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ECONOMY ON “FIRE” AND IN DEBT
Interview with iTulip.com’s Eric Janszen. Green energy the next bubble?
Eric Janszen is editor of the iTulip.com website and author of the forthcoming book The Post-Catastrophe Economy. The Santa Fe Reporter went to Janszen looking for a quote on a piece they did concerning the collapse of a local mortgage company, and ended up interviewing him at length.
We featured Janszen in this week's Finance Digest as well. This interview adds up to a general background piece on why we are where we are and the history and politics which drove and continue to drive the situation.
Janszen is an interesting man. He does not back away from using terms like "financial oligarchs" on CNBC interviews. Nor does he mince words here.
Santa Fe Reporter: I liked your Harper's article on the housing bubble.
Eric Janszen: Thanks. It seems to be panning out.
That was back in early 2008, when many people had not yet grasped the extent of the subprime mortgage crisis. But you went so far as to predict the next bubble -- green energy.
I am actually working on a book on that. So far it does seem likely to focus on infrastructure.
The refrain I keep hearing was that nobody saw the real estate crash coming. You say people could have seen it coming.
Many people did, of course. And many people who did made money on seeing it coming. It was not all that hard. There were a few fantasies you had to not buy into. One is that housing prices always go up, and stock prices always go up.
If any other product was sold based on those premises, you would think people would be somewhat skeptical. It is pretty marvelous to convince so many people of something that cannot possibly be true.
Was the bubble contingent on people not understanding what these financial institutions were selling, with mortgage-backed securities and so forth?
They do not even understand that they are products. They think they are a guarantee of something -- that if you put money in the stock market, you are saving.
These are financial products. Houses are products. Mortgages are products.
And you say regulations have been written in the finance industry's favor over the years?
Starting with Reagan, under the banner of free markets and low taxes, with the tax relief act of 1981. If you look carefully, what it was was the Debtor Creation Act.
The idea was to free up money that used to go to paying taxes to finance public projects -- what some economists called the fourth factor of production, the infrastructure, the highways, what all industries need to be efficient, and move people and products.
Now we spend all our money on servicing debt. That is what we do in this country. All this nonsense about trying to cut taxes was really to make room so you could take a good chunk of cash flow out of all these corporations and [give it to banks].
Can you put today's economic situation in a historical perspective? Is there any parallel?
More than 1/4 of all homes have negative equity in the U.S. That is a bad problem. But there is a worse problem developing.
I refer to the American housing market as "the big slum." A slum is where the market value has fallen below the replacement value. It does not make sense to fix anything. You do not fix it, you just let it go to hell. There is no way to get your money back.
So in a tangible sense, the country is falling apart?
Yes. I just got back from a trip to Florida. I have been going down there for 20 years. It is pretty striking. In Miami, South Beach, 20-30% of the businesses are out of business. Hotels, restaurants are boarded up with "for lease" signs. You can basically see the area is not doing well.
What has happened is, we had this finance-based economy that was very dependent on continuous debt creation. That has suddenly dried up.
Have we had an economy like this in the past? Yeah, we did in the 1920s.
The "slum" analogy reminds me of Bangkok. I lived there a few years ago, and there were unfinished skeletons of skyscrapers all over town, left over from the 1990s financial crisis.
I have seen that. When I was there -- toward the tail end of that, in the late '90s -- you saw the buildings going up. I was there with my wife on a business trip. I told her, "They are never going to finish these things."
That is happening here in the U.S. In Miami, there are a lot of half-finished buildings. There is a condo project, in Boston [where Janszen lives] ... Nobody is working on it. They ran out of money. That just does not happen here. It is not supposed to happen here.
Besides Robert Schiller at Yale, who else predicted the housing crash?
Not to toot my own horn, but we have been making calls on this stuff since 1998. We noted in December of 2007 that we were going to have a debt deflation and bear markets that would take the stock market down 40% in 2008. These things are not that hard to call.
But the people who called it were all called Chicken Littles.
It is not that popular to be negative when things appear to be going well. I get interviewed more by the European and Asian press than the U.S. press.
It is part of the culture, that we do not really like people who are skeptical, who ask questions like, "How can you grow an economy that requires $5 of debt growth to create $1 of GDP growth?"
Most [other] countries have an industrial policy: A combination of government and industry sit around and go, "How do we play our cards here in the global economy?" And it does not always work that well. But those decisions are not ceded to the banking industry, like we did here. Our industrial policy has been set by the finance industry for 20 years.
And for the larger, national news organizations, it is more difficult for them to want to be telling a story about how the economy is heavily influenced by financial interests, and it only became socially acceptable to use the word "financial oligarchs" after that Bill Moyers interview with Simon Johnson from the IMF.
I don’t know -- Citibank was not a life-or-death ad account for, say, The New York Times, was it?
Finance, insurance and real estate: If you put them all together, it is about 80% of all their advertising.
The biggest problem with financial news reporting in the U.S., particularly on television, is that it is hard to tell the difference between the news and the advertising.
I went on CNBC. I said, "Don't buy any stocks." I was talking about energy stocks. It is going to be a great investment boom after the Depression, not before it. I used the "C" word, I talked about cash. They did not like that very much.
The advertisers are brokerage firms. That is the whole point of the station.
You basically know the game is over when Jon Stewart is beating up on Jim Cramer on national television. Now it is OK. I am not saying Jon Stewart was told by his producers not to beat up on Cramer [before]. My argument is it would not have occurred to him to look at it at that point, at the peak, when the product is selling.
It is not just looking like a Chicken Little. It is basically explaining that this is how the product is sold.
Who were those people you mentioned who made a lot of money on the crash?
There are some famous guys, hedge fund guys, who shorted the home builders, the credit default swaps. They made some money on it.
Most of the guys who made a lot of money did not talk to anybody. You do not make money telling people what your expensively developed trades are.
The short sellers have been demonized, almost like they engineered the crisis.
Yeah. There are reasons I did talk about it. I did not want to be part of the process of making money off what I understood to be a fundamentally corrupt system.
I do not see that as my role. I would like to see us discard the FIRE economy and move to a healthier economy: Making stuff, and competing on an even footing with other countries.
Playing the downfall of this crummy system is not what I was interested in doing. I would not disparage anybody who did do that. People have to protect themselves. What I would do is tell people what I thought was going to happen. People can start their own trades.
Generally speaking, our guys have done very well. At least, they have not lost all their money.
Are there any good guys in this story?
Some of the regional banks. There are some banks here in Boston. We have a friend who bought a house -- at the top, when we told her not to. She does not make a lot of money. The bank said, in order to get a lower interest rate, if you take this class, we will teach you how to manage money. Basically, they provided her with financial education. That is how it should work.
Most of these guys, it is the opposite.
The largest banks did most of the shenanigans. Below that, smaller banks did not participate in any of that stuff. In a fair world, what would happen is, with the big banks that were stupid and badly managed, the government would come in, declare them insolvent and sell off their assets to smaller banks -- or just banks that are competently run -- at market prices.
We are obviously not doing that, for reasons we can speculate on.
I keep seeing people like Treasury Secretary Tim Geithner on TV, stammering to explain the bank bailouts. I think he cannot tell the truth, which is that the finance industry has the government over a barrel.
They are not over a barrel.
I get calls from members of Congress asking me what I think she should do. They do not really want to hear the answer. I think the ultimate problem is having to write down trillions of dollars of bad debts for their campaign contributors. There is hardly any other rational explanation.
We lectured the Japanese not to do what we are doing right now. Why can’t we do what we did in the savings and loan crisis? If some guys break the law, we put them on trial. Something like 1,000 people went to jail over the savings and loan crisis.
Are you saying Obama is more beholden to the financial sector than Reagan was?
It is hard to say. There is some noise about Wall Street being corrupt. But I do not hear anything along the lines that there are elements of the finance industry itself which are a burden for the economy.
You hear about restructuring mortgages so people can still pay them. Of course what is really needed is to reduce the level of debt in the economy. To continue to pay off the debt on a mortgage that used to be worth $2 million and is now worth $1 million, that is not the objective. The objective should be to reduce the principal.
It is not only mortgages, it is student loans -- most students today do not realize that tuition used to be free, or nominal, at many universities not too long ago.
It is absurd how high tuitions have gotten. If you have got credit chasing after everything, it will raise prices. It was the same with housing ... you had these crazy products like CDOs and so forth.
Right: Textbooks would not cost $150 if they were not purchased on credit, through student loans.
It is stupid.
That is how these credit bubbles work. Everybody is happy on the way up, because everybody seems to be making more money.
Are there more crimes there?
I have not checked. Anecdotally, there is an increase in youth violence. Property crimes, I am not sure.
In Florida, I happened to sit next to a Miami Herald reporter talking real loud on a cell phone, telling whoever he was talking to that since the economy turned down -- particularly since last year -- there has been an incredible crime wave.
There is a serious discussion going on in Michigan about shutting down parts of Flint. They are saying, "There will be no police, no fire protection; If I were you I would be moving out."
If you think about it, what they ought to be having a conversation about is doing homesteading: If you move in, there will be no property taxes for 10 years. It would have the opposite effect. Generally people will move in and try to rebuild communities.
You always hear about how the government in Afghanistan does not control much territory beyond Kabul. I wonder sometimes how much territory the U.S. government has essentially ceded in a similar way. I mean, it is not just cities like Flint, it is rural America, too.
When people talk about slums, they think about urban slums. There are huge areas of exurbs, just outside the suburbs, where the economic activity has really died. The people there do not have much to do. Their economy died. Nobody cares about them.
I am not sure what you do about that. I think some form of homesteading is the solution.
But don’t people migrate to the city, where the jobs are?
That has not been happening. The Census released a report -- migration in the U.S. is off like 87%. It is not like there is some booming state someplace. Which is what is unusual about this downturn compared to every other since World War II.
Also, this is the only downturn where there are fewer cars on the road. There are all sorts of other obvious indicators that this is not just a recession.
Another thing you will see reported all the time is that this is the highest rise in new jobless claims since 1982. The implication is this is like the early ‘80s recession, except in some ways worse.
What is not reported is every recession was induced on purpose by the Fed, in order to cool down the economy. This recession was not created by the Fed. The implications of that are lost of a lot of people: They are absolutely not in control.
It is going to come down to fiscal stimulus. They are doing some pretty stupid things, like you are seeing there, which is building roads.
Even though most people are not employed in construction ... Is that because the Democrats are beholden to labor unions?
No, they are just not very creative. They just spend a lot of money and hope the money goes into the hands of people through some jobs that get created.
Everybody seems to repeat these numbers the Obama people put out, about how many jobs the stimulus will create, and if you look closely, they are based on these ridiculous formulas -- X amount of money creates Y amount of jobs, however you spend it.
That is the myth of the multiplier. That is the idea you spend this money and it produces more stimulus than it would appear to directly -- that it is going to generate more output than it would if you just bought the stuff. It is a fallacy.
Japan started out where we were, in terms of public debt, back in 1992. They were at about 60% of gross debt to GDP. Now they are at 159% -- a notch above Zimbabwe, just below Jamaica. None of that spending improved their sustainability as an economy. All they did was move the debt from private to public accounts over 20 years through the stimulus programs.
This is what our rocket scientists are planning for us. There cannot be enough output to pay the principal and the interest on all this debt.
Well, what if Americans’ productivity keeps going up?
Indentured servitude, maybe?
There you go.
It is siphoning off the cash flows from households and businesses that could be going to savings or investments. Instead it is going to pay off inflated debts from the FIRE economy era. It is a political decision. And not a very good one.
I propose that we restructure the economy to do stuff that we would have been doing, like building a First World transportation system and communications system.
Hey, that would be nice. Another thing I remember from Asia -- cellphones are super-cheap and you do not have to sign your life away on a contract.
And they actually work everywhere! And they have 4-megapixel cameras and video, because the bandwith is there. Some of that has do do with the fact that population densities are very high. That makes it more economical to build wireless networks. We are a big country -- that makes it harder.
Fundamentally -- and I have got to run -- the real boon is in reducing the energy intensity of our economy, so it takes less energy to produce $1 of GDP. That is going to work like a tax cut. We need a debt cut and a tax cut.
When is the book out?
Hopefully within a few months. It is Portfolio/Penguin. The book's title is The Post-Catastrophe Economy. It is going to be about how we are going to reconstruct this thing.
PROLONGED GLOBAL WINTER
Governments’ misguided activities have darkened the global outlook. (What else is new?)
Martin Hutchinson offers his perspective on how governments are messing up the economy, referencing history as is his wont.
Great Britain is currently "printing money" at a rate faster than that which led to hyperinflation in Weimar Germany. Hutchinson contrasts this with the adjustment Britain went through during the demobilization following the Napoleonic Wars, in 1816-17 (perhaps similar to the adjustment the U.S. went through in 1921 in returning to a peacetime economy, although Hutchinson does not reference that episode here). The U.K. was further burdened by the "Year without a Summer" in 1816 following the eruption of Indonesia's Mount Tambora the previous year, which led to a failure of the British harvest.
What was British government's response to the downturn then? Approximately nothing. How long did the recession last? About a year. An echo recession happened two years later when Britain went through a 20% deflation to get back on the gold standard. Thinks were different back then!
Wouldst that some government ... any government ... demonstrated the wisdom of the U.K. government ca. 1816-17.
With increasing frequency over the last few weeks, economic statistics have emerged suggesting that the first shoots of economic spring are emerging and that the bottom of the U.S. and global recession is only just round the corner. Higher vehicle sales and factory orders, the Institute of Supply Management monthly index and slightly higher personal income and retail sales figures have all burgeoned like early crocuses, suggesting that the slope into economic decline has turned shallower, so we may reach bottom about mid-year.
Had we not been afflicted with a global epidemic of panicking governments, those modest green shoots might indeed have blossomed into a genuine spring. However, governments' misguided activities have darkened the global outlook. Far from entering spring, we are still in the opening stages of a winter that has become nuclear and will blight the world for the best part of a decade.
There is no necessity for a severe recession, such as the present one, to be excessively long; it depends on the government policies pursued. At one extreme are the Great Depression, both severe and lengthy, and the Japanese rolling recession of the 1990s, appallingly lengthy but at no time particularly severe. As is generally agreed, both these downturns were artificially prolonged by misguided government action.
At the other extreme, we can examine the British recession of 1816-17, after the end of the Napoleonic Wars. This would have been severe in any case, because of the transition to peace after 20 years of war and the immense financing difficulties and investment "crowding out" effect caused by Britain's 1815 public debt burden of over 250% of Gross Domestic Product (GDP), 50% larger than Japan's today and double Italy's.
However, the downturn was made much worse by the April 12, 1815, eruption of Indonesia's Mount Tambora, the largest volcanic eruption in recorded history. This deposited 100 billion tons of volcanic ash (more than the volume of Lake Geneva) over the world's surface and caused in 1816 the "Year without a Summer" -- with fairly mild effects in southern climates and the United States, but causing the entire British harvest to rot in the fields. More serious than a mere banking crisis, therefore.
Lord Liverpool, Britain's prime minister, implemented only one policy to fight recession. In February 1817, with parliamentary approval, he suspended the operation of the Habeas Corpus Act, in order that any impending riots could be efficiently quelled. This well-designed "stimulus package" proved remarkably successful. Only one small disturbance occurred and by December, 1817, after a bountiful 1817 harvest, Liverpool was able to end the suspension, as the recession was over and the threat to public order gone. Total recession duration: about a year, though there was a second "dip" in 1819 because of the 20% deflation needed to put Britain back on the Gold Standard.
In the current global unpleasantness, there are alas no world leaders with Liverpool's economic grasp (having David Ricardo as economic advisor doubtless helped). Even compared with other recessions within living memory, such as 1974 and 1982, the reaction from the global political class has been notably panicky and hysterical. Five trillion dollars of global stimulus programs, largely consisting of public spending, are unlikely to increase the stability of the global economy, and nor are the moves by three of the world's four most important central banks to "quantitative easing" -- the monetary policy of the early Weimar Republic.
Under Weimar, the profits from "seigniorage" -- the issue of new money -- financed around 50% of public spending in 1919-23. Notoriously, this resulted in a trillion-fold devaluation of the mark by November 1923. In the United States today, around 15% of public spending is being financed through seigniorage -- the Fed is purchasing $300 billion of Treasury bonds over six months, an annual rate of $600 billion per annum, 15% of 2009 federal spending of $4 trillion.
The U.S. may still be the right side of the Weimar dividing line, but in Britain the figures are more alarming. The Bank of England is purchasing £75 billion of gilts over 3 months, an annual rate of £300 billion per year, more than 65% of Britain's projected 2009 central government expenditure of £454.6 billion. Of course, the Bank of England may not repeat its gilt purchases every 3 months, but at least in the short term it is disturbing that Britain is currently "printing money" faster than Weimar Germany.
On the fiscal side, the figures are equally exciting. The United States, Britain and Japan are all running fiscal deficits of more than 10% of GDP in 2009. Once you factor in the newly released OECD's more pessimistic economic forecasts, they will run even larger deficits in 2010. Furthermore, if recovery is at all sluggish, the "output gaps" between those countries' actual GDP and their increasingly theoretical "full employment" GDP are likely to produce fiscal deficits close to the same level in 2011 and possibly thereafter.
There seems to be no recognition among policymakers of how dangerous these profligate policies are. Only last week, at the G20 meeting, the world agreed to provide yet another $1 trillion of capital to the international bureaucrats of the International Monetary Fund and the World Bank, who will on past form divert it almost entirely to governments of the countries most devoted to overspending.
Deserving countries, in Latin America and East Asia, which have managed their affairs properly without excessive balance of payments or budget deficits will see little of this money, and nor will the beleaguered emerging markets private sector. Like the world's other fiscal deficits, the IMF and World Bank funding will have to be borrowed, and in being borrowed will create either inflation or "crowding out" of truly productive Western and emerging market corporations, whose funding needs will become more desperate as the global recession drags on.
Except in a few countries such as Germany and China, which had previously been fiscally conservative with low or negative budget deficits, the correct amount of "fiscal stimulus" in this downturn was zero or negative. Most countries were already running substantial budget deficits in the boom, and the automatic stabilizers in all big-government economies would anyway have widened budget deficits beyond all past peacetime records, even without stimulus.
Similarly, the global economy has been bedeviled for the last decade by excessive money creation. The correct policy in the downturn would have been to hold monetary policy tight, in order to fight the inflation threatened through past excesses and the budget deficits, providing only the minimum liquidity needed to ensure that the money markets continued functioning.
Given the marginal short-term benefits of current global policies and their huge long-term costs, one would imagine that the world's politicians were all running for election this year, perhaps about August, after the bottoming out of the initial recession has become fully apparent but before the long-term disasters of inflation and sluggish recovery are fully manifest. However this theory does not quite work. Germany's Angela Merkel is running for re-election, but has been notably cautious on both fiscal and monetary policy, while France's Nicolas Sarkozy, Russia's Dmitry Medvedev and Barack Obama are with us until 2012.
Nevertheless imminent re-election is certainly a factor with the enthusiastic expansionists Taro Aso of Japan, Manmohan Singh of India and Gordon Brown of Britain. In all three countries, near-term fiscal disaster is close enough and unpleasant enough that rational people would prefer retirement to having to face it after winning re-election -- but these people are politicians!
While the current downturn may reach bottom by the summer, therefore, recovery is likely to be very slow indeed. Government borrowing will crowd out much private investment, reducing the potential of the global economy as funding is diverted from new investment into less productive courses. At the same time, inflation, caused by excessively stimulative monetary and fiscal policies, will return to plague the global economy as in the 1970s, forcing a return to restrictive monetary and fiscal policies if a global repeat of the Weimar disaster is to be avoided. (Chinese central bankers seeking to invest their reserves in something sound will find no available outlet other than gold). Political panic may have marginally reduced the depth of the recession, but it will enormously increase its duration.
It therefore follows that the sharp recoveries in global stock markets in the last few weeks are wildly premature. At current levels, U.S. stocks are only marginally above their equilibrium value, based on U.S. economic performance in the decades to 2007, but there is now no certainty that we are in the economy of 2007, or anything like it. With higher taxes and a large "output gap" such as is appearing between actual and potential GDP, which will remain with us for many years, the profitability and growth of U.S. industry will be permanently damaged, so stock prices should in equilibrium be correspondingly lower.
There is thus likely to be another downward "leg" in the U.S. stock market's long decline from its bubble-induced euphoria of 1995-2007, taking it to around the historical low valuations of periods such as 1949 when the cult of the equity was dead and buried. Taking "normalized" post-recession earnings on the Standard & Poor's 500 as being around $60, and applying a 1949 multiple of about 7 times earnings, would give a bottom for the S&P 500 of about 420, equivalent to below 4,000 on the Dow. In other words, the likely market bottom is at about half its current level.
The global economic climate, far from bursting into bloom, is likely to endure a prolonged winter, extending over several years, as if nuclear war or a volcano larger than Tambora had struck the world in 2008. For the global economy, it will be the White Witch's Narnia -- always winter and never Christmas. [The White Witch was the witch in the first of C.S. Lewis's Narnia Chronical books, The Lion, The Witch and the Wardrobe. It was permanent winter until she was killed.]
PANAMA : THE “IT” PLACE FOR RELOCATION!
Here is another in a line of articles we have posted the processes people have engaged in when deciding where to relocated away from their home country. The author here and her husband are semi-retiring "very early" and thus a low cost of living and the potential ability to earn money down the line were priorities. Other reasonable criteria such as distance from the U.S., a literate population where most people understand at least some English, climate, being out of the hurricane zone, etc. were factored in. And the winner was ... Panama. Not the first people who came to that decision.
It seems that year in and year out, for the past decade, Panama has ranked in the Top Three destinations to retire to, relocate to or just escape to! Whether as a retirement haven or a second home base or relocating a business, just to escape the red tape of North America's business climate, Panama has many attractions making it the “IT” place to relocate.
And even for those of us who will soon retire from the business world there is still the worry about living in the real world and as such, we have concerns about the tax structure, currency restrictions, privacy laws, banking, infrastructure, language, education level of any new country we would consider moving to.
For the past five years my husband and I plotted out our "perfect" spot for semi-retirement by embarking on three month journey's to a variety of selected countries -- Panama, Honduras, Argentina, and Mexico -- in search of the right place for us. Aside from the low cost of living we require -- because we are retiring very early -- we need to be assured about a few other factors that we could only learn about through the experience of living in a place -- and so living in each country we did. By year five, we have finally settled on Panama as our spot for semi-retirement. We plan to move there sometime in 2010.
Lots of people go to a country and become enthralled by its physical beauty, peace and just the general difference of being anywhere but home, but we looked at each country from a personal and business bottom-line perspective. The business perspective came in to play because we felt if we became bored, or started running low on funds, we would want to work or open a business.
Some important factors to know about Panama include:
What we learned on our journey in selecting Panama may be helpful to others ... we rated 15 category areas under each country on a rating scale of 1 to 10 -- with 10 being perfect, 5 average and below 3, forget about it. Here are our 15 categories and some information on each, showing why we put Panama at the top of the IT list:
- It is known as The Republic of Panama,
- It is located at the narrowest point of the Central American Isthmus, which connects the continents of North and South America,
- It is just 2.5 hours by air from Miami, and located in the same time zone as the U.S. East Coast (five hours behind Greenwich Mean Time),
- Panama is located between Costa Rica and Colombia,
- Panama is known as the ideal jurisdiction for international investors and businessmen to operate their offshore corporations, banking, investing, finances, and all other areas of international trade,
- Panama City is a capital that is a first world city of skyscrapers to rival those of Manhattan,
- Duty free shopping with high end goods, U.S. style malls and U.S. mega-stores as well
- The friendliest people in Latin America,
- Beaches to die for and spectacular mountain backdrops,
- A country with a low cost of living with virtually non-existent inflation that offers a generous list of incentives to attract foreigners,
- Panama has less bureaucracy and red tape to deal with than other retirement destinations,
- Inexpensive real estate as compared to North America,
- Safety -- Low crime rates and good policing differentiate Panama from typical snowbird and retiree destinations like Florida and Mexico,
- Stability -- A stable economy based on the U.S. $, virtually zero inflation and a stable democratic government combine to make Panama an ideal country in which to live,
- Infrastructure -- Panama offers a First World infrastructure with many U.S. companies and brands to be seen on its streets,
- US$ economy, makes it nice and easy for expatriates to settle and handle the transition of moving to a new country,
- Great amenities -- Panama City especially is a major modern metropolis offering all the amenities you would expect in a First World capital,
- US standard health care -- Enjoy the same types of facilities as you would in the States or Europe. Many English speaking doctors in Panama are U.S.-trained,
- A Booming Economy -- the Canal expansion brings more cruise ships, bringing tourists and money. The more money coming into Panama, the better the economy. The canal expansion is due to be completed by 2014.
- The Free Trade Zone -- Panama's Colón Free Trade Zone is the second largest in the world and receives over a quarter of a million visitors a year. This zone, offering exemption from tax on importation and re-exporting, is a vital part of the Panamanian economy.
- Tax breaks and incentives for retirees -- The Pensionado Program offers retirees the best incentives in the world. For example, people retiring to Panama can enjoy perks like 50% off entertainment, 25% off airline tickets, 15% off hospital bills and much more ... Plus, you do not have to be a certain age to be classed as a "pensionado" -- anyone over 18, who has an income of $1000 or more from a pension, can take advantage of these benefits.
- Tax breaks for foreign residents -- No tax to pay on income earned abroad and your financial privacy is guaranteed.
My husband and two teenagers' insist on living in a country where most people understand at least some English. Panama's official language is Spanish; however, English is the second most widely spoken language. 8 out of 10 Panamanians business people are bilingual in English and Spanish. And this is growing in to other industries as well -- such as tourism.
Literacy and Education
This is important to both my husband and me, as we are teachers. We want to live in a country with a high literacy rate. It makes life easier in dealing day to day with anyone from the gardener you are trying to pay wages to or in dealing with utility companies when we are trying to negotiate services. I want to deal with a literate workforce. As it turns out Panama has a very high literacy rate in comparison with other Central and South American countries. And, as a mom I do not want my two teenagers "hanging out" with other teenagers who are not literate.
The educational system provides for the free schooling of all children. An excellent parallel private school system exists primarily in Panama City. The main universities are the University of Panama, a state institution, with six campuses, and the University of Santa Maria La Antigua, a Catholic institution. There are more than five other private universities, plus the recently created City of Knowledge.
Panama City boasts an excellent private school system. Education is offered in English, French, Italian, Mandarin and there are several bilingual schools (Spanish/English).
Panama is extremely easy to access from almost anywhere, due to its central location in the middle of the Americas. Its proximity to large cities in the US and Europe makes it relatively cost effective to bring in specialist know-how for installation and maintenance. Direct flights are available to Panama from most major cities around the globe. We had a nagging worry about the need for emergency travel to the USA and Guyana, as we have relatives and work in each country.
So one of our criteria to consider was a close location for emergency travel. Panama is about two and one-half to four hours from any place we would need to travel for emergency reasons. Additionally, it has an excellent airport and to obtain a flight on any number of airlines would never be a problem.
Miami is only a 2 1/2 hour flight away from Panama City and Copa Airlines, Panama's main airline, is opening up more direct routes to many US cities. It is easy to visit family and friends. Panama is also sandwiched between the Pacific Ocean and Caribbean Sea making it a veritable Paradise which is unspoiled by mass tourism and overbuilding.
Another of the criteria under location to consider was if we were out of the Hurricane Zone as we wanted to live someplace that is free of environmental and natural disasters such as hurricanes, tornadoes, earthquakes, tidal waves, etc.. Panama is out of the 'zone.'
Not only is Panama a tropical haven without the hurricanes that other countries, like Belize, suffers but it has great weather. It has hot temperatures all year round and a rainy season from May to November which keeps its scenery lush and green. Sea breezes and the advent of air con in many properties and public buildings make any humidity easy to bear. Mountain living, in places like Boquete, offers eternal springtime with warm temperatures all year round.
Standard/Cost of Living
In Latin America, Panama ranks as one of the best places to live, according to a business survey of 192 cities worldwide by the Corporate Resources Group. Panama ranked among the top three cities in which to live in Latin America next to Buenos Aires and Montevideo.
The survey takes into account transportation, crime rate, arts and entertainment. In executive living expenses, recreation and entertainment costs and prices of basic goods, Panama ranks well below Buenos Aries, Sao Paulo, Santiago and Caracas (EIU, Worldwide Cost of Living Survey).
Health care is both excellent and reasonably priced in Panama. Many of the country's physicians earn their degrees in the U.S. and other industrialized countries, and the state university offers a top quality medical program. Bilingual doctors are common in all Panama City hospitals. Water supply is safe to drink with few exceptions throughout the country.
Panama is the only city in the world in which a protected, tropical rainforest can be found within city limits. The country has many and varied outdoor attractions from the mountain region of Chiriquí to the beaches on the Caribbean coast.
Panama is still looking to welcome foreigners, such as retirees and investors. Changes to the law include the following:
- Elimination of the Small Investor's Visa -- The only investor visa now available is the Large Investor's Visa which is issued to those investing sums of $200,000 or more.
- Pensionado Program -- To benefit through this program, you will need to have a pension of $1000 per month for the main applicant, instead of $500, and $100 for each dependent ($1100 for a couple). See below for more details.
- Person of Means Visa -- The amount has been raised from $200,000 to $350,000 and the CD must be in a local bank, in your own name for a minimum of 4 years. Real estate must be residential, be in your own name and free of liens.
- Employment Visas -- The minimum salary is now $1000 -- watch out, the visa is not permanent.
The majority of people relocating to Panama from North America are eligible for the Pensionado Visa. Obtaining the visa is not difficult -- no insurmountable pile of red tape to fight your way through. Simply prove to the Panamanian authorities that you have a pension income from a private pension or government agency.
No minimum age is required, just a pension amount of $1000 or over, or $1100 for a couple. To prove your pension, you will need to show the authorities your pension statements and possibly bank statements.
The Pensionado Visa does not have an expiry, but you will need to prove your income on an annual basis. The benefits of the Pensionado Program are what draw many people to Panama:
Panama’s Communications Systems and Infrastructure Are the Equivalent of Any First World Country
- A one-off exemption from tax and duties on the importation of household goods, such as furniture, up to a value of $10,000.
- An exemption from tax on importing a new car every two years.
- 50% discount on hotels Monday to Thursday and 30% at weekends.
- 50% discount on entertainment such as entry to movies, theaters, cultural events and sporting events.
- 25% discount on utility bills.
- 25% discount on restaurant bills.
- 30% discount on public transport and 25% on airline tickets.
- 20% discount on doctor's bills.
- 15% discount on hospital bills.
- 15% discount on loans.
- 15% discount on eye examinations and dentist's bills.
- 10% discount on prescriptions.
I can do without a lot of things, as can my husband and children, but what we cannot do without is a top quality communications and internet service. Panama is a technically advanced country with excellent communications services, highly comparable to all first world countries. This assessment applies to both cell and land line service, as well. In addition to this fact -- the overall costs for communications is relatively low.
Panama's communications systems and infrastructure are the equivalent of any first world country such as the USA, Canada, or the United Kingdom. Telephone, fax, internet, and cellular communications are all offered in Panama by the world's largest communications companies.
Panama has the highest level of communications infrastructure for telephone, fax, internet, and cellular communications in all of Central and South America, including the Caribbean. Panama has the best access to multiple high-bandwidth continental fiber optic networks in telecommunications infrastructure. The extremely low risk of natural disasters (hurricanes etc.), gives the Panama telecom sector security and reliability of service as well as a competitive advantage over other offshore jurisdictions.
Panama is a 100% Tax Haven:
Non-resident Panamanian International Business Corporations (IBC's) and Private Interest Foundations do not pay tax on any of their income (as indicated below), nor do they have any reporting requirements to the Panamanian government. So there are no capital gains tax on your offshore investments, no interest income tax on your offshore bank account interest, no inheritance tax, etc. and:
- No income tax.
- No capital gains tax.
- No interest income tax.
- No sales tax.
- No tax on issuance of corporate shares.
- No tax to shareholders.
- No stock sale or transfer tax.
- No capital stock tax.
- No property tax.
- No estate tax.
- No gift tax.
- No stamp tax.
- No succession tax.
- No inventory tax.
Panama's circulating currency is the U.S. Dollar, and Panama has no currency exchange controls or currency restrictions so funds can flow in and out of the country freely.
Panama uses the U.S. dollar as its legal tender (currency), instilling tremendous fiscal and monetary discipline while keeping inflation very low -- under 2% for the last 40 years.
This we need to be shown before we buy. The U.S. inflation rate has been much higher than 2% per year, so how does Panama have an inflation rate lower than the U.S. dollar rate? We do buy that tying in to the U.S. dollar, as bad as that has been, has been a superior alternative monetary policy to the policies followed by most Latin American counties.
A dollar economy insulates Panama from global economic shocks. During the Asian monetary crisis of 1998, Panama became one of the healthiest economies in Latin America.
There are no currency exchange controls. Panama has no restrictions on monetary remittances abroad, including dividends, interests, branch profits and royalties. There are no restrictions on funds flowing in or out of the country in any currency.
Panama has what is considered by government analysts to be the most stable government in all of Central or South America. It has had a democratic government since 1990. It is one of the safest countries in the world to visit. The government of Panama is headed by the executive branch, which is composed of a president and two vice presidents, democratically elected for a five-year term by direct vote. It has a civil law system.
The Panamanian military was abolished by constitutional amendment in 1994, and the government still has a unique security arrangement with the U.S. due to the Neutrality Treaty of the Panama Canal. As a result, the risks of going back to the earlier military regime are virtually non-existent.
Panama's economy is one of the most stable, prosperous, and most advanced in all of Central and South America. Panama is home to the second largest international distribution and trade center (free trade zone) in the world next to Hong Kong. Panama's Colon Free Zone has over 1500 international import/export businesses operating within it, receives more than 250,000 visitors yearly, and generates exports and re-exports valued at more than US$11 billion annually.
Panama's inflation rate has been less than 2% for the last 40 years, although it has been slightly higher on 2008. Panama's GDP (2007) was over US$19 Billion. In recent years, the service sector has accounted for over 80% of the country's GNP. The Panama Canal is also a large contributor to Panama's overall economic success. Panama is at the top of the list of the world's freest economies, according to Canada's Fraser Institute (Economic Freedom of the World: 1998/9 Interim Report, Nov. 1998). Ranked 8th with Australia, Ireland, the Netherlands and Luxembourg, Panama represents an environment conducive for the creation of companies, jobs and prosperity.
Panama has been ranked first in Central/South America for low cost of living, operational cost and index of labor by the Tripartite Committee, which consists of the Economic Commission for Latin America and the Caribbean (ECLAC), the Organization of American States (OAS) and the Inter-American Development Bank (IDB).
Major companies in Panama include Federal Express, DHL, UPS, Price-Mart, Movistar, Kansas City Southern Railways, Continental Airlines, Copa Airlines, American Airlines, ICA (construction), Cable & Wireless, Evergreen and Hutchinson Whampoa, and many others.
Excellent Banking System
Panama City is home to the second largest international banking center in the world next to Switzerland. Panama has the most modern and successful international banking center in Latin America, with more than 150 banks from 35 different countries. Panama offers a modern and technologically advanced banking system. Total assets in Panamanian banks are over US$100 billion.
Some of the banks present in Panama's banking center are: Citibank, HSBC, Dresdner Bank, Bank of Tokyo, Bank of Boston, Banco Nacional de Paris, International Commercial Bank of China, Banco du Brasil, Societe Generale, Banque Sudameris, BBVA, Stanford Bank, Metrobank, Banco General, Banistmo, Global Bank, Multi Bank, ABN Amro, Banco Aliado, BancoLat, BIPAN, Bank of Nova Scotia, and much more.
Are you sold on Panama as yet? I invite you to check it out on your next vacation as a retirement retreat or maybe to buy that second home you are longing for. You will not be disappointed.
WHY I CHOSE GRENADA
One family or individual chooses to move to Panama ... the next chooses Grenada. "A relatively unknown pearl in the Eastern Caribbean," the author describes Grenada, and if our previous ignorance is any measure he has a point. He found that the island scored highest in political stability, safety and [lack of] discrimination. Grenada particulars notwithstanding, this essay offers a good overview of Caribbean living plusses and minuses.
As a hi-tech entrepreneur I spent much of my career traveling all over the world, working hard and living well. Where to spend the weekend was a matter of choice. After traveling all continents I finally ended my journey in Grenada, a relatively unknown pearl in the Eastern Caribbean.
This article explains why I chose, and continue to choose, Grenada as my worldwide favorite -- and explains how I ended up preferring serenity, natural beauty and a simpler, nicer life over my former luxury included, high pace life. Along with praising the great life in Grenada I will also summarise the backside of the coin.
When I returned home from a business trip my youngest son said, “What’s Daddy doing here,” and that was my sign on the wall that my business life had overtaken my personal life. During a Sunday morning walk, my wife suggested that living in a heather shack would be better than having no time for the family. So I decided to give up my well-paid executive life and started to research the ultimate destination.
My main considerations where: A nice climate, safety, natural beauty and nice people. While I was checking out the world my oldest daughter saw a feature about Grenada on Dutch TV and enthusiastically proposed it as a potential destiny.
Checking out the Globe
I put a scientific approach to my mission to check out the ultimate place to live. I evaluated political stability, safety and [lack of] discrimination by talking to people that lived on my short list destinations. Grenada scored highest on all points, so I decided on a visit and, while visiting, I was completely sold. I even decided to check out potential properties for our dream to build a small, sustainable resort. Five months later we came to Grenada and finalized the purchase of eight wonderful beachfront acres on the Southeast cost of Grenada and decided to call it Paradise Bay.
The government appeared to be very responsive to our plans to build a resort and committed to cooperate in all aspects. Paradise Bay Resort opened in 2007.
A True Democracy
After the island was liberated by the USA from a communist coup, and democracy was restored in 1983, the island developed positively and is now considered to be one of the most stable political climates in the region. More than corruption, “favoritism” is the milder version that rules here -- as with many other places in the world, knowing the right person always helps to get things done. Grenada and her sister islands of Carriacou and Petit Martinique have about 98,000 inhabitants, and has ministries for all vital aspects. The government welcomes foreign investors and grants special facilities such as tax credits (usually 10 years no income tax) and duty free concessions on building materials and equipment for approved projects. The Grenada Industrial Development Corporation (GIDC) handles all inquiries in a professional and swift way.
Life in Grenada reminds me to how people dealt with each other in small Dutch villages decades ago, People always greet one another and when they ask how you are they really mean it. When I come back from a trip abroad people ask how it was and welcome you back wholeheartedly. When I organize tours for visitors I always include showing how people live; it is a real eye opener for many that have been living in a cold, impersonal environment for too long.
Grenadians are very keen to talk to visitors. It is no surprise that several of our hotel's visitors started thinking of retiring here and/or having a second home in Grenada. In Grenada there is absolutely no discrimination: All races live together in perfect harmony.
Caribbean people are laid back which is a charm on one hand, but if you have to work with them it can be less charming. For instance, when people promise to come to work on a particular day or time I have learned not to be surprised if they do not show up: They may had something more important to do and will even say that afterwards.
When it rains they show up later at best. They will rarely call, saying, "my phone giving me trouble." The average work speed is at least half that of Western standards. Sometimes workers try to "speed up the work" by doing their job different -- albeit less successfully -- than ordered. In particular, construction workers have this habit which can cause big problems.
Low Violent Crime
Theft is an issue here -- like elsewhere in the Caribbean, if the occasion is offered, the thieves will grab it. Violence however is very rare in Grenada -- I have never heard of armed robberies of gas stations or shops. Violence towards visitors is also unheard of. With violent crime on the increase in many Western countries it comes as no surprise that people are on the lookout for a safe haven. Grenada is definitely a great, save place to live.
Hard drugs are very rare here, but marijuana is rather common. Many people on the countryside simply grow it in their backyard. Although formally forbidden, smoking marijuana is generally not seen as a crime and consequently there is also no related violence. In my observation, problems caused by alcohol are more severe than smoking marijuana.
The Caribbean has the image of being a beach destination. Not surprisingly as the beaches belong to the most attractive in the world. Some islands have indeed little more to offer than the beaches, sailing and snorkeling. For most visitors, this is enough.
But there are islands like Grenada that have a fascinating hinterland to offer. Rainforest hikes are an experience that few ever had in their lives. I have been conducting many hikes in Grenada and most visitors saw these as their most interesting experience.
Our resort is located amidst thousands of acres of gorgeous nature and I warmly recommend visitors to walk either North or South from beach to beach -- up the hill, down the hill and every 15 minutes they will find a new beach and different nature.
Nature flows in the gently sloping hills -- that remind to Ireland -- as well as to cactuses and mangroves.
The walks are not too strenuous and can be done by most people. More strenuous are the rainforest walks and hikes, although there is one exception and that is a walk that starts at a water reservoir high in the mountains which leads to a rain forest in less than 10 easy minutes. Grenada has many water falls to choose from, some very easily accessible, and some requiring a walk or hike. Check out my article on Hiking in Grenada in this magazine for loads of ideas on hiking.
And then, there are the beaches. On the leeward West Coast the water is tranquil and confirms what people have in mind as a Caribbean Beach. The two mile long Grand Anse white sand beach is considered one of the most beautiful beaches in the Caribbean. On the Atlantic side the ocean is more rough, yet quite fine to swim in. The scenery of the water playing with the rocks is fascinating. And, as Grenada is not overrun by tourists, the beaches offer much space.
Snorkeling and Diving
The Caribbean is a known as a top spot for snorkeling and scuba diving and indeed it is a real paradise for those activities. Grenada is quickly growing in to a major diving destination, confirmed by the fast growing hotels with in-house dive shops. Sister island Carriacou is also great for snorkeling and scuba diving and many take day trips to go there. Most dive shops also offer dive classes.
A little north of Carriacou are the Tobago Cays (best reached by sailing) and which is a top ten snorkelling and diving destination. Paradise Bay has weekly 2-day sailing trips to the Grenadines from Carriacou.
On the Ocean
Sailing in this area is immensely popular and many hotels offer boats to rent. Grenada's West Coast, Carriacou and the Grenadines offer the most tranquil waters for sailing. The Grenadines consist of many Robinson Crusoe type of small islands; most of them inhabited and are considered by many as the ultimate Caribbean sailing experience. This is where Pirates of the Caribbean, Part 1 was filmed.
Whale watching is offered year round with the best chances for viewing these wonderful creatures happening during the migration season (December through April), and from about eight miles outside of Grenada's West Coast. But, you need to be lucky, too. I have had times when we did not see a dolphin and also had times when there were so many whales that we lost count at 38, with one after the other jumping through the air. Dolphins are playful and often swim with, and jump in front of, the boat.
Sport fishing is also a big thing in the Caribbean and Grenada is one of the better places for it as it has deep water close to shore. Several small charter boats operate from Grenada. Blue Marlin, White Marlin, Sailfish, Tuna and Dorado are common game fish, in addition to the widespread Barracuda and other smaller species. Carriacou also offers sport fishing with typically smaller fish caught.
On a small island one cannot expect the same options as in a metropolis. But, there are some nice cultural activities. Steel bands which usually play in groups of several dozens -- some of them consisting, surprisingly, of young children -- are not to be missed. A good place to see them is the weekly festival Fish Friday in Gouyave at the North West Coast, where fishermen sell anything from fish cakes to lobsters. But the cultural highlight of the year is definitely Carnival, in the second week of August. While it may not compete with big carnivals such as in Rio de Janeiro it has an atmosphere that many prefer. When you want to come and see the Grenada Carnival, make sure that you make flight reservations early as many expat's come home then.
I often bring guests to local bars which gives them a good idea on how people live and think. One bar is located in a welding shop where they also bake bread and show movies to their clientele from time to time. Another interesting thing is going to a "Bloggo," an informal party that can be organized by anyone at a shop or on the street with this recipe -- loud Soca and Calypso music, rum, beer and barbecued chicken. It is very simple, but nice.
Before the economic depression, Grenada seemed to be in good shape. Wages were rising and almost everybody can afford to have a TV. Construction was booming with new hotels and second home resort communities under construction. Grenada was mentioned in the 2008 Annual Wealth Report by high end property consultant Knight Frank and Citibank, listing Grenada as one of the top 10 second home markets and as being prime suspects for future growth. ... Moreover, the real estate prices are far lower than on other islands that have far less to offer than Grenada.
As all other tourism destinations Grenada also suffers from the decline in the number of tourists and the average money spent. The construction also faces a slowdown due to halted projects. As tourism and construction are the two main motors of the economy the depression is clearly felt here by most people. This may however be an opportunity to revitalize agriculture as currently much of the produce and most chicken and meats are imported. Obtaining financing to realize such projects will be a decisive factor.
Being a small tourism destination it is an option to focus on niche markets. For example, we recently bought a small sailing yacht and now offer all-inclusive guests walks, hikes and excursions, as well as a mini cruise to the Grenadines -- all without extra charge. Another market with opportunities is the honeymoon market, where Grenada is putting more and more focus. Grenada is also a great place for destination weddings where the personal attention a big resort (a.k.a. wedding factory) cannot offer is actually a big plus.
The government's main income comes from duties on imported items. Income tax starts at about US$2,000 per month and is levied at 30% over the excess. Only few people pay income taxes; the average income is about 850 US$ per month. The prices of imported products are therefore rather high. Cars and gas are about double the U.S. cost. Local produce, fish and meat are quite affordable. Most people have no problem making ends meet because their expectations are not as high as their Western counterparts, who are generally, less happy.
Grenada has a modern airport in the southwest part of the island and a cruise terminal that can handle three ships at the same time. The main roads are good for Caribbean standards and are fairly well maintained. There are however almost no road signs, so combined with fuzzy explanations by locals, renting a car (although widely available) is not always the best option -- taking tours is better and can be less expensive.
Thanks to the presence of a university (primarily medical) with more than 4,000 largely American students, and a growing expat population, plus the yacht and second home owner community, the availability of Western goods is much better on Grenada than most other Caribbean islands.
Living in Grenada
When you decide to live permanently in Grenada the most economical option is to buy or rent a house in a residential area, unless you wish to be in the better, and very expensive, neighbourhoods. If you chose to live here part of the year it is a better option to take a villa or apartment in a resort (community) as you then have no concerns about and security/theft and maintenance (leaking water lines can be very expensive). Take a look at which shows the villas at Paradise Bay.
If you think of building a house here, think again and first read my article on this -- check out the magazine for my Stop the Construction Carnival article. If you still want to build a house after reading the article, read it again ...
Good medical care is available from licensed doctors and there is also a good private clinic. Living in Grenada is relaxed and once you understand Herman Wouk's statement, "The West Indian is not exactly hostile to change, but it is not much inclined to believe in it," and do not try to change anyone, you will be relaxed too. Most expats regularly spend time abroad for shopping, family and friends, theatre and being reminded why they want to go back to Grenada. Airlines regularly have specials to Grenada.
Working in Grenada
Like most places, when you want to do work that can also be performed by locals, you will not be permitted to do so. For those professions not competing with locals or in case of a shortage, you should be able to get a work permit. If you consider to move to Grenada and wish to have an opinion from me about your situation, feel free to contact me. If you happen to be a good, broad-oriented maintenance man and want to change life, I am on the lookout ...
Income over here (and in most of the Caribbean) is generally considerably lower than in the western hemisphere and very much depends on the occupation. If you intend to start your own business and need local staff to run it, you must have a lot of patience and be prepared to take over work from absent staff on a regular basis unless you "over" hire.
How to Get There
Air Jamaica operates direct flights from New York and flights from major North American cities via Montego Bay. American Airlines flies three times a week via Miami with additional flights via San Juan, Puerto Rico. Air Canada operates a winter flight from Toronto. British Airways, Virgin Atlantic and Monarch Airways fly direct from London Gatwick with connections to Europe. Condor flies direct from Frankfurt with connections to Germany and Austria. Airlines additionally have indirect flights, mainly via Barbados with connections via local airline LIAT, who operates inter-island flights within the Eastern Caribbean. There are seasonal charter flights.
Generally, flights are cheap in the low season (May-July, September-November), while it is recommended to book early for Christmas and August as many Grenadians living abroad come to visit. I encourage anyone looking for a little piece of paradise to try Grenada as you will not be disappointed. And, I hope to see some of you during your visit to our beautiful island.
IRS OFFERS CARROT FOR OFFSHORE ACCOUNT HOLDERS
The IRS's "Offshore Voluntary Compliance Initiative" of 2003 offered to forgo criminal prosecution in exchange for taxpayors coming clean about illegally unreported foreign financial accounts -- forking over evaded taxes, and concomitant interest and penalties -- and fingering the person who promoted the offshore arrangements to them. A forthcoming initiative in the same vein will offer leniency incentives for offshore bank account holders who make a voluntary disclosure to the IRS.
We are not sure how intentional this is, but it is distinctly odd to us how many articles on the matter fail to state the conditions under which a foreign account must be reported, thereby implying that all such accounts require disclosure. Be aware, IRS Form TD F 90-22.1 must be filled out by "Any United States person who has a financial interest in or signature authority, or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year." (Emphasis added.)
So, as has always been the case, as long as the aggregate value of one's foreign financial accounts never exceeds $10,000 during a calender year, none of the accounts need be reported. We just thought people should know.
As the United States government readies a new assault on offshore financial centers and their users, the IRS is promising to be more lenient with holders of offshore banks accounts who decide to make a voluntary disclosure to the tax man before the IRS comes looking.
IRS Commissioner Doug Shulman has announced that a partial amnesty program being launched by the agency will see account holders avoid heavy penalties and possible criminal prosecution. "This is a chance for people to come clean on their own," he told reporters on March 26.
Currently, if IRS investigators discover during the course of an audit that a taxpayer has not declared money held in offshore accounts or income accruing from offshore assets, they can impose penalties of up to 50% of the balance of an undeclared account for each year that it remained undisclosed. In addition, interest will be owing on any unpaid tax.
Under the new scheme, the IRS will impose a penalty of 20% on the highest single account balance held over the past six years, and will agree not to initiate criminal proceedings against taxpayers if they volunteer information on their offshore accounts and earnings before they are audited.
The program will run for the next six months, and will also help the IRS to develop useful "intelligence" not only on taxpayers with offshore accounts and other assets, but also on the banks and institutions that help manage their offshore financial affairs.
The IRS undertook a similar initiative in 2003 when it collected $170 million in unpaid tax and penalties as a result of its Offshore Voluntary Compliance Initiative (OVCI). Under the 3-month OVCI, more than 1,300 taxpayers came forward, amended their returns, paid taxes, interest and penalties and furnished the IRS with information regarding the person who promoted the offshore arrangements to them. According to the IRS, some 479 promoters of tax schemes were identified during the course of the partial amnesty, half of whom were previously unknown to the tax agency.
U.K. REVENUE TEAMS TO EXAMINE FINANCES OF THE VERY WEALTHY
You had better know the right people if you want to avoid the shakedown.
The 5,000 wealthiest taxpayers in the UK are going to get some special "service" from Revenue & Customs. Particular attention will be paid to "opaque" structuring, e.g., that involving offshore structures such as trusts.
Obviously the idea is to pick up some desperately needed revenue for the U.K. government, which is having to print money at Weimar Germany-rates -- see post above -- in order to cover their deficits. In the longer run, thanks to the culling out of the weaklings this inititave will effect, the financial structuring consultants will learn how to create sounder plans for their clients ... not that U.K. politicians are thinking of the long term at this point in time.
High earners could be pursued with new vigor by the tax authorities as specialist teams were set up this week to examine the financial affairs of some of the UK's most wealthy individuals. The new "high net worth unit" will identify the 5,000 wealthiest taxpayers in the UK and conduct thorough reviews of their financial dealings and assets.
Inspectors are expected to pay particularly close attention to complex property and shares transactions, particularly when opaque structures, such as offshore trusts and companies, have been used.
HM Revenue & Customs (HMRC) says the intention is to offer wealthy individuals a more personal, tailored and proactive service. Each person who comes under the scrutiny of the new teams will be assigned their own contact who will be experienced in the kinds of complex tax structures used by wealthy people.
"We will be engaging with these customers and their agents to help them ensure they pay the right amount of tax," explains a Revenue spokesman. "We will be taking a holistic approach, looking at all aspects of the individual's tax affairs."
HMRC claims the new specialist division will help it better understand the financial affairs of high earners and make it easier for them to submit an accurate tax return. But accountants say the "better" service could translate into a bigger tax bill for clients.
"There will be a smaller, very specific team who will really concentrate on the tax affairs of particular high net worth individuals," says Sue Holmes, head of tax investigations at Smith & Williamson, the accountancy firm. "Clients are concerned they are going to come under the microscope more than ever."
Previously HMRC's "complex personal tax teams" dealt with around 42,000 wealthy UK-domiciled people. So the fact that just 10% or so of these people are being transferred to a specialist team signals a much closer interest in their tax status. HMRC says the new unit will be made up of around 500 staff, so each person will be dealing with just 10 wealthy taxpayers. It has not specified the level of wealth for individuals to come under the new teams but accountants suggest it could be £10 million-plus.
Holmes expects that anyone likely to be targeted will be informed over the next couple of months. She says the selected individuals are likely to receive a detailed questionnaire asking about their assets and dealings, which will be used to obtain information that is not available in the public domain.
"I expect there will be some fairly probing questions that are trying to establish the extent of the person's wealth and their connections offshore," she says. "I don't think the Revenue will wait for the next set of tax returns to come in."
The new inspectors are also likely to sift through publicly available information such as property sales databases, land registry titles and shareholder registers, as well as records held by overseas revenue authorities and other federal agencies to glean information about their clients.
David Kilshaw, head of private client advisory at KPMG in the UK, believes that while the establishment of the new teams could trigger an initial reaction of "fear, fear, fear" in some clients, there could be advantages. "It is better for wealthy people to deal with someone who is an expert in their field rather than someone who jumps to the wrong conclusion as they do not have the right experience," he says.
The launch of the new high net worth teams comes as HMRC is generally taking a much tougher stance on tax avoidance. This week it has also acquired enhanced powers to claw back unpaid tax. It now has greater rights to go into business premises to inspect tax records. If someone works from home, the Revenue can enter their property to examine records, often with little or no notice.
"The Revenue no longer has to wait until someone submits a tax return if it thinks there has been a transaction that could affect the tax due," says Holmes.
The penalties for tax evasion are also rising. People committing the worst kind of evasion -- where there has been serious and deliberate concealment -- could now be fined up to 70% of the tax due. Previously the fine was up to 40%.
CAYMAN ISLANDS PLAYS DOWN “GRAY” TAX HAVEN LISTING
Caymans, along with almost every other Caribbean offshore haven, accused of being too much talk and not enough action.
The O.E.C.D. has come up with a "gray list" -- distinct from their "black list" -- of financial havens which have been cooperative with the big boys in principle, but not quite cooperative enough in practice. The specific criterion for inclusion on the gray list is for a country not to have signed a double-taxation agreement with, we guess, the U.S. and certain other O.E.C.D. members.
Note that the "double" in "double-taxation agreement" is at best obfuscatory. More accurate would be to call it Orwellian. The implication of the label is that it involves a bilateral exchange where each country discloses to the other useful tax information it holds on the other's citizens. But how much interesting tax-relevant information does the U.S. hold on Cayman Islands citizens that the Caymans government would actually be interested in? Approximately none. Instead we have the Caymans unilaterally giving the U.S. something valuable in exchange for nothing -- the equivalent of an unconscionable contract. Depending on how much justice one can afford, one can obtain a remedy to an unconscionable contract by having it set aside. Unless it is with the government, which specializes in unilaterally imposing unconscionable "contracts," in which case there is no remedy.
The government of the Cayman Islands, a major Caribbean financial center, said ... it was moving to improve its cooperation to fight tax evasion and played down its inclusion on an OECD "gray list."
"We have taken note of the Cayman Islands position and believe that the Cayman Islands is cast in the ‘lightest shade of gray’ among the financial centers with which we have been listed," Kurt Tibbetts, the Cayman Islands' Leader of Government Business, said in a statement sent to Reuters.
The Group of 20 leading industrialized and emerging nations pledged ... to crack down on jurisdictions that fail to cooperate in cross-border tax evasion cases, using information from the OECD as its basis.
The Cayman Islands, a British overseas territory, is home to an estimated 8,000 hedge funds and a host of other funds aimed at professional or qualified investors and institutions. It was included, along with a host of other small Caribbean territories, on a list drawn up by the Paris-based OECD of tax havens which have agreed to improve transparency standards, but have not yet signed the necessary double-taxation accords.
Tibbetts said the Cayman Islands government was reviewing the measures proposed by the G20 leaders, especially those related to strengthening financial supervision and regulation, resisting protectionism and promoting global trade and investment, and strengthening global financial institutions.
"Government will be looking for opportunities to engage with international standard setters directly or through government counterparts to provide our input where we can, keeping with our commitment to being ‘a strong link in the chain’ in the global financial system," he added.
The OECD had recognized that the Cayman Islands had set "a good example" by enacting legislation that allowed it to exchange tax information unilaterally, Tibbetts said, adding the territory had identified 12 countries with which it was prepared to do this. The OECD said it was reviewing this legislation. Cayman Islands committed to the OECD tax standard in 2000.
Also included on the OECD's "gray list" of tax havens was Antigua and Barbuba, whose government and regulators last month seized banks and property belonging to Texas billionaire Allen Stanford, who is accused of an $8 billion securities fraud.
Other Caribbean states and territories on the same OECD list were: Anguilla, Aruba, Bahamas, Bermuda, British Virgin Islands, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and Grenadines, and Turks and Caicos.
Singapore Vows to Change Tax Laws to Remove Havens
The OECD "grey list" includes, in addition to the Caribbean havens listed above, practically every other financial haven worthy of the label -- e.g., Belgium, Gibraltar, Liechtenstein, Luxembourg, Monaco, Switzerland and Singapore -- and some which had some that had never registered on our radar screens as such, like Brunei and Chile. Singapore promises to get itself into the OECD's good graces by year-end.
The OECD ... said Singapore was one of the countries that had not yet carried out their commitments to respecting global standards on exchanging tax information.
Singapore "intends to implement the standard by effecting legislative amendments later this year," a finance ministry spokesperson said in reply to a query from AFP ...
The OECD, which groups the world's leading developed nations, listed 38 countries and territories that "have committed to the internationally agreed tax standard, but have not yet substantially implemented" the measures.
As well as Singapore the list also includes Belgium, Brunei, Chile, the Dutch Antilles, Gibraltar, Liechtenstein, Luxembourg, Monaco, Switzerland and Caribbean island nations including the Bahamas, Bermuda and the Cayman Islands.
The OECD released the list after the Group of 20 summit in London agreed to crack down on tax havens. "As expected, Singapore has not been classified by the OECD as a tax haven but as a financial center that has committed to the internationally recognized tax standard," the Singapore finance ministry said. "This recognizes that Singapore has endorsed the OECD standard for the exchange of information through Avoidance of Double Taxation Agreements (DTAs), and intends to implement the standard by effecting legislative amendments later this year and negotiating and concluding relevant DTAs."
It added that "Singapore's position in this regard is no different from that of other major financial centers such as Hong Kong, Switzerland and Luxembourg, which the OECD has similarly recognised as jurisdictions that have committed to implementing the OECD standard."
Costa Rica, Labuan, Philippines, Uruguay Off OECD Tax Haven Blacklist
Gray is the new black.
The OECD "black list" now has a membership of zero, to be replaced with the "gray list," consisting of countries who say they will comply with rules on sharing tax information but have yet to act. Sounds a lot like the old black list to us, practically speaking.
The Organization for Economic Cooperation and Development published a report last week on progress by 84 countries and territories toward financial openness on the exchange of tax information.
The OECD divides countries into three categories: those who comply with rules on sharing tax information (white list), those who say they will but have yet to act (gray list), and nations which have not yet agreed to change banking secrecy practices (blacklist).
Costa Rica, Malaysia (Labuan), Philippines and Uruguay, added ... after being taken off blacklist.
Also: Andorra, Anguilla, Antigua and Barbuda, Aruba, Bahamas, Bahrain, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Dominica, Gibraltar, Grenada, Liberia, Liechtenstein, Marshall Islands, Monaco, Montserrat, Nauru, Netherlands Antilles, Niue, Panama, St. Kitts and Nevis, St. Lucia, St. Vincent & Grenadines, Samoa, San Marino, Turks and Caicos Islands, Vanuatu.
The following gray list countries have not fully implemented the rules, although their economies are sufficiently diversified away from financial services so as not fit the classic definition of tax havens: Austria, Belgium, Brunei, Chile, Guatemala, Luxembourg, Singapore and Switzerland.
Argentina, Australia, Barbados, Canada, China (excluding Hong Kong and Macau), Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Guernsey, Hungary, Iceland, Ireland, Isle of Man, Italy, Japan, Jersey, Korea, Malta, Mauritius, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Russia, Seychelles, Slovak Republic, South Africa, Spain, Sweden, Turkey, United Arab Emirates, Britain, United States, and the U.S. Virgin Islands.
Hong Kong and Macau are referred to as special administrative regions of China which the OECD says "have committed to implement the internationally agreed tax standard."
LUXEMBOURG PRIME MINISTER CALLS FOR U.S. “TAX HAVENS” TO BE BLACKLISTED
He fails to understand that rules are for “the little people.”
The Luxembourg PM has publicly pointed out the obvious hypocrisy of the U.S., and the UK as well, in blacklisting just about every financial haven in existence while failing to finger U.S. states such as Deleware and Nevada which would fail to escape the blacklist if subjected to the same criteria. PM Juncker is not the first to make this type of accusation, just the latest. Whether the U.S. feds ulimately clamp down on those states will provide an accurate gauge of whether the goals of the U.S. efforts against foreign tax havens include lowing competition for its own tax havens.
Luxembourg Prime Minister Jean-Claude Juncker has suggested that U.S. President Barack Obama should look to the "tax havens" in his own back yard before telling the financial centers of Europe and elsewhere how they should be running their affairs.
In a speech to the European Parliament on March 31, Juncker implied that it was hypocritical of Obama and other world leaders such as UK Prime Minister Gordon Brown to moralize over banking secrecy laws in the likes of Luxembourg, Switzerland and Austria when it is still possible to set up companies in certain low- or no-tax U.S. states and provide the minimum of information to the authorities about the ownership of the company.
Juncker argued that if countries like Luxembourg are facing the prospect of being "blacklisted" for their privacy laws, then so should the United States. "The G20 has no credibility as an undertaking if Delaware, Wyoming or Nevada or far-flung islands from the United States are not on the blacklist," he told MEPs, adding, "If there must be a blacklist then, America should have its place on it."
Juncker said that by the end of the G-20 conference in London on April 3, it will be possible to discern whether the U.S., the UK et al would have found a "real solution" to the problems of regulating that world's financial system -- one which includes the United States -- or whether Obama and Brown are merely posturing and playing to the "public gallery" with their anti-tax haven rhetoric.
Nearly two million corporations and limited liability companies are formed within the United states each year, but in many cases U.S. states form these corporations without asking for the identity of the corporation's beneficial owners, and this can make life difficult for law enforcement agencies when investigating allegations of financial and other crimes.
A recent bill introduced into the U.S. Senate would require state authorities to obtain beneficial ownership information for the corporations formed under their laws and to provide access to this information to law enforcement bodies upon receipt of a subpoena or summons. A similar bill introduced last year was co-sponsored by President Obama when he was a member of the Senate.
Michigan Democrat Senator Carl Levin, who also supports the crackdown on offshore financial centres and has introduced a bill which attempts to neutralize banking secrecy, has been pursuing this issue since 2000, when a Government Accountability Office investigation found that just one individual had been able to set up over 2,000 Delaware companies and move $1.4 billion through company bank accounts.
The U.S. has drawn criticism from the Financial Action Task Force (FATF) for its failure to comply with certain standards on the reporting of beneficial ownership which the FATF warns could undermine attempts to thwart money laundering. It urged the United States to correct this deficiency by July 2008.
For its part, Luxembourg, in an attempt to ensure it is omited from any blacklist, announced on March 13 that it intends to conclude more double-tax treaties to the benchmarks set by the OECD, thereby increasing exchange of information channels in cases where fiscal crime is alleged to have taken place.
However, a government statement announcing the decision also pointed out that OECD rules do not cover banking secrecy, and therefore Luxembourg will maintain this "in order to maintain its depositors' privacy.”
Luxembourg has already established a double-tax treaty network covering more than 50 countries, all following the OECD Model Tax Convention, although the treaty with the U.S. contains "Savings" and "Limitation of Benefits" clauses which can negate the purpose of the treaty in some circumstances.
ONLINE POKER SETTLEMENT COULD SHAKE INDUSTRY
Enhancing its rogue elephant status, the U.S. government has succeeded in enforcing an ex post facto law against a major internation business. In 2006 Congress passed the "Unlawful Internet Gambling Enforcement Act." Online gambling company PartyGaming, best known for its online poker room PartyPoker.com, stopped accepting U.S. customers at that point. U.S. prosecutors pressed charges anyway, contending that pre-2006 laws forbade the company from offering internet gaming services to the U.S.
Of course. Competing with domestic gambling interests was a crime. Anyone could have figured that out.
Now PartyGaming was agreed to pay $105 million to avoid being prosecuted further. PartyGaming's largest shareholder, Indian businessman Anurag Dikshit, has previously agreed to pay the U.S. a $300 million penalty for violating Internet gambling laws. So that is a total haul of $400 million for the U.S. government. Not a huge chunk of change in this day of trillion dollar bailouts, perhaps, but not chickenfeed either. And it paves the way for future shakedowns.
The PartyGaming CEO said it made "commercial sense" for the gambling site to resolve the "long and complicated process," adding that it cleared the way for the firm to expand. In other words in made sense to pay for "protection" -- after all, they would not want an accident that might damage their business to happen, right? Some financial analysts said PartyGaming also had now increased its chances of gaining a license from any future regulated U.S online gaming market. Perhaps so.
In a development that could signal a shift in the murky and unregulated world of online gambling, the parent company of one of the most popular internet poker sites said ... it has agreed to pay the U.S. government $105 million to settle charges that it illegally offered gambling to players in the United States.
PartyGaming Plc, the publicly traded parent of the Web site PartyGaming, said it would pay the money over three years as part of a "Non-Prosecution Agreement" it recently reached with the U.S. Attorney's Office for the Southern District of New York.
Prior to the enactment of the Unlawful Internet Gambling Enforcement Act in October 2006, PartyGaming operated one of the largest and most active Internet poker sites in the U.S. The company immediately withdrew from the U.S. market and stopped accepting U.S. players, which caused a dive in its earnings and stock price. Nevertheless Justice Department prosecutors continued to consider charges against the company for targeting U.S. players before 2006, contending that previous laws also outlawed Internet gambling.
As reported in a Washington Post series on online poker last year, some legal scholars and Internet gambling proponents see the government crackdown as a disconnect between 21st-century technology and the 20th-century laws used to protect Americans from gambling.
The Justice position is considered controversial with some members of Congress and gaming analysts arguing it has steered U.S. players to unregulated offshore sites. "The U.S. government has now succeeded in driving out the reputable publicly-traded Internet gaming operators," said Joseph M. Kelley, a professor of business law at the State College at Buffalo, who has also served as an expert witness for gaming and government interests. "It has not decreased online gambling, but has reduced the ability to monitor suspicious transactions."
The chances for the PartyGaming settlement increased in December when the biggest shareholder, Anurag Dikshit, one of India's richest businessmen, turned himself in to U.S. authorities. He pleaded guilty to violating Internet gambling laws and agreed to pay $300 million in fines.
[The] news sent online gambling stocks soaring overseas. That is because some financial analysts see the settlement as possibly leading to others, thus reducing uncertainty in the industry and opening the door to industry consolidation and expansion outside the U.S. Some analysts said PartyGaming also had now increased its chances of gaining a license from any future regulated U.S online gaming market.
Under the terms of the agreement, PartyGaming officials said the government would not prosecute the parent firm or any of its subsidiaries for offering Internet gambling services to U.S. customers between 1997 and October 2006, when it voluntarily withdrew from the market.
Jim Ryan, the chief executive of PartyGaming, said it made "commercial sense" for the gambling site to resolve the "long and complicated process," adding that it cleared the way for the firm to expand. PartyGaming is now based on the Isle of Man in the Irish Sea.
UK and Liechtenstein Begin Tax Talks
Liechtenstein is "cooperating" -- with the UK in the news here -- to the point of asking for assistance from the UK "to help determine the identity of UK residents with beneficial interests in Liechtenstein structures and bank accounts."
"Not surprisingly, the move has been welcomed by the UK government," the writer dryly notes.
Senior representatives of the Liechtenstein government and HM Revenue and Customs met on April 1 to discuss how to take forward increased tax transparency between the UK and Liechtenstein.
Liechtenstein has asked for technical assistance from the UK to help determine the identity of UK residents with beneficial interests in Liechtenstein structures and bank accounts. Not surprisingly, the move has been welcomed by the UK government. ... The UK and Liechtenstein have agreed to move forward quickly to reach a formal tax information agreement in the near future.
Stephen Timms UK Financial Secretary to the Treasury said: "The outcome of these discussions demonstrates that we are fast moving forward into a new era of transparency and openness in global tax administration, founded on exchange on tax information. This is good news both in terms of the interests of the majority of honest taxpayers who pay their fair share and also in protecting the revenues that fund our vital public services."
Dave Hartnett, Permanent Secretary for Tax at HMRC commented: "These were unprecedented discussions and we are looking forward to more detailed talks. We are grateful to the Liechtenstein government for their efforts to conclude an information agreement between Liechtenstein and the United Kingdom." ...
The announcement follows the "Liechtenstein Declaration" on March 12, when the Principality pledged to conform to OECD standards on transparency and seek out new tax agreements with other countries and jurisdictions.
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