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

W.I.L. Offshore News Digest :: August 2009, Part 2

This Week’s Entries :


The U.S. government’s attacks on foreign financial institutions are one more means by which the U.S. is slowly establishing controls that will prevent the populace from escaping their indentured servant status here, or just escaping, period.

LewRockwell.com columnist Jeff Snyder has connected the dots in the IRS vs. (Swiss bank) UBS dispute and concluded what we have been saying from day 1: The U.S. government’s ultimate aim is to keep its citizens’ capital imprisoned behind U.S. borders: “The U.S. government’s attacks on foreign financial institutions are one more means by which the U.S. is slowly establishing controls that will prevent the populace from escaping their indentured servant status here, or just escaping, period.”

Obviously we agree. Whether you believe in the solutions offered by W.I.L. or not, our advice is do something. Sooner is better than later because too late will be exactly that: too late.

J.H. Huebert had an excellent article last Friday about the U.S. attempts to force the Swiss bank, UBS, to divulge information about U.S. account holders to the IRS. These efforts are nothing less than an attack on Switzerland’s sovereignty in the form of its ability to establish and maintain its own banking laws.

This is the kind of arcane financial news that is easy to disregard. When people hear “Swiss bank accounts,” they may brush off the attacks as the problems of the ultra rich. If only we were so “unfortunate” to have this kind of problem to worry about, right? Unfortunately, however, I think we do. I believe that there is far more to this than a temporary, one-time money grab by the IRS from tax evaders. I believe this is also very bad news even for us “wage slaves.”

The day Mr. Huebert’s article appeared, the Justice Department announced that the U.S. and Switzerland had reached an agreement in principle to settle the U.S. lawsuit against UBS AG seeking the names of 52,000 account holders. No details of the agreement were released but, given the amount of leverage that the U.S. can bring to bear on UBS’s operations in the United States, it would be astounding if UBS had not agreed to some major accommodation to U.S. demands.

Let us go back and supply a little context about how we get to this issue in the first place.

Like most countries, the U.S. taxes its residents on income that they earn outside of the U.S. Unlike most countries, the U.S. also taxes its nonresident citizens on their worldwide income. Solely by virtue of being born here, the U.S. claims lifelong rights to your earning stream even if you take up permanent residency in another country. As a result, the U.S. is constantly seeking ways, through treaties, laws or, now we see, international strong arm measures, to track the international financial transactions of its citizens, whether in the name of preventing drug trafficking, money laundering, tax evasion or other crimes.

U.S. taxpayers are required to report, and pay taxes, on interest or other earnings derived from foreign accounts. Unlike U.S. banks, which will send you and the IRS a Form 1099 each year, foreign banks do not have an obligation to report your earnings to the IRS. Accordingly, the IRS is keenly interested in finding out from you whether or not you have any such foreign accounts.

Schedule B to Form 1040 (used for reporting interest and dividends) asks, “At any time during (the previous year), did you have an interest in or a signatory or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?” As described by the law firm of Bove & Langa in an on-line article about this matter, the answer to this question has serious potential consequences:
The question calls for nothing more than checking a “yes” or “no” box in response, but most taxpayers (and many tax preparers) just ignore it. The yes box or the no box, that is it. There are no boxes that say, “maybe” or “I don’t understand the question,” or “I decline to answer on the grounds that an answer may incriminate me.” Maybe there should be such choices, since there are many who do not fully understand the serious implications of ignoring the question when such an account exists, or worse, of intentionally providing an incorrect answer, which, surprisingly, may include no answer at all. That is to say, intentionally leaving both boxes blank could be deemed a false answer by the IRS or a court.”

Note: If you check the 1040 Schedule B instructions carefully you will see that “no” is a legitimate answer if the sum total of signatory, etc. interests in foreign country financial accounts was less than $10,000, i.e., the same trigger level for filing Treasury Department Form 90-22.1 (see below). When offshore legal entities and less than full interests are involved, the threshhold calculation can get tricky.

In addition to this reporting obligation on Form 1040, a U.S. citizen, resident alien and even certain persons who are not resident but are doing business in the US with no other connection are also required, by the Bank Secrecy Act, to report the existence of a foreign account to the IRS on Treasury Department Form 90-22.1 if the combined total value of all such accounts exceeds $10,000 at any time during the year. The definition of the type of accounts that must be reported is very broad and includes even prepaid credit card and debit card accounts. The report must be filed even if the accounts generate no interest or other taxable income. As described by Bove & Langa, the penalties for a willful failure are quite severe:
“[t]he civil penalties for failing to report the account on the prescribed form ... can range from up to $10,000 for a ‘non-willful’ failure, and for a willful failure the greater of $100,000 or half the balance in the foreign account. [emphasis supplied.] If criminal activities are involved, the monetary penalties are increased and may be accompanied by possible imprisonment for up to ten years.[footnote omitted] ... [F]ailure to maintain adequate records of the foreign account may result in additional civil and criminal penalties. The IRS states that records should be kept for five years.”
As Mr. Huebert pointed out, while the IRS is seeking information about approximately some $20 billion in UBS accounts, because of the possibility that most people with these accounts may have been accurately reporting all earnings and paying all applicable income taxes on those earnings, it is possible that the IRS will not obtain all that much money, especially when judged against the current federal deficit. However, since the intentional failure to report an account can result in loss of one-half of the entire account, the IRS does indeed have a very strong financial motivation to obtain the UBS information, because even a relatively small number of noncompliant taxpayers with very large foreign accounts could generate sizable revenues. The threat of this penalty alone will give the IRS considerable leverage for nonreporting taxpayers to settle somewhere between the penalties for unintentional and intentional failure, likely resulting in considerable tax revenues from persons who honestly did not know they were violating the law.

The IRS’s highly visible targeting of the “establishment” Swiss banking system will likely garner much greater future compliance with these reporting obligations.

More importantly, the IRS’s highly visible targeting of the “establishment” Swiss banking system will likely garner much greater future compliance with these reporting obligations, so that the IRS and U.S. government will likely obtain detailed information about many more foreign accounts from people who have either intentionally hidden these accounts or who just want to “play it safe.” In this regard, please note that TDF-90-22.1 requires the reporting individual to provide the account number of the account itself, as well as the names of the account holders and name and address of the financial institution, thus providing all the information necessary to enable the governmental to file tax liens, seek the freezing of accounts or other enforcement actions available to it under tax treaties or applicable foreign laws.

Still, it is very likely that these consequences will fall predominantly upon very high-income taxpayers. Unfortunately, the US strong arm tactics to compel foreign banks to disclose US account holders’ information are having an additional, and more disturbing effect on a far greater number of people, and one that is quite possibly also intended by our lords and masters. And that is this: to make it extremely difficult for Americans to have accounts abroad, and therefore to prevent both the safeguarding of wealth outside the United States and living outside of the United States.

By creating high costs for foreign banks to permit U.S. citizens to open and maintain even checking and savings accounts in foreign countries, U.S. citizens will be unable to have the normal banking services they need to live in a foreign country.

According to this Forbes article [see below], Americans are fast becoming pariahs of foreign banks. Because of U.S. demands and pressures, foreign banks in countries around the world are deciding to close Americans’ accounts, or are not permitting Americans to open new ones. In some cases, the banks are not terminating or rejecting new applications for just securities or investment accounts, but also current accounts, i.e., the standard checking accounts people use for their living expenses. In other words, the U.S. is making it more difficult for you to live in another country, by creating international difficulties that, in the end, will seriously obstruct your ability to conduct everyday financial transactions in a foreign country. By creating high costs for foreign banks to permit U.S. citizens to open and maintain even checking and savings accounts in foreign countries, U.S. citizens will be unable to have the normal banking services they need to live in a foreign country, and will not be able to do things like pay rent, utilities, travel on public transportation and buy groceries.

Possibly the most unequivocal sign that distinguishes a totalitarian system from a relatively free society is the simple right to leave. In totalitarian societies, the “iron curtain” falls, and “citizens” are not free to leave. The people and their assets are effectively property of the state. They, and everything they produce, are “human resources” that belong to the government. The “citizens” are more accurately described as prisoners confined within their national borders.

The U.S. government’s attacks on foreign financial institutions are one more means by which the U.S. is slowly establishing controls that will prevent the populace from escaping their indentured servant status here, or just escaping, period. One of the effects of these attacks will be, to some extent, to lock American assets into American banks and keep funds here, onshore, where they are readily controllable, seizable and debasable. These attacks are a way of closing the borders, are the makings of a banking “Berlin Wall.”

Slowly and methodically, we are being locked in.

U.S., Switzerland Resolve Bank Secrecy Dispute

Legal showdown averted. Terms of the deal were not immediately disclosed.

As mentioned in the post immediately above, the U.S. and Switzerland have reached a settlement in the now longrunning UBS vs. IRS dispute, which averts a Shootout at the OK Corral like showdown. Terms of the settlement have not been disclosed yet. Swiss newspaper Le Temps laments that “UBS’s mistakes have opened a gaping hole in banking secrecy that can no longer be closed.” We will soon see how “gaping” the hole is.

This article from Washington Post provides an excellent history and analysis of the case for those coming in late to the story. It is clear that UBS’s conduct, if allegations are correct, was both egregious and stupid; and that the U.S. persons who succumbed to UBS’s solicitations did not look very hard for holes in the UBS proposed strategy. But the parties who lose out from those actions go well beyond UBS and its customers.

U.S. and Swiss negotiators have initialed a settlement that averts a legal showdown over the U.S. government’s landmark challenge to Swiss bank secrecy, a government lawyer said Wednesday.

The U.S. government had sought a federal court ruling compelling Switzerland’s largest bank, UBS, to turn over the names of Americans suspected of dodging taxes through the use of 52,000 secret accounts.

In a conference call Wednesday (August 12) morning with the federal judge presiding over the case, Justice Department lawyer Stuart D. Gibson said the parties had initialed agreements and that they would ask the judge to dismiss the matter when the final documents are signed.

Terms of the deal were not immediately disclosed, leaving unclear what each side gained or conceded.

Deal “protects the United States government’s interests,” IRS Commissioner says. Swiss Federal Department of Justice and Police head says compromise “is in the interests of both states.”

The agreement “protects the United States government’s interests,” Internal Revenue Service Commissioner Doug Shulman said in a statement.

“We will release more details when the Swiss government signs the agreement as early as next week,” Shulman added.

The head of the Swiss Federal Department of Justice and Police, Eveline Widmer-Schlumpf, issued a statement saying the compromise “is in the interests of both states.” UBS Chairman Kaspar Villiger thanked the Swiss negotiators “for their outstanding efforts” and said the bank was grateful for the agreement.

The announcement followed a long-running legal battle that had already undermined Switzerland’s legendary bank secrecy, exposed what the United States alleged was a conspiracy at the heart of Swiss banking giant UBS, and threatened to damage relations between two otherwise friendly countries.

Switzerland had bitterly contested the U.S. demand. The Swiss government had said it would prevent UBS from complying, even if a U.S. court ordered it to turn over the information.

Switzerland has been trying to protect the system of secrecy that has helped make its banking industry one of the richest in the world and a major source of Swiss wealth.

The bank had maintained that the information the U.S. was seeking was “protected from disclosure by Swiss financial privacy laws,” and a UBS executive told Congress in March that the bank could make no further disclosure without exposing its employees to prosecution in Switzerland.

The U.S. government has been fighting to collect potentially substantial amounts of unpaid taxes, punish tax evaders, and give other Americans reason to think twice before attempting to hide money abroad. The Obama administration has said its effort to crack down on financial havens is an issue of fairness for honest American taxpayers.

The Justice Department last month announced that the sides had reached an “agreement in principle” on the major issues, but a final resolution had eluded them. Barring a deal, a trial in the case, which had already been postponed three times in recent weeks, was scheduled to begin August 17.

Top Swiss official recently hinted at the terms of then emerging settlement; suggested U.S. demands would be pursued through Swiss legal system. But U.S. has already tried that channel without success.

A top Swiss official hinted at the terms of the emerging settlement in a recent interview with a Swiss newspaper, suggesting that instead of pursuing its demand through a federal court in Miami, the United States would submit a new request for the information under a long-standing treaty between the two countries.

Moving the U.S. demand from American courts back to a Swiss legal channel has been a Swiss priority because it would help Switzerland argue that its bank secrecy regime remains intact.

However, the United States has already tried to use that legal channel without success, and it was unclear why the same process would lead to a different outcome.

In theory, the U.S. government holds great leverage over UBS: About 1/3 of UBS’s assets are in the U.S.

In theory, the U.S. government holds great leverage over UBS. Largely as a result of the bank’s purchase in 2000 of the PaineWebber brokerage firm, much of UBS’s business and about a third of its assets are in the United States. The U.S. could have tried to seize those assets and put the bank’s U.S. operations under new management, a federal judge recently noted.

Which is why W.I.L. and many others warn against using “foreign” financial firms with U.S. legal and/or physical presence, such as UBS had and has.

However, the government also had reasons to compromise. It faced the possibility of lengthy appeals if it won a court order against UBS. In addition, the case had strained relations with Switzerland, which assists the United States in countries where the United States has no diplomatic relations. Coincidentally, Iran detained three Americans on July 31, as the bank secrecy negotiations entered their endgame, and the U.S. again asked Switzerland for help.

Swiss banking has long been a target of international criticism. More than a decade ago, UBS settled a class action lawsuit alleging that its predecessor banks had wrongfully kept money from heirs of depositors who perished in the Holocaust.

The latest allegations that UBS was abusing bank secrecy came into focus last year, when a former UBS insider pleaded guilty to helping a California real estate billionaire evade taxes of $7.2 million and hide assets of $200 million.

Former UBS banker claims bank solicited wealthy Americans and then helped them set up sham companies to mask their ownership of UBS accounts.

Former UBS banker Bradley Birkenfeld told federal authorities that UBS sent private bankers to the U.S. to surreptitiously woo wealthy Americans and then helped them set up sham companies to mask their ownership of UBS accounts. Because the bankers from Switzerland were not licensed to do business in the United States, UBS trained them to avoid detection, Birkenfeld alleged.

UBS bankers also taught Americans to tap their Swiss accounts by stealth, Birkenfeld alleged. In one instance, Birkenfeld bought diamonds using funds from a client’s Swiss account and then smuggled the jewels into the United States in a toothpaste tube, according to a statement of facts filed in connection with Birkenfeld’s guilty plea.

The U.S. government pursued parallel criminal and civil actions.

On the civil front, it went to court last year to seek the names of thousands of UBS depositors.

On the criminal front, a top UBS executive was indicted in November on charges of conspiring to defraud the United States by helping about 20,000 clients hide $20 billion from the IRS. The cross-border business generated about $200 million in annual revenue for UBS, the indictment said.

UBS executives “at the highest levels” were unindicted co-conspirators, the indictment said.

Ironically, UBS was indirect major beneficiary of U.S. bailout funds.

Ironically, while the probe was unfolding, UBS was, indirectly, a major beneficiary of U.S. bailout funds. The federal rescue of global insurer AIG helped UBS, which was a counterparty to deals with AIG, collect $5 billion.

By early this year, the U.S. government was threatening to charge the bank itself, which could have put UBS out of business and destabilized the Swiss financial system, a Swiss regulator has said.

UBS deferred the threat of prosecution in February by admitting wrongdoing and agreeing to pay $780 million over a period of years. The Swiss also agreed to divulge the names of 200 to 300 UBS clients.

UBS and Swiss cabinet maintain previous U.S. client disclosures were cases where alleged misconduct crossed a line in Swiss law. Swiss Financial Market Supervisory Authority suggests disclosures were dictated by pressure rather than principle.

The bank and the Swiss cabinet reportedly maintained that the disclosure was consistent with bank secrecy because client protections are not absolute and the alleged misconduct of those depositors crossed a line in Swiss law.

But the Swiss Financial Market Supervisory Authority, a regulatory agency, suggested the disclosure was dictated by pressure rather than principle. The regulator said it ordered UBS to turn over the names “to avert the drastic consequences such charges would have for UBS and the stability of the Swiss financial system.”

Unsatisfied with the 200 to 300 names, the U.S. government more than doubled its civil demand to encompass disclosure of what it said could be 52,000 secret accounts.

Swiss newspaper laments that Swiss banking will never be the same thanks to UBS errors. UBS reports large deposit outflows which go beyond American clientele.

As the new settlement between the U.S. and Swiss governments was being negotiated, the Swiss newspaper Le Temps recently lamented that Swiss banking would never be the same, according to an English-language Web site of Swiss Broadcasting Corp.

“UBS’s mistakes have opened a gaping hole in banking secrecy that can no longer be closed,” Le Temps reportedly declared. “The U.S. has blown up a dam that was considered unshakeable and without weakness.”

UBS has been closing the secret accounts of its American clients, forcing them into the cold, tax lawyers say. Many Americans with undeclared accounts have sought leniency by making voluntary disclosures to the IRS.

Meanwhile, UBS has reported large outflows of deposits, which go beyond its American clientele.

IRS Extends Deadline for Filing Offshore Bank Account Form

The IRS has extended the deadline for some taxpayers to file a form reporting offshore bank accounts. Investors in hedge funds, mutual funds and other entities who have been struggling with how to handle the form are likely to be helped by the extension.

On Friday (August 7), the IRS said certain taxpayers have until June 30, 2010, to file the 2008 FBAR, or Report of Foreign Bank and Financial Accounts.

The move occurs amid a government crackdown on people who use foreign accounts to evade taxes. The ongoing case against UBS AG (UBS), which took a further turn on Friday, has many with hidden accounts rushing to turn themselves in to the IRS. It has also prompted a lot of anxiety among hedge funds and other financial entities over whether they have complied with FBAR rules.

The new IRS extension includes people with signature authority over, but no financial interest in, offshore accounts. It also includes those with a financial interest or signature authority over a commingled fund, for example a hedge fund or mutual fund.

This is the second time the IRS has extended the deadline for some of these taxpayers in recent days. In June, the agency issued guidance on who must file the FBAR, and extended the traditional June 30 deadline to September 23 for some.

Americans Now Pariahs of Foreign Banks

Move over, Iran and North Korea: Americans are the new outcasts of banking.

Swiss and other European banks have begun distancing themselves from American clients in the wake of UBS’s spat with U.S. tax authorities, either by closing existing accounts or rejecting new applications.

Banks, particularly smaller Swiss ones, are “actively closing” accounts of Americans resident in Switzerland, as well as those of U.S.-domiciled Americans, said David Treitel, tax director of London-based U.S. Tax & Financial Services. Similar cases have begun to spring up in Britain, too. “Clients are being told, ‘We’ll be closing your accounts; you have X-number of days left,’” he said, adding that Americans were becoming “increasingly unpopular” among large foreign banks.

European banks have always treated American clients with caution, but their attitude has changed dramatically ever since the Department of Justice began demanding that UBS hand over the details of some 52,000 clients suspected of evading U.S. taxes. The dispute has left UBS between a rock and a hard place: It will break Swiss secrecy laws if it hands over the information, but face punitive action from the U.S. government if it does not.

According to Don Curtis, chief executive of Geneva-based Curtis & Co., Swiss banks are closing accounts of American clients across the board, ranging from pension to securities to current accounts. The placement of funds and securities have been the most affected, according to Stuart Hearn of Carouge, Switzerland-based Compta Center.

A spokesman for UBS said that nothing had changed since last year, when the bank announced it would be exiting its offshore services for U.S.-domiciled clients. Swiss-domiciled American clients would, however, continue to be able to open regular current or business accounts.

“Banks are very worried about the administration costs and financial regulation,” said Treitel. “They see taking the business as too costly or as too invasive of privacy.”


Our posting last month of the July “Clews Views” column reviewed all of this years’ Caribbean Property Magazine e-zine articles through July by Carter Clews. This month Clews covers a location we were actually previously aware of: Roatan, the largest, most populous and developed, and best known of the three Honduran Bay Islands. Another Caribbean Property Magazine article last month, posted here, also was on the subject of moving to and living on Roatan. The followup to that piece is immediately below.

So one might expect that property there is not so cheap as less publicized Caribbean/Latin American expat destinations. Partially true. Clews tells us one can find “a beach view lot for around $75,000.” Now you have to build something on the lot. This is cheap compared to U.S. beach-front property, but not compared to deals for real estate near the ocean shared in previous Clews Views columns. Of course Roatan is Clews’s “favorite Caribbean island”: “When you know you are living on the golden shores of heaven on earth, it is kind of hard to work yourself into a dither over anything short of a nuclear holocaust.” Now one understands why he is willing to pay up.

Note that Hurricane Mitch hit Roatan in 1998 – as is mentioned in the next posting. This blog informs us that Roatan is “typically” not in the hurricane belt, although a hurricane hits the island on average every 24 years. Supposedly major damage was sustained from Mitch, but other reports indicate that besides docks the damage was mostly sustained by structures with substandard construction. So the risk in low, but not zero.

Clews’ Views is about places you may want to live, and might be able to afford ... without breaking the bank, or, perhaps, even borrowing a dime. So, those familiar with beautiful Roatan Island may think that recommending this tropical paradise is a bit of a stretch.

But, in the immortal words of Sportin’ Life from Porgy and Bess, “It Ain’t Necessarily So.”

Believe it or not, if you look hard enough (and I will tell you how in just a second), you can still find a condo on this divers’ dreamland for under $150,000. You can even find a beach view lot for around $75,000. And you can live a life of ease and island opulence, basking in the sun and soaking up the surf, for about $2,000 a month.

But, before I tell you where to look, let me tell you why. Then, you can decide for yourself whether my favorite Caribbean island might turn out to be yours, too. Let us take a quick Cook’s Tour so that you can get your bearings.

Roatan is the most developed of the three small islands that make up the Isla de Bahia – Bay Islands – off the east coast of Honduras. Guanaja and Utila are the other two. Together, they make up one of the Honduras’ 18 “departments,” or states.

Honduras is not “war-torn.” It did not just have a “military takeover.” And no “Banana Republic” dictator has seized power. In fact, quite the opposite occurred.

Now, since I said they are part of Honduras, and that country has been in the headlines worldwide in recent days, let me set the record straight right from the start. Honduras is not “war-torn.” It did not just have a “military takeover.” And no “Banana Republic” dictator has seized power.

In fact, quite the opposite occurred. On Veintiocho de Junio (June 28) – a date many Hondurans are already commemorating as their own “Cinco de Mayo” – the country’s Congress and Supreme Court impeached the President, removed him from power, and maintained their much-beloved democracy. It is just that simple.

They did so under Section 239 of the Honduran Constitution, following the procedure to the letter of the law. The president of the Congress became the democratic president of the country, again, as prescribed by law. And they will have elections, as previously scheduled, in November of this year.

As the Wall Street Journal, the Los Angeles Times, the Christian Science Monitor, and the prestigious ALG International News Service editorialized, the replacement of the Honduras president was not usurpation, it was a preservation, of that country’s democracy. And all those who live there – or may one day want to – can breathe a sigh of relief.

Enough said. Now, let us return to the joys of living the good life at a great price on beautiful Roatan Island. Roatan is the most populous and the largest of the Bay Islands with just under 30,000 people live on its 150 square kilometers of lush, low-lying mountains and white-sand beaches.

An easily traveled paved road connects the most developed communities of the Island. If you start on the western end, you travel through the quaint communities of Lighthouse Point, West Bay, West End, Sandy Bay, Coxen Hole (the capital of Roatan), Brick Bay, Mount Pleasant, French Harbour and Oakridge – Punta Gorda. After that, the asphalt gives way to red-clay dirt as you navigate each to Paya Bay, Camp Bay, Port Royal, and other outposts.

Now, when I call West End, Coxen Hole, French Harbour, and the rest “communities,” please do not get the idea you are heading for a traditional western-style town with a lamp post-lined Main Street, a bustling town square, and a Starbucks at the end of the block.

Most of the towns on Roatan are tiny, with a few hundred to a few thousand people at most.

For the most part, except, perhaps, in Coxen Hole, there are no blocks. So, you can forget about your Sumatra whole bean bold roast. Most of the towns on Roatan are tiny, with a few hundred to a few thousand people at most. Many of them are fishing villages, with the relaxing air endemic to communities worldwide where the locals have long-since learned that nature not only takes it own course, it takes its own sweet time, as well. And you may as well enjoy the wait.

On Roatan, of course, the wait is worth your while, because no matter where you are, the sun is shining, the waves are cresting, and the pristine beach beckons you to bare your feet and wiggle your toes in the warm, powdery sand. There are no crowds on Roatan Island. There are no traffic jams to impede your passage, no grocery lines to try your patience, no hurry, scurry, hustle, or bustle.

Roatan is its own paradise island. It is where you go when you are through going.

Roatan is its own paradise island. It is where you go when you are through going. Where you land when the flight is finished and the time has come to cool your engines.

I know all of this because I lived on Roatan Island for four paradisiacal months in the winter to spring of 2007. I was doing some work for Dan Taylor at beautiful Keyhole Bay on the island’s western end. And I came to realize, as I have told all and sundry since, that when you know you are living on the golden shores of heaven on earth, it is kind of hard to work yourself into a dither over anything short of a nuclear holocaust.

Just so you will know, Keyhole Bay is an idyllic residential development on 23 acres of rolling hills high above the turquoise Caribbean. On a clear day, you can bask on Keyhole Bay’s private beach and see the mainland on the distant horizon. And since about 320 days a year are crystal clear on Roatan Island, that is not a bad way to idle away the hours.

Now, let me make clear that I am not now paid by Keyhole Bay, nor will I make one single cent if you decide to buy one of the luxury condominiums there. So, if you decide to plunge into one of its infinity pools, or frolic in the cascading torrent of its 30-foot manmade waterfall, all I get out of it is the joy of knowing that you are living life to its fullest where the sun never sets on dreams come true. And that is no exaggeration.

Just a short jaunt from Keyhole Bay is the typical tropical village of West End. Here, a single sand-covered street leads you from one end of “town” to the other. Walking from east to west, you will have the Caribbean Sea on your right and the majority of shops on your left.

Most of the shops are small cafes or trinket boutiques, though you will also find some clean, comfortable restaurants where $10 will buy you a delectable dinner. For those willing to spend a little more for finer fare and ambiance, Fosters is at the far end of town, perched atop a picturesque pier.

Now, for those who, like me, prefer the big city and bright lights, Coxen Hole (population 13,000) is only about a 10-minute drive from West End. And there, they have everything (if your idea of everything is not really all that much). There is a real super market – well, maybe not super, but certainly a market – with fresh fruit, vegetables, some meat (mostly fowl), and even a well-stocked candy counter. There is a department store, with clothes, cosmetics, and even (a few) appliances.

And I can personally attest to the fact that Minelli’s hair salon gives as good a haircut as you will get for twice the price as any salon I have ever visited on the U.S. East Coast (and I am pretty darn particular about who trims my curly locks).

The other place I would recommend you consider settling if you venture down to Roatan is Oakridge. Located on the east side of the Island, Oakridge is as quaint a fishing village as you will ever chance to visit. Scaling the hillsides engulfing an inlet, Oakridge at eventide, with the sun settling into the sea evokes an aura of a day well spent, the promise of a peaceful night. Imagine Cabin Cove without Jessica Fletcher nosing around trying to stick you with a murder rap.

Seriously, whether you are on the West End or east side, Keyhole Bay or Coxen Hole, I can personally promise that you are unlikely to find a more pleasant place to live on the face of God’s good earth than Roatan Island.

When you can begin each day with a leisurely jog along a pristine beach, counting the starfish idling offshore and listening to the call of boatbill herons flying above, as I did for four full months, you sense something of what Thoreau meant when he wrote, “Heaven is under our feet as well as over our heads.”

Should you decide to explore Roatan Island for yourself, with an eye to possibly settling there, I am going to take the unusual step, for me, or recommending a realtor to you.

Again, I do so not because there is any financial gain in it for me, but because there is a world of knowledge to gain for you. Janine Goben (rjgoben@globalnet.hn), a Brit by birth, has lived on Roatan Island for over a decade. She will not only show you the best buys, she will also show you a good time. And you will gain a friend in the process. Not a bad bargain, I would say.

So, take my advice: visit Roatan. Enjoy the distinctive island ambiance. Then, sell your home and move back to live out your life in sun-kissed serenity.

Reinventing Your Life? Try Roatan! (Part 2 of 2)

In part 1 of the 2-part article series Reinventing Your Life? Try Roatan!, Janine Goben took us through the thinking process that led her and her husband to uproot their family and move to Roatan. In this second part she shares the process of moving to the island – as the move itself was happening, Hurricane Mitch hit Roatan and went on the cause major damage in Honduras, Nicaragua and Guatemala – followed by getting a house built and becoming generally established in the new home area.

Suffice it to say that the process was sufficiently traumatic and costly that Ms. Goben has now set up a business to help expat newbies avoid making the same mistakes she did. In particular she knows which locals can be trusted.

Last month I told you how my husband and I came to live on the Western Caribbean island of Roatan, our home for the past 11 years. It was quite an adventure, but purchasing the right piece of property was only the beginning ...

Twelve years ago, my husband and I arrived on the Western Caribbean island of Roatan as tourists on a scuba diving vacation; we left as land owners. But we did not leave for long. You can read about our adventures and how we got to that stage of our lives in last month’s July edition of Caribbean Properties and Lifestyle magazine, if you haven’t already done so.

We learned a lot of lessons in the week on Roatan – which culminated in becoming the stunned owners of our piece of paradise ... and, we had no idea how many were still to be learned.

In spite of our inept and self-serving real estate agent, we managed to make some good connections on our own, and my husband was lined up to teach at one of the private, bi-lingual schools here, so we had to make the decision to move right away. Paperwork was completed on our second trip in September 1998, and we moved here at the end of October ... or, that was the plan.

Back home in Denver, we had three teenage boys at home. The oldest was independent and we arranged to rent our 5-bedroom home to him and 4 of his friends (DON’T DO IT!!!); the two younger boys were moving with us. There is so much to do when you decide to relocate to a different country, and the only person we knew to rely on was our realtor on Roatan. Enough said – we handled things ourselves. You will recall from last month’s article that I am now a realtor here, so I can help people avoid some of the pitfalls we encountered.

The first thing we needed to do was to start the process of acquiring residency in Honduras. We had spoken with an attorney while still on Roatan and discovered that the process actually starts in your country of citizenship, or residency, if the two are different. So, we had to go to a Honduran consulate or embassy in the U.S. Unfortunately, Denver does not have one, but as luck would have it, I was scheduled to give a presentation at a conference in New Orleans, so we made an appointment to start our residency there.

It turned out to be quite easy. We already knew what documents we would have to provide, so we made up packets for each of us and took them to New Orleans and appeared before the Consul General to get everything stamped and authenticated. The next phase of the residency process was to have the stamped documents mailed back to us – for some reason it could not be done while we were there – and then take them with us to Honduras.

Getting the household sorted out and packed up was excruciating. We had two yard sales and were pretty proud of ourselves for scaling back our lives to the bare minimum. Many lessons here – all learned after we had been on Roatan for a while. Most importantly, bare minimum in the U.S. is completely different from bare minimum in Honduras. My advice? Leave it all behind except for personal items. Leave the vehicles and buy one in Honduras that was made for the Central American market, not the U.S. market – very different. Second lesson: If you are moving from a place with a different climate, like the dry climate of Colorado, do not bring anything made of wood. I was very attached to my specially made wooden furniture. Not anymore.

Clothes – fortunately, I had the good sense to get rid of all my clothes which had to be dry cleaned – we still do not have a dry cleaner on the island. (NOTE: This sounds like a business opportunity.) You can imagine how difficult it was to get the 2 boys to downsize ... some things you just have to let happen, so all their goods came with us, including skateboards and bicycles, which were never touched once they got here.

Pets – part of our family – they had to come, that was a deal-breaker.

We opted to rent a U-Haul truck and drive it to Tampa, Florida, along with a minivan and a 1978 Ford F150 truck. Jackson Shipping is in Tampa, and they ship directly into Roatan, as does Hyde Shipping from Miami. They were very helpful in telling us how to prepare our cargo for shipping and also for customs in Honduras. So, all our boxes were labeled with their contents and I made a complete list of every item, along with its estimated value. When goods arrive in Honduras, you need a customs agent to handle import taxes, etc. Believe me, it is well worth the fee.

Hurricane Mitch strikes – the first hurricane to strike Roatan in 19 years.

Now it was the end of October, and we arrived in Florida just as Hurricane Mitch was bearing down on the Bay Islands of Honduras. During the drive from Denver, we survived numerous fights between the boys, the escape of one of the cats and the subsequent retrieval of said cat, nights in motels with fights between the boys, meals on the go with fights about which fast food place to eat from, ill-timed bathroom breaks for the boys and the dogs ... we were relieved to see the City of Tampa sign and quickly got to our motel.

The next day we were scheduled to unload our cargo into a container at the shipping company. Yes, we unloaded it all from the U-Haul and loaded it into a container. Our Ford truck was placed in its own container, and the company workers strapped in down ... sort of. Note to self: Check everything yourself, even if it means crawling under a truck.

While we were finishing up the task of unloading and reloading, we got news from the shipping office that the hurricane was going to hit Roatan and the ship was not going to sail until it passed. As it turned out, Hurricane Mitch hit the Bay Islands head on and continued onto the mainland of Honduras, Nicaragua and Guatemala, doing millions of dollars of damage to the infrastructure of those countries and killing thousands in landslides.

A direct hit from a hurricane is rare on Roatan, the previous one being 19 years earlier. We were sick and knew our beautiful property was going to be ravaged of all its fruit trees and the rocks we fell in love with, and on top of that – our dreams had been devastated, too.

So now what to do? We had a rental home waiting for us on Roatan and my husband had a job waiting for him. We had quit our jobs and sold a lot of our stuff and given our home over to renters. The ship would not sail for at least a week, so I flew back to Denver and stayed with my son while my husband, two boys, two large dogs and three cats remained in Tampa to wait for the ship to sail. The reason they waited for the ship is that was their transportation to Roatan, along with our goods.

The ship had 2 small cabins and they all squeezed into one of them for a 3-day trip to our new home. Apparently, it is a trip my husband chooses to lock away in a part of his memory he does not visit very often! The boys were not happy, the cats were seasick, the dogs did not want to leave the cabin and the food was the same as the crew ate, which was totally foreign to the boys, so they did not want to eat. The best decision I ever made was to fly to Roatan after the airport reopened! I think I may have saved the life of a family member by not traveling with them!

In spite of all the events, my family arrived safely after three days of rough sea, and I came down two weeks later. I remember crying as the small plane circled around to the airport, desperately searching for our property, which is very close to the airport, and praying that there might be a tree left standing, indeed, I prayed that the island had been spared. Everyone on the plane was praying for the island and for the safety of their loved ones. It was astonishing to see that there was very little visible damage, and yes, our property was exactly where it should be and the trees were still there, minus a few leaves and branches! Amazing!

And so we settled into our new life. The boys were enrolled in school, My husband started teaching and I surveyed box upon box as we squeezed around then in the tiny house that our realtor had helped us find. Fortunately, we found a much better one a couple of months later and moved into a four-bedroom house on the beach.

So now I needed to find a job. There was no one doing property management and there was certainly a need, so I started handling people’s rentals and other tasks involved in being an absentee property owner. It was very difficult, but I am very thankful because I had to learn very quickly how to get repairs done, who to go to for various tasks, in short, it was a great stepping stone to learn how things should be done.

When we moved to Roatan, neither of us spoke Spanish, but that is not very important on Roatan, as it is a mostly English-speaking island. However, it quickly became apparent that knowing Spanish would be very helpful in business, at least, so I learned some as I went along. One of the things I focused on was being able to read some Spanish, especially legal documents, so I set about teaching myself how to read property documents and corporation documents, since I was now also helping people sell their properties. And, thank goodness, I took the time to learn about these legal documents.

A defective corporation.

I have always trusted people too easily, and probably still do, but I prefer to see the good in others until proved otherwise. And it was proved otherwise in a big way. The “corporation” our realtor’s attorney had set up for us was not a corporation at all. In fact, we had little control over it and could lose our property if the attorney and previous owner decided to take it back. I immediately consulted another attorney and corrected the situation.

We had interviewed several builders and asked lots of questions so we thought we had chosen well when we hired a Canadian builder to build our home. Our realtor suggested him, intimating that a local builder would rob us blind. Ha! When we asked for references, he said he would do better than that, he would show us some of the houses he was working on. Fair enough, we thought, and so we walked around two houses that were incomplete, but the owners had moved in and work was being completed around them ... or so we thought.

Don’t be afraid to ask pointed questions.

Here is the most important question to ask when asking for references: “Show me some work you have completed.” We were looking at homes that the builder has not finished to this day. In short, we hired the builder, signed a contract without having a lawyer look at it and got ripped off ... big time. Trust – don’t get carried away with it, and don’t worry about hurting someone’s feelings by asking pointed questions. Believe me, you are not going to offend an honest person because they will have the answers and the dishonest ones have no conscience anyway ... so, ask the questions.

The builder started doing some work then stopped, and all the materials I had paid him to buy disappeared. Pay vendors directly, not through your builder. I ended up paying for the wood for my house three times and the house is still not finished. Unless I finish it myself, it will not get finished. The builder took all our money, did not do the work and stole all the supplies I had bought to build the house – all of it, from nails to appliances.

Losing everything except a small slush fund they had vowed not to touch.

Of course I rushed to my realtor and told her what happened and asked about a lawyer, since we were new to the island and still did not know all the players (believe me, I know them now, skeletons and all!!). She set me up with a lawyer, so now I had someone to trust ... wrong. It is not uncommon for money to exchange hands and alter the course of even the most straightforward law suit. Yes, imagine the worst ... payoffs, delays, lies ... it all came into play and we lost everything we had except a small slush fund we had vowed not to touch, but which we ultimately used to build another home on our large property.

Ask yourself what you would do in this situation – your answer might help you decide if an overseas move is the right move for you. I will bet most people would cut bait and return “home.” I certainly know a lot of people who have done just that. That was not an option for me. No one was going to crush my dream, and so we stayed. I worked harder and took on more properties, and then things started falling into place for us. I was offered several employment opportunities, and I became the sales manager at Lawson Rock, a very prestigious development on Roatan, when it was starting up. I stayed until we sold the first phase out, then I was courted by International Living magazine and went to work for them as the bureau chief for Honduras, opening two offices in Honduras, one on Roatan and one in La Ceiba on the mainland. My husband also worked with them now, and together we traveled all over the country and went to other countries to give presentations about Honduras to investors and people considering moving overseas.

The goal: spare everyone else the pain and disappointment the author and her husband had endured.

I learned a lot about Honduras as a country and particularly about Roatan and its history. I also put on conferences in Honduras and made a lot of money for realtors who contracted with us to help our readers in purchasing property. It finally dawned on me that although I was having a great time traveling and meeting lots of people, everyone was making money except me, and all my information and research was free, so I became a realtor and vowed to help my clients in more ways that just selling them property. I do not want anyone to go through the pain and disappointment my husband and I endured.

And so we are still here in Honduras! I live on Roatan and my husband has an apartment in La Ceiba, a ferry ride away. We see each other every weekend, sometimes more, and drive to San Pedro Sula every few weeks just to have some time away together. Sometimes we drive to Tegucigalpa, the capital of Honduras, for the weekend. Honduras is an astonishingly beautiful country. My work with real estate keeps me grounded on Roatan, and my husband loves to play golf, which he does every morning in La Ceiba.

At 5:30 a.m. every day he and his dog play 9, 10, 15, 18 holes of golf, however many he wants to play. We belong to the country club there, which allows us to play any of the 7 golf courses in Honduras for free. It costs $500 to join and $400 a year which includes green fees, so he pays nothing more unless he has dinner or a drink at the club, which he rarely does. Guests can play for approximately $10 a day. Play as much as you can stand! The club has a pool and tennis courts, which I enjoy when I go there. The apartment he has is 2,000 square feet, 3 bedrooms, 3 bathrooms and costs $500 a month. His elderly mother lives with him – Roatan is not the place for an elderly person who needs to be near doctors and hospitals but La Ceiba has excellent facilities.

And so our lives are not completely together, but for now it works well for us. I concentrate on my clients here on Roatan and my husband takes care of his mother. We do not know how long this arrangement needs to be in place, but it works for us. Living in Honduras has allowed us so many opportunities that life in the U.S. did not. And we have had some disasters, but we have also been able to reinvent ourselves in a fluid manner. When one path takes a turn, we either moved with it or changed direction. You can do that here. And you do not have to go through all the ups and downs we endured, because I am here to help guide you!

I promise to offer you choices and suggestions. I will not make decisions for you, but I can certainly warn you of potential pitfalls. I can also introduce you to the right people for whatever you need. Living on an island is like living in a small town. People know me and most trust me. I have clearly made a few enemies, but they are the crooks I encountered.

I can help you in many ways and I invite you to join an investment tour we are conducting from August 17th to the 19th where I will show you how to enjoy life here and how to make informed decisions. This is a way to decide if Roatan is for you or not, it certainly is not for everyone. And this is at no risk to you. The tour cost is $200 per person or $350 per couple. If you purchase property through our company up to 6 months after the tour, I will refund the entire tour fee, so you stand to get the information for free!

Let me know right away if you would like to join us this month, and if you cannot make it during this time, I will set up a personal appointment for you, but you will get more out of the organized tour and conference with speakers you can interact with.

I hope I have given you something to think about. I am passionate about this country, warts and all, and I like nothing better than to share it with others. Let me be your person on the ground, and come and visit ... for a few days, or for a lifetime.


British expats are having to go to greater lengths to sever their ties with the land of their birth.

Different from the U.S., British citizens who prove to HMRC’s satisfaction that they are truly “nonresident” can escape much of the UK’s heavy tax burden. Fulfilling the nonresident criteria, however, is becoming a tougher task. One has to do much more than merely count the days that spent in and out of the UK every year. Herewith is some advice by an expert on the whole matter. As he puts it: “The overall pattern of your life must reflect your declared non-resident status and the fact that you have left the UK for the foreseeable future.”

With HM Revenue and Customs (HMRC) using an ever-broadening test to establish whether someone is resident in the UK for tax purposes, British expats are having to go to greater lengths to sever their ties with the land of their birth.

HMRC’s recently rewritten guidance on these matters – booklet HMRC 6 – explicitly emphasizes the broader criteria employed in HMRC’s investigations of residence status. What is more, you have to do much more than merely count the days that you spend in and out of the UK every year to qualify as a true non-resident, as evidenced by the long-running Gaines-Cooper legal case.

“It is all too common for people to go to live abroad only to find out later that they have not in fact left the UK as far as UK tax rules are concerned.”

“It is all too common for people to go to live abroad only to find out later that they have not in fact left the UK as far as UK tax rules are concerned. This leaves the ill-informed vulnerable to attack from HM Revenue & