islands. Now, she says, "inventory stands about 30% above normal, but the market did get more active earlier this year."

Some pros expect the Virgin Island market to turn up in 2009, so now could be a good time to start house-hunting. But houses are not cheap. A 2,000-square-foot home with an ocean view usually costs more than $1 million -- sometimes much more.

Puerto Rico is a much different market, dominated by natives, rather than vacation-home seekers. It, too, however, experienced a miserable 2006, but for different reasons. That year, the governor and the legislature could not agree on fiscal and tax-reform proposals. In March, the government basically declared itself bankrupt, and 95,000 public employees had a surprise two-week vacation. At that point, the housing market keeled over.

Residential real estate, which had been appreciating about 6% annually, has been in reverse since then, says Jorge Zabala, a real-estate agent for Coldwell Banker Commercial Isla del Coqui, in Guaynabo, P.R. "The housing market in Puerto Rico is still going down. Depending on where you are on the island, home prices dropped from peak about 5% to 30%."

But Puerto Rico should bottom out in 2009 and could offer the best bargains in the Caribbean. Buyers will find plenty of places to consider. The most popular attraction for mainlanders is San Juan's beachfront corridor, which stretches from Condado to Isla Verde. This is mostly a mid-rise and high-rise condo market, and prices vary widely by location and age of the buildings. The range: from the low six figures to over $1 million.

Another popular area is just outside San Juan, in a series of gated communities that make up Dorado. These are mostly large homes -- singer Ricky Martin has a house here. At the bottom of the market, there are still some smaller houses and condominiums around, and they go for less than $1 million. But the bigger properties still fetch around $4 million to $5 million.

If you really want a bargain on exotica under the U.S. flag, go west, very west.

The U.S. has political sovereignty over American Samoa, located in the South Pacific, and Guam and the Northern Mariana Islands. These latter two are both part of the Mariana chain, which is so far west of Hawaii that it is almost due south of Tokyo.

The Tumon Bay area of Guam looks like a mini-Waikiki, with a line of high-rise hotels (Westin, Hilton, Marriott, Nikko, etc.) along the beach. However, since most of the tourists come from Japan, every sign is in English and Japanese.

Like Hawaii, Guam's economy also gets a big lift from the American military. Last year, Washington announced it is committing $15 billion over a decade to build up the island's infrastructure.

As a resort island, Guam historically has depended on the vicissitudes of the Japanese economy. When that country's economy flourished in the 1980s, so did Guam. When it nose-dived a decade later, Guam's real-estate market dropped off a cliff. Raw land that once sold as high as $1,500 a square meter fell to $250 to $300.

But the market is clearly on the mend, thanks in no small part to Uncle Sam's plans to station some 8,000 marines in Guam. Real estate began to make a comeback in 2006, and 2007 was a record year, with almost $700 billion in sales, says Nick Captain, president and owner of The Captain Co. in Hagatna, Guam. The median price of a home has doubled since 2003, to $205,000, he says. A 2,000-square-foot house by the water sells for about $600,000, about 40% less than in the Virgin Islands.

Guam is also much cheaper than Hawaii, and not as isolated as you might think. Though it is seven hours from Hawaii, good short-haul airlines make it easy to reach Japan, the Philippines or China. The big worry in Guam is weather. The island sits in the western Pacific's typhoon zone. In the past decade, it has been hit by two super-typhoons.

One hears a lot about bugs and dangerous reptiles in Guam. Termites definitely can be a problem, but the hype about the brown tree snake, which supposedly has overrun the island, is definitely overblown.

The inhabitants of Guam's neighbor to the north, the island of Saipan in the Northern Marianas, should only have to worry about typhoons and bugs. A resort locale for the Japanese, Saipan has been ravaged by everything but the Biblical plagues. The Northern Marianas have suffered the loss of airline flights to Japan, a collapsed economy, a weak government and allegations of international money laundering.

Result: Real estate is so thoroughly deflated that Saipan is probably the cheapest property market under the U.S. flag. In 2007, land and built-out property was selling at about 10 cents on the dollar. The 310-room Nikko Hotel, once one of the major resorts on the island, was sold recently for $3 million, says Roy Alexander, president of Alexander Realty & Development in Saipan, who adds: "The owners gave it away."

As for residential real estate, Alexander says, "I did a deal this year with a foreigner who bought an acre of land with an ocean view for $135,000." Try getting that in Malibu or Palm Beach.

But there is one big snag: You cannot actually buy property in the Northern Marianas. Instead, you lease it, sometimes for as long as 55 years. According to the island's constitution, only descendents of native Mariana Islands peoples can own land. This law may be loosened in 2012; at a minimum, lease lengths may be extended to 75 years.

The legal hurdles are well worth jumping, for Guam and Saipan are beautiful islands with endless beaches, lush lagoons, mountainous interiors and wondrous reefs for diving. U.S. history buffs also will find plenty to like: The World War II battles in this part of the Pacific were lengthy and particularly brutal and, to this day, especially in Saipan, many vestiges of the war are evident in the islands.

Perhaps the prettiest of all U.S. island territories is American Samoa, a deeply forested, tropical speck of land in the South Pacific, east of Fiji and west of French Polynesia. As with Guam and Saipan, to reach it you head to Honolulu and then take a plane from there. The flights, all done overnight, take five hours.

American Samoa is the least developed of the territories because, as on Saipan, buying property there is not easy. Only about 10% of the land is privately owned; the rest is communal family land. American Samoa's law generally prohibits the transfer of land ownership to anyone who is less than 1/2 Samoan. But, it is possible to lease communal land, and the lease can be extended to 55 years, with an option to renew. Not surprisingly, properties do not change hands very often on the island.

"About three years ago, a client of mine sold two acres of absolutely stunning beachfront property for $350,000," says Henry Kappel, an attorney who is now a legislative counsel on the island. He uses his own home as a benchmark for property prices. The 1,800-square-foot house sits on a nice half-acre lot with just about every kind of exotic fruit tree imaginable -- mango, papaya, banana, pineapple and more -- and it was appraised at just $285,000.

Talk about a tasty bargain.


Liechtenstein bends, claims it has not broken.

We have a few helpful additional details to what has been previously reported in these pages, on Liechtenstein Prince Alois's speech announcing the country's move to "more forceful cooperation" on tax inquiries from other nations. One can try to parse the announcement to a fare-thee-well to see just how "cooperative" Liechtenstein will be.

For instance the Prince adds this little contingency: "We should offer all States comprehensive cooperation if they are willing to find sensible solutions with us for the client relationships we have built up." Sounds reassuring (for clients), but what will that amount to in practice? The Prince also announced that "Liechtenstein is going about as far as Switzerland or Luxembourg in its negotiations" -- which makes sense as a "level playing field" negotiating stand/line in the sand.

The speech's conclusion is clearly designed to reassure the principality's clients: "At the same time, we should not overestimate the threats, such as those by Germany. ... [O]ne should not forget that Germany has always put pressure on Liechtenstein, since Liechtenstein has always accepted tax refugees and other refugees: About 40 years ago, a German minister of finance threaten to invade Liechtenstein with the German fire brigade, should we continue to be a tax oasis. Attacks from the tax desert in the north have a long tradition -- and still, we remain a tax oasis."

Liechtenstein's National Day ... serves the purpose of reflection on the present and consideration of the future. Not unexpectedly, the tax affair in Germany and its consequences for the Liechtenstein financial center were one of the focuses this year. Hereditary Prince Alois of Liechtenstein announced the willingness of the country to cooperate in tax matters.

As expected, the speech by Hereditary Prince Alois of Liechtenstein on the occasion of National Day 2008 discussed the current developments in the financial center. The Hereditary Prince indicated that, in light of the international trend toward stronger cooperation in tax matters, the time has also come for Liechtenstein to move more forcefully in the direction of cooperation. In the view of the Hereditary Prince, the system of mutual legal assistance and administrative assistance in tax matters should be based on a new foundation. As the Hereditary Prince said, "We should offer all States comprehensive cooperation if they are willing to find sensible solutions with us for the client relationships we have built up, and if they are interested in fair and constructive cooperation for the future."

In his remarks, the Hereditary Prince made clear that Liechtenstein is no longer an offshore center, but rather a financial center with strong growth in onshore business as well as a successful industrial location. "We are not an offshore center as such, but rather have -- in addition to the increasingly strong onshore sector of the financial center -- an extremely successful industrial sector, which, in terms of economic output and jobs, is considerably larger than the financial sector." Solutions for the prevention of double taxation are therefore a logical and justified concern. Despite the new level of cooperation in tax matters announced by the Hereditary Prince, Liechtenstein will continue to distinguish itself sufficiently from other financial centers. "While many States are introducing the 'transparent citizen', we practice a culture of privacy that goes far beyond bank client secrecy in tax matters."

Hereditary Prince Alois praised the Government's efforts to diversify the financial and business center and to integrate it internationally, especially by signing the Schengen Agreement, negotiating an Anti-Fraud Agreement with the EU, and negotiating the continuation of the QI status with the United States. This offensive strategy of the Government, set out in the "Futuro" vision for the future, was "substantially disrupted by the tax affair staged via the media", Hereditary Prince Alois regrets. Nevertheless, the Hereditary Prince expressed optimism about the future of the Liechtenstein financial and business center, calling for a reform of mutual legal assistance and supervision of the fiduciary sector, in order to reduce the possibilities for abusing the financial center. The Hereditary Prince sees particular opportunities in the area of charitable foundations, insurance, investment funds, and pension funds, which he believes can be marketed more easily if Liechtenstein adopts the European standard with respect to cooperation in tax matters.

Prime Minister Otmar Hasler also spoke out in favor of enhanced cooperation. Free access to the markets requires closer cooperation, Hasler said in an interview with the Liechtensteiner Volksblatt: "For this reason, after the reform to tighten general due diligence obligations for the financial center, the Government took up the topic of stronger international cooperation in the fight against tax offenses." After extensive preparatory work, Prime Minister Hasler believes the time has come to "choose a forward strategy and tackle the questions surrounding untaxed assets." According to Hasler, such a strategy would lead Liechtenstein out of isolation and also give the business location a new perspective. In this context, Prime Minister Otmar Hasler reiterated that Liechtenstein has a very successful and diversified business location that is competitive internationally.

In an interview, Reigning Prince Hans-Adam II expressed a pragmatic view concerning the foreign pressure on the Liechtenstein financial center: "Of course there will always be pressure. At the same time, we should not overestimate the threats, such as those by Germany." With respect to information exchange, the Reigning Prince announced that Liechtenstein is going about as far as Switzerland or Luxembourg in its negotiations. Negotiations and agreements can reduce the pressure from abroad, Reigning Prince Hans-Adam II emphasized. However, one should not forget that Germany has always put pressure on Liechtenstein, since Liechtenstein has always accepted tax refugees and other refugees: "About 40 years ago, a German minister of finance threaten to invade Liechtenstein with the German fire brigade, should we continue to be a tax oasis. Attacks from the tax desert in the north have a long tradition -- and still, we remain a tax oasis."

The “Futuro” Looks Bright for Liechtenstein, Prime Minister Says

More public pronouncements from Liechtenstein's government. Apparently cooperation on tax matters will only be in response to specific requests, but will not be limited to offenses that are illegal under Liechtenstein's laws. This is less protective of client privacy than Switzerland's policies.

In a policy statement before parliament, Prime Minister Otmar Hasler unveiled the government's key tax and policy reform measures as part of the ongoing "Futuro Strategy" designed to improve the future of the Liechtenstein financial center.

According to Hasler, the effects of the global economic crisis, combined with growing pressure to conform and co-operate with other States and international organisations on tax measures have taken their toll on the center. Indeed, with the EU hoping to strengthen the snooping powers of the Savings Tax Directive, this pressure will undoubtedly only mount.

Dependent on recognition by the international community, the country's goals are to improve foreign relations and carry out domestic reforms designed to strengthen the business location. However, it must also balance this against protecting the privacy of investors. ...

Despite past problems, Hasler emphasised that Liechtenstein was endeavouring to restore relations with onshore powers. Indeed key objectives are: to conclude negotiations with the U.S. and the Anti-Fraud Agreement with the EU by the end of the year and to remove Liechtenstein from the list of non-cooperative states in the field of tax co-operation.

Negotiations with the U.S. on information exchange in tax matters are already close to completion. This will not lead to automatic information exchange, rather information will be exchanged upon specific request at the level of both mutual legal and administrative assistance. Information exchange will not be limited to offences covered by Liechtenstein's definition of fraud. This also raises expectation of positive developments in relations with the U.S., an agreement on the longer-term Qualified Intermediary "QI" status and the beginning of tax co-operation with the U.S.


The Chairman of the Swiss Bankers Association, Pierre Mirabaud, firmly defended his personal beliefs concerning bank-client confidentiality. He argued that privacy was a fundamental human need. He also said that if Switzerland backed off on its laws defending client -- domestic and foreign -- financial secrecy protections, it would be via voter referendum and not due to the government caving in to outside pressures.

It is refreshing to see such a principled defense of privacy in these times.

In a speech aimed at silencing many EU critics and ending mounting foreign pressure, the Chairman of the Swiss Bankers Association (SBA), Pierre Mirabaud, vehemently defended Switzerland's stance on banking secrecy and his own belief in bank-client confidentiality.

The 95th General Assembly of the Swiss Bankers Association held in the Stade de Suisse in Bern proved the perfect stage for Mirabaud to denounce his critics and firmly uphold his convictions.

Arguing that protecting privacy was a fundamental human need, Mirabaud remained undeterred: Switzerland, a state founded on the rule of law, would not deviate from the principle of treating native citizens and foreigners alike.

Financial privacy is firmly rooted within Switzerland and is considered an opportunity and not a risk for Switzerland and the Swiss financial center.

Emphasising the distinction in Swiss law between tax evasion -- which is not a criminal offence in Switzerland -- and tax fraud, he stressed that it would be the electorate that decided upon the future of banking secrecy and not foreigners.

Turning his criticism and concerns on others, Mirabaud reiterated his concerns that Germany has set a worrying precedent by paying for information about the German clients of a Liechtenstein bank, contained on a data disc obtained by "dubious" means.

It is said that the German intelligence service paid in the region of €5.5 million for the data disc, which was stolen by a former employee of LGT Bank in Liechtenstein, a country that also upholds strict banking secrecy laws. Data on the discs also found its way into the hands of tax collectors in several other countries, including, among others, the UK, the U.S., Canada, France and Australia, with, it is understood, substantial sums of money handed over by these governments in most cases.


The EU Savings Tax Directive came into force in 2005 after years a haggling among the member states. The major "loophole" that emerged from the negotiations was that Belgium, Luxembourg and Austria's banks were allowed the alternative of withholding a percentage of interest income from clients who chose not to have their identity reported to their home country. Switzerland, the Isle of Man, and the Channel Islands chose to voluntarily comply with this "retention tax" law in dealings with their EU clients.

But another "loophole" was big enough to drive a small car through: The EU STD only applied to interest income earned by "physical persons". We noted this exemption, here, back in June of 2004 before the directive even took effect.

Now the EC is shocked -- shocked! -- to discover that there are loopholes in the Directive, and proposes to start plugging them. Luxembourg has already said it sees no need for a reexamination, three short years (3 2/3, but who's counting?) after the law came into effect. Expect another protracted round of wrangling if the EC does introduce the threatened proposals.

A formal loophole-closing proposal by the EC will surprise no one. The statists are nothing if not persistent. Especially when they are funded with taxpayer money. In the battle between preservationist and developer, the developer only has to prevail once while the preservationist has to prevail every year. Similarly, once laws are passed they never go away.

The European Commission said ... it would propose plugging loopholes in EU tax rules used by German investors to avoid tax by salting away millions of euros in neighboring Liechtenstein.

Germany persuaded EU finance ministers in March to speed up a review of the bloc's savings tax that taxes interest payments EU individuals receive on bank accounts or mutual funds in other member states or in non-EU countries that apply the bloc's rules like Liechtentstein, Switzerland or San Marino.

The rules came into force in 2005 after years of haggling but loopholes have already emerged, such as investment trusts in Liechtenstein fall outside the scope of the rules.

"The directive is working but working within the limits of what it can do," said Philip Kermode, direct taxation director at the EU executive. "There is certainly a case for amendments, essentially to close loopholes and simplify as much as we can," Kermode told a news briefing.

EU Tax Commissioner Laszlo Kovacs will make a formal proposal by November that will need unanimous backing from all 27 member states to be adopted, as in all EU tax matters. Luxembourg has already said it sees no real case for amending the rules that were only introduced three years ago.

The Commission said amendments would probably include: Critics say even if the EU rules are beefed up, investors will simply take their money elsewhere, particularly Hong Kong and Singapore, to escape the tax net.

As they already have been doing. No need to express the idea in the future tense. As for that other great wish of the EC, to get major non-European financial centers to agree to be bound by the Directive, the governments of Hong Kong and Singapore heve already voiced their opposition to such a proposal.


As the end of 2008 peeps over the horizon, U.S. taxpayers are going to have to join the Wall Street speculators and take some chances with certain tax reduction gambits. Some deductions available in 2007 may continue to be available for the 2008 tax year ... or they may not. And the now standard annual alternative minimium tax last minute “temporary relief” will probably be granted at the very last minute as usual ... or not.

CCH, formerly Commerce Clearing House (we thought the fad of turning age-old company names that had stood the test of time into initials was past), has provided a timely warning about all this. One of these days Vegas will started taking bets on U.S. tax code revisions. How about an over/under on the size of the inflation adjustment for the AMT?

As 2008 heads into the fourth quarter, taxpayers who want to minimize their tax burden for this year and next have a range of options, but also face a considerable amount of uncertainty, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information.

"There are many things the average person can do to lower this year's taxes," said Mark Luscombe, CCH principal federal tax analyst. "But more than most years, many people will have to keep an eye on Washington to see how their returns will be affected. Congress has yet to act on the alternative minimum tax exemption for 2008 and the fate of several popular tax benefits that expired at the end of last year is up in the air. The presidential election adds even more uncertainty."

Until Congress approves new tax extenders legislation, CCH warns that taxpayers cannot take an itemized deduction for state and local sales tax or the qualified higher education expenses deduction, an "above-the-line" deduction valuable even if taxpayers cannot itemize.

In addition, the ability of educators to take an above-the-line deduction for school supplies expired at the end of 2007, and tax credits for many types of energy-saving home improvements ended with the 2007 tax year, although there is a chance they will be extended before year-end.

Also uncertain is how many people will be subject to the alternative minimum tax (AMT). In 2007, the AMT exemption, which largely determines who falls under the alternative system, was set at $44,350 for single individuals and $66,250 for married couples filing jointly, but this year these amounts reverted to just $33,750 for individuals and $45,000 for married couples filing jointly.

Congress is expected to enact another round of temporary relief, but just when that will happen and whether the relief will be enough so that people not previously subject to the alternative tax will continue to escape its clutches is uncertain. According to CCH, the best bet is that the AMT will continue in something like its present form, with exemption amounts a bit higher than the ones in 2007, at least for the 2008 tax year.


UK Government’s Tax Policies Killing British Pub Industry, Report Warns

There must be some lesson here on what happens when one political party is in power too long. The British pub and brewing sector, which is deeply ingrained in the British culture and an integral part of the life of many communities, is being put out of business by Labour tax and regulator policies. One might think that pub proprietors and frequenters would have a predisposition towards the Labour party, but that may just be us. So WTF does the government think it is doing? It also highlights that central authorities in general don’t give a damn about actual people and communities. It is all about power and prerogatives.

Government taxes and red tape are damaging Britain's brewing and pub sector as it grapples with one of its most severe periods of economic pressure on record, according to a new report published on [September 15].

The report, "A Wake up For Westminster -- a new and comprehensive analysis of the challenges facing the sector," by the British Beer and Pub Association (BBPA) contends that government policies on tax and regulation have severely restricted business flexibility and are hampering the sector's ability to respond to economic change.

The report highlights the fact that pub beer sales have sunk to the lowest level since the Great Depression of the 1930s and that pub closures, at five a day, have reached unprecedented levels.

However, the BBPA warns that the situation is unlikely to improve as the government prepares to increase beer taxes by a third over the next four years, and introduce a raft of new red tape, such as a new mandatory code of practice, which will add more layers of bureaucracy to how alcohol is sold in Britain.

The BBPA is calling for the government to abandon its plans for a beer tax escalator, as well as plans for new, mandatory codes of practice on how alcohol should be sold. They are also calling on Government to focus on enforcing the existing rigorous laws, rather than create new ones.

"The economy is shrinking, drinking trends are shifting and overall consumption is sinking. Now is not the time for the government to be introducing policies that will force up prices for all," argued BBPA Chief Executive, Rob Hayward. "The government should abandon its plans for more punitive tax rises on beer, and should concentrate on enforcing existing laws rather than introduce new ones. If we don't have a change of approach, many more communities will be without their much-loved pubs."

France Finds “Picnic Tax” Plan Unpalatable

The French environment minister proposed that taxes be raised on non-recyclable plates, cups, and cutlery. The idea is to encourage people to bring along reuseable equivalents on their picnics, and then when they get back home to wash them with scalding water, heated with gas piped in from staunch ally Russia, in order to remove the now hardened crud and comply with who-knows-what sanitary directives.

Public outcry forced a quick backpeddling. But President Sarkozy has promised that a "working party will be convened to discuss which household products might be taxed in the future." Thank goodness for that. Hopefully the working party will be a little more discrete next time and slip the tax in without fanfare. And a big tut-tut to the environment minister's blunderbuss style. Someone mail the guy a muzzle!

As part of the drive to make France a more environmentally-friendly economy, the French environment minister Jean-Louis Borloo had announced last week the move to increase taxes on non-recyclable throwaway plates, cups and cutlery intended to encourage people to buy recyclable products. The so-called "picnic tax" would have seen a levy of €0.9 raised on throwaway plates and cutlery made from non-recyclable cardboard.

The plans were a forerunner for a wider range of measures aimed at levying new green taxes on 19 product categories, including fridges, washing machines, televisions, batteries and wooden furniture. Borloo had wanted to extend an eco-friendly tax system already applied to cars with hefty levies imposed on the most heavily polluting vehicles while entitling the greenest vehicles to a welcome tax break.

Amid fierce criticism and widespread negative publicity ... Prime Minister Francois Fillon vehemently denied the new tax. This embarrassing volte-face, however, strikes at the very heart of Borloo's campaign upon which he has staked much of his political credibility.

Despite the red light, President Nicolas Sarkozy's office reports that although such products will now no longer be taxed due to French concerns about their dwindling purchase power, a working party will be convened to discuss which household products might be taxed in the future.

Swedish Exit Tax on Companies Too “Restrictive,” Says EU

The U.S. just passed an "exit tax" on individuals. Sweden has a law applying to departing companies which includes a provision similar to a major element of the U.S. law, imposing a tax on unrealized capital gains. In the European Commission's "reasoned opinion," however, this impingement on a company's right to reestablish runs counter to the EU treaty. Too bad there is not such authority protecting U.S. taxpayers.

Under Swedish law, an exit tax is levied on unrealized capital gains, and deductions made for the untaxed reserves if the company is no longer taxable in Sweden upon a change of the seat or place of effective management, or in case a permanent establishment ceases its activities in Sweden or transfers its assets to another member state.

However, according to the EC, such provisions impinge on a company's right to freely establish anywhere in the EU, and as a result, they run counter to Article 43 of the EC Treaty, which guarantees freedom of establishment for companies. ...

The Commission's request is in the form of a "reasoned opinion," the second step in infringement proceedings against national laws that are considered incompatible with the EC Treaty. The matter may be referred by the Commission to the ECJ if it has not received a satisfactory response to its request from the Swedish government within two months.

EU Sues Portugal for Biased Tax Policy

In what looks like bureaucratic hairsplitting, or authority asserting, the EC has ruled that certain Portuguese rules discriminate against foreign (apparently meaning other EU members) service providers. Except it turns out the only EU member allegedly hurt is Cyprus. We bet the number of Cyprus service providers wanting to service Portugal is very small. But rules are rules ... and if you do not follow one before you know it there will be total chaos. Whew! That was a close one.

The EC has referred Portugal to the European Court of Justice (ECJ) for its discriminatory tax rules against non-Portuguese service providers. The Commission has pointed out that currently, non-resident entities providing services in Portugal are subject to a withholding tax based on the gross amount of their income, whereas domestic providers are taxed only on their net profits. The Commission considers that these rules are incompatible with the EC Treaty, which guarantees the free provision of services. ...

In the view of the EC this legislation is likely to dissuade foreign services providers from providing services in Portugal, and might dissuade Portuguese clients from buying services from foreign providers, and therefore constitutes an infringement of Article 49 of the EC Treaty (freedom to provide services).

Portugal notes that taxation on the basis of gross income does not apply to service providers resident in member states with whom Portugal has signed a Double Tax Convention (all member states except Cyprus).

In addition, Portugal remarks that in the case of taxation on the gross income the difference in the tax base might be offset by the difference between the rate applicable to resident entities 25% and the final withholding tax rate of 15% applied to non-resident entities. The Portuguese Government also claims that the measures are necessary to combat tax fraud.

However, the Commission considers that there is discrimination to foreign services providers established in Cyprus which has not signed a DTC with Portugal. The Commission is of the view that discrimination exists when it cannot be ensured that differences in the level of taxation due to the differences in the tax bases are always offset by the differences in the tax rates.

Korea Takes Swing At Golf Club Tax Cheats

South Korea's tax system has some unusual elements to it that we have been previously uninformed about. If a Korean taxpayer owes back taxes, apparently his wages, interest payments, bank accounts, etc. are not subject to seizure. But the National Tax Service can cut off the scofflaw's golf club membership.

The horror! The horror!

Tax officials in South Korea have frozen the memberships of several players at some of the country's most lavish golf clubs this week after suspicions were raised that they were knowingly evading taxes.

The move was made after the country's National Tax Service (NTS) made an enquiry into the lack of tax revenue received from a number of golf club members, who can pay anything from $200,000 to over $1 million annually for their highly-coveted memberships.

The NTS made the decision to withdraw 1,232 memberships from 960 individuals this year on the grounds that, if these individuals can afford memberships at exclusive golf clubs, they can well afford to pay their fair share in taxes.

In a statement, the NTS explained:

Hungarian Tax Cuts Hang by a Thread

Hungarian Prime Minister Ferenc Gyurcsany is on the horns of a dilemma. He is trying to get passed tax cuts that would make the country more competitive with other, mostly Eastern European, members of the "New EU." (The cuts would allegedly be paid for by a crackdown on tax evasion. Where have we heard that before?) The PM does not have the votes to push the measures through because a crucial member of the governing coalition does not like the cuts. The PM can either forget the tax cuts, or trigger an election. The later might enhance his chances of getting his tax proposal through but also risks losing his job.

A question that occurs to us is, do any of the members of the objecting coalition party -- now threatening to become ex-members -- fear losing their seats in the event of an election? The PM would not be the only one at risk.

A package of tax cuts that would provide tax relief for businesses and individuals in Hungary is hanging in the balance as Prime Minister Ferenc Gyurcsany's minority Socialist government clings on to power by the skin of its teeth.

While the government has approved the proposed tax reductions, worth about €5 billion, it narrowly survived a motion to dissolve parliament, which could have triggered an election, earlier this week, and remains a crucial five votes short of forcing through the 2009 budget, which contains Gyurcsany's tax plans.

The tax reforms ... would remove the 4% solidarity tax on corporate income and top rate individual taxpayers and give Hungary a base corporate rate of 18%. The plan also calls for long-term cuts in payroll tax and across-the-board individual tax relief through the raising of income tax thresholds. The tax cuts are paid for in large part by a planned crackdown on tax evasion.

However, the Free Democrats' Alliance (SzDSz), a former member of the governing coalition, has made clear its opposition to Gyurcsany's tax proposals, and the party effectively holds the keys that will unlock the door for the governing Socialists to pass the budget along with the tax cuts -- and ultimately save Gyurcsany's job.

Meanwhile, representatives of the country's business lobby have complained to Finance Minister Janos Veres that the tax cuts are not deep enough. ...


This is a fairly technical discussion piece on a subject of broad interest in trust law: the obligations of a trustee to a beneficiary. The broad fiduciary duty of the trustee is unequivocal. He/she must conduct trust operations for the benefit of the beneficiary. Does this include fulfilling every request for information by the beneficiary, including the trust document itself?

It is hard to initially see why a trustee would object to such a request, but on further thought one can conceive of instances where doing so would, e.g., contravene the intentions of the trust grantor, or actually be against the best interests of the beneficiary. In practice, the English and British Crown Territorial courts have ruled that there is no absolute right of the beneficiary to such information. But: "As a general principle the trustee should consider disclosure unless there are good reasons to demonstrate that the need for confidence or privacy outweighs other considerations."

The purpose of this briefing note is to consider Cayman Islands law in relation to beneficiaries' rights to trust documents and trustees' obligations of confidentiality, in particular the Cayman Islands case of Re Ojjeh’s Trust, the Privy Council case of Schmidt v Rosewood Trust Company Ltd, the recent English case of Breakspear v Auckland and the Confidential Relationships (Preservation) Law (as amended) as it applies to trusts.

It has long been said that a beneficiary is generally entitled to inspect all documents relating to the affairs of the trust. In O’Rourke v Darbishire [1920] AC 581, the English House of Lords referred to a beneficiary's right to access to documents on the basis of a "proprietary right".

However, the decision of the English Court of Appeal in In re Londonderry’s Settlement [1965] Ch 918 made clear that in some cases it is appropriate to withhold documents from beneficiaries on the grounds of confidentiality. The Court set out categories of documents that trustees are not normally bound to disclose, on the basis of protecting the well-established principle that in the exercise of discretionary powers trustees are not required to provide reasons.

In the English case of Armitage v Nurse [1998] Ch 241 it was held that a trustee owes an "irreducible core" of obligations to beneficiaries, which is fundamental to the concept of a trust. If those obligations are missing then there is no trust. A trustee's duty to account to beneficiaries for his administration of a trust is one of the core obligations. On that basis, every beneficiary is certainly entitled to see the trust accounts. It is also generally accepted that a beneficiary is entitled, on reasonable request, to information to enable the enforcement of the trustee's fiduciary obligations.

It is clear that, in principle, beneficiaries have a right to disclosure of certain trust documents, but there are limitations on this right and, as a result, it is often difficult for a trustee to decide how to react to requests for disclosure.


Re Ojjeh's Trust [1992-93] CILR 348 is the most important case in the Cayman Islands on beneficiaries' rights to inspect trust documents. In that case it was held (applying the dicta of Lord Wrenbury in O’Rourke and the dicta of Romer LJ and Evershed M.R. in Butt v Kelson [1952] Ch 197) that the principles governing the disclosure of information to beneficiaries were as follows:
  1. A beneficiary will normally be permitted to inspect and take copies of essential trust documents on the basis of the proprietary right he holds over them.
  2. That normal right does not extend to detailed information about the affairs of companies owned by the trust. To obtain information of that kind, the beneficiary must make out a special case.
  3. In order to make out a special case, the beneficiary must specify the documents that he or she wishes to see.
  4. There must be no valid objection by the trustees or directors, or (in special circumstances), beneficiaries whom the trustees consider should properly be consulted upon the matter.
  5. The beneficiary seeking disclosure must give proper assurances that he or she will not disclose the documents to anybody but his or her own legal or other advisers and will not make copies save as may be properly advised by his or her legal or other advisers.
In Lemos v Coutts & Company (Cayman) Limited [1992-93] CILR 460, the only reported decision of the Cayman Islands Court of Appeal on this issue, it was held that although a beneficiary has a proprietary right to trust documents, it is by no means an absolute right and there may be documents or categories of document which it would be just and proper to exclude from the ambit of the right where the documents are not relevant or evidentially essential to the beneficiaries' case, or where the probative value is minimal and considerably outweighed by prejudice to the other beneficiaries or to the proper administration of the trust. However, it was held that where the beneficiary is making serious allegations impugning the validity of the trustees' actions, it is only in an exceptional case that an absolute refusal of an application for accounts would be justified. Again, the Court emphasized that each case had to be considered on its merits.

The decision of the Jersey Royal Court in In Re Rabaiotti 1989 Settlement [2002] 2 ITELR 763 concerned an application by the trustees of discretionary settlements. The Jersey Court held that there was a strong presumption in favor of beneficiaries seeing trust documents, unless it could be shown that there was a good reason why disclosure was not in the interests of the beneficiaries as a whole. As regards letters of wishes, the presumption was against disclosure on the basis that the settlor was likely to have intended the letter to be confidential although the Court could and would order disclosure where there were good grounds to do so.

Following the decision of the Judicial Committee of the Privy Council in Schmidt v Rosewood Trust Limited [2003] 2 WLR 1442, it is now established that rather than considering whether or not a beneficiary has a proprietary right to information, the more principled and correct approach is to regard the right to seek disclosure of trust documents as one aspect of the Court's inherent jurisdiction to supervise, and if necessary to intervene in, the administration of trusts. Lord Walker stated that the dictum of Lord Wrenbury in O’Rourke could not be regarded as a binding decision that a beneficiary's right or claim to disclosure of trust documents or information must always have the proprietary basis of a transmissible interest in trust property. The Privy Council therefore concluded that:
"No beneficiary (and least of all a discretionary object) has any entitlement as of right to disclosure of anything which can plausibly be described as a trust document. Especially when there are issues as to personal or commercial confidentiality, the Court may have to balance the competing interests of different beneficiaries, the trustees themselves and third parties. Disclosure may have to be limited and safeguards may have to be put in place. Evaluation of the claims of a beneficiary (and especially of a discretionary object) may be an important part of the balancing exercise which the Court has to perform on the materials placed before it. In many cases the Court may have no difficulty in concluding that an application with no more than a theoretical possibility of benefit ought not to be granted any relief."
The recent English decision of Briggs J in Breakspear v Auckland [2008] EWHC 220 (Ch) is significant both as the first English case to consider disclosure of letters of wishes to beneficiaries and as a fairly comprehensive summary of the law in this area. Briggs J said that there is an inevitable tension between confidentiality and disclosure in relation to wish letters, and that it is advisable to lay down guidelines to attempt to avoid unnecessary litigation. Applying Londonderry, he said:
"It is in the interests of beneficiaries of family discretionary trusts, and advantageous to the due administration of such trusts, that the exercise by trustees of their dispositive discretionary powers be regarded, from start to finish, as an essentially confidential process."
The current position is therefore that although trustees have a duty to provide information to beneficiaries arising from the trustees' fiduciary obligation to account for their dealings with the trust property, no beneficiary is entitled as of right to disclosure of trust documents or trust information. Indeed, there may be compelling reasons for refusing disclosure, but each case will depend on its own facts.

The article then delves into some technical aspects of Cayman Island trust law, before concluding:

Whilst trustees are under a duty to provide information arising out of their fiduciary obligation to account to beneficiaries for their dealings with trust property, no beneficiary is entitled as of right to disclosure of trust documents or trust information. In deciding whether or not to provide disclosure, the competing interests of different beneficiaries, the trustees themselves and third parties must be considered. As a general principle the trustee should consider disclosure unless there are good reasons to demonstrate that the need for confidence or privacy outweighs other considerations. A trustee should in appropriate circumstances apply to the Court for directions as to whether or not to give disclosure and the extent of any such disclosure. The trustee should ensure that all relevant information is put before the Court on such an application (a) to enable the Court to carry out the necessary balancing exercise, and (b) to ensure that the trustee is adequately protected and can safely act in accordance with the Court's directions.


As politicians debate over how much of the public's money to steal in order to keep the morally defective unbacked dollar-based money and credit system from meeting its deserved death, it is useful to recall that this crisis is hardly a bolt from the blue. It is the result and logical consequence of "a long train of abuses and usurpations" which have invariably pursued the same object -- to reduce the net taxpayers to being mere subjects of the net tax consumers, in John C. Calhoun's words as cited in this piece from Thomas DiLorenzo.

From the beginning of the American Republic there has been a group of influential people who have devoted their lives and careers to putting more Power In Government (PIGs). As soon as the American Revolution ended Alexander Hamilton schemed to overthrow the first Constitution, the Articles of Confederation, and replace it with a document that would legitimize a permanent president who would appoint all the governors and have veto power over all state legislation. He wanted a king, in other words, who could force British-style mercantilism and an imperialistic foreign policy on America without any significant resistance by the citizens of the states. He failed during his lifetime, but that is essentially the system Americans live under today. We now live in "Hamilton's republic," as his idolaters gleefully remind us.

As soon as Hamilton's party, the Federalists, gained power, one of the first things they did was to rescind the First Amendment to the new Constitution with the Sedition Act during the presidency of John Adams. Hamilton authored several long-winded reports as Treasury Secretary in which he invented the insidious notions of "implied" powers in the Constitution along with such an expansive interpretation of the General Welfare and Commerce Clauses that the Constitution would become useless as a restraint on governmental tyranny.

Hamilton's political compatriot, Chief Justice John Marshall, turned Hamilton's legalistic mysticism into legal precedent during his long tenure on the Court, with many other PIG lawyers following suit over the succeeding generations. And of course Abraham Lincoln established a French Revolutionary/Stalinist-style regime that imprisoned tens of thousands of Northern political dissenters, employed an army of spies and informers (on Northern citizens), shut down hundreds of opposition newspapers, illegally suspended habeas corpus, deported an outspoken member of the opposition party, confiscated firearms, illegally created the state of West Virginia, censored all telegraph communication, and myriad other assaults on the Constitution, including waging war on his own country after promising to defend the lives and liberties of the very people he was waging war on.

The brilliant John C. Calhoun explained the inevitability of all of this -- and more -- in his Disquisition on Government, written in the late 1840s and published shortly after his death in 1850. Calhoun wrote that it is an error to think that "a written constitution, containing suitable restrictions on the powers of government, is sufficient, of itself, without the aid of any organism ... to counteract the tendency of the numerical majority to oppression and the abuse of power."

All democracies are broken down into two basic groups -- net taxpayers and net tax consumers, said Calhoun. And the latter group (PIGs) will inevitably prevail, as history teaches us. The party in favor of constitutional restrictions on governmental power at first "might command some respect" but "would be overpowered." It is mere folly, he argued, to suppose that "the party in possession of the ballot box and the physical force of the country [i.e., the military], could be successfully resisted by an appeal to reason, truth, justice, or the obligations imposed by the constitution." Moreover, "the end of the contest [between net taxpayers and tax consumers] would be the subversion of the constitution" whereby "the restrictions [on state power] would ultimately be annulled, and the government be converted into one of unlimited powers."

This is why Calhoun embraced the Jeffersonian idea of nullification during the sectional dispute over the 1828 "Tariff of Abominations." As explained by Ross Lence in the Foreword to Union and Liberty: The Political Philosophy of John C. Calhoun, the former vice president was "seeking a means by which [disunion] could be avoided," and so he "turned to the doctrine of interposition, which defended the right of a state to interpose its authority to overrule federal legislation. The seeds of this doctrine were introduced by Thomas Jefferson and James Madison in the Kentucky and Virginia Resolutions of 1798 and 1799." Of course, such ideas as nullification, interposition, secession, and federalism were snuffed out by the Lincoln administration as a result of the War to Prevent Southern Independence.

Calhoun's prediction of a government of unlimited powers eventually came true. The Jeffersonian strict constructionists did more or less prevail for a while, but were nearly wiped out by 1865, and were nowhere to be found by the turn of the twentieth century. At that point numerous notorious PIGs gleefully thumbed their noses at the Constitution and the freedoms it was supposed to protect. This story is told in great detail in the new book by Tom Woods and Kevin Gutzman entitled Who Killed the Constitution? The Fate of American Liberty from World War I to George W. Bush.

Woodrow Wilson resumed the totalitarian attacks on free speech that Adams and Lincoln had pioneered with the Espionage Act of 1917 and the Sedition Act of 1918. These laws literally criminalized opposition to going to war in Europe, as Woods and Gutzman explain. In addition, the creepy-sounding "Committee on Public Information" portrayed Germans "as subhuman savages"; and sauerkraut even became known as "liberty cabbage," an early precedent for the moronic "freedom fries" language adopted by the Bush administration after its invasion of Iraq in 2003 when the French government refused to participate.

During the Lincoln administration roving gangs of Republican Party thugs destroyed printing presses, intimidated Democratic voters in the Northern states, and generally behaved like 20th-century brownshirts. Woods and Gutzman write of how the exact same thuggish behavior was an integral part of the Wilson administration. A Christian minister was sentenced to 15 years for distributing a pamphlet to five people explaining that Jesus Christ was a pacifist (reminiscent of how Congressman Ron Paul was loudly booed by an audience of "evangelicals" when he reminded them in 2008 that Jesus was known as The Prince of Peace). Men were tarred and feathered for not spending enough of their income on "Liberty bonds" that helped fund the war. German language Bibles were burned. And the producers of a movie about the American Revolution that portrayed America's "ally" Great Britain in an unflattering light were sentenced to 10 years in prison.

By the 1950s American presidents clearly thought of themselves as dictators who were not constrained one iota by the Constitution. Consequently, Harry Truman felt justified in having the government seize and operate the steel mills so that he could better prosecute the undeclared war in Korea. Truman insisted that he had absolute, dictatorial power to "do whatever is for the best of the country." Constitution schmonstitution. The Supreme Court eventually ruled against this particular act of theft, but it had little effect in deterring future dictatorial behavior. Today, American presidents think of themselves not just as unrestrained dictators but as emperors of the world.

Woods and Gutzman provide a scholarly analysis of why Brown vs. Board of Education was unconstitutional. The Supreme Court "set itself above the Constitution" for what the majority believed was a good cause. Constitution schmonstitution.

There is no constitutional authority for the myriad pork-barrel spending projects that Congress funds year in and year out with tax dollars, but so what? Woods and Gutzman describe the evolution of this particular power grab, from the time when the "father of the Constitution," James Madison, vetoed an "internal improvements" bill as unconstitutional to today's anything-goes mentality in Washington, D.C.

Then there is the theft of privately-held gold by FDR. The Supreme Court never even bothered to comment on this grossly unconstitutional act of thievery. Nor is there any constitutional basis for the government's ban on prayer in public schools or military conscription. Not to mention the dictatorial implications of presidential "executive orders." Teddy Roosevelt receives special mention with regard to this latter authoritarian tool. He issued 1,006 executive orders compared to 51 and 71 for his two predecessors, write Woods and Gutzman. The "Bush Revolution," discussed in chapter 12, proves that modern American presidents and their advisors have nothing but absolute contempt for the Constitution.

Upon reading Who Killed the Constitution?, the Jeffersonian wing of the founding fathers, were they alive today, would be reaching for their swords, preparing for another revolution. The Hamiltonians, on the other hand, would be popping champagne corks, high five-ing each other, and smiling very broadly. Calhoun would be deeply saddened that his dire predictions about the fate of an American democracy that is stripped of its Jeffersonian, states' rights moorings have all come true in spades.


Billionaire sues UBS in tax case.

Here is a recent development in the IRS vs. Swiss Bank UBS story:

An AP story gives details of a suit by Orange County, California real estate developer billionaire Igor Olenicoff, who plead guilty to filing a false tax return involving foreign banking accounts, against Swiss bank UBS. Olenicoff alleges that UBS duped him into skirting U.S. tax laws. He claims that the bank told him his funds would be invested in accordance with U.S. tax laws, but then hid it in offshore entities. The lawsuit also names financial entities in Liechtenstein, where UBS allegedly moved Olenicoff's $200 million in investments.

The lawsui seeks $500 million in compensation and damages. Also, in a typical breach of fiduciary duty claim, Olenicoff accuses officials at some of the foreign businesses of investing his savings in risky investments "against his will" -- perhaps a more accurate rendering of the suit would be that the investments were inconsistent with Olenicoff's specified objectives and understanding.

The U.S. Senate has accused UBS and a Liechtenstein bank of helping wealthy Americans evade billions of dollars in taxes each year. Earlier, former UBS private banker Bradley Birkenfeld plead guilty to defrauding the IRS.

The IRS has asked the Swiss government for help in its investigation of possible tax evasion by the U.S. clients of UBS. UBS has said it is cooperating with Swiss and American investigations and will disclose records involving U.S. clients who might have broken tax laws.

Man accused in TJX data breach pleads guilty.

Several alleged ringleaders of one of the biggest identity thefts ever, involving over 45 million credit/debit cards and 100+ financial institutions, have been formally accused of the crime. The prosecutors say they have "forensic" evidence that bears on the case.

One of the 11 people arrested last month in connection with the massive data theft at TJX Companies Inc., BJ Wholesale Clubs Inc. and several other retailers pleaded guilty [September 11] to four felony counts, including wire and credit card fraud and aggravated identity theft.

Damon Patrick Toey is scheduled to be sentenced on December 10 in U.S. District Court in Boston. He faces a maximum prison term of five years and a fine of $250,000 on each of the counts. In addition, under the terms of the plea agreement, Toey has to forfeit all of the money he earned for his role in the data theft. It is not clear how much he may have made from the attacks, although he had about $9,500 in his possession when he was arrested in May.

Toey was one of 11 alleged hackers arrested last month in connection with a series of data thefts and attempted data thefts at TJX and numerous other companies. Besides TJX and BJ's, the list of publicly identified victims of the hackers includes DSW, OfficeMax, Boston Market, Barnes and Noble, Sports Authority and Forever 21.

Manager of Washington, D.C. Tax Office Admits Check Fraud

This perpetrator deserves some kind of an award. A woman working for the D.C. tax office defrauded the city of $48 million over 20 years. Then she got caught. As usual we cannot help but wonder: How does one expect to get away with a $48 million crime? And if she had just stopped after, say, $5 million would she have gotten away with it?

A former manager in the District of Columbia tax office admitted to cutting more than 200 fraudulent property tax refund checks in a scheme that drained more than $48 million from the city's treasury over almost two decades. The ex-manager, Harriette Walters, 51, pleaded guilty to wire fraud, conspiracy to commit money laundering and tax evasion. The agreement calls for her to serve 15 to 18 years in prison and to pay restitution. Ms. Walters admitted to issuing refunds to friends and relatives and then sharing the proceeds with them.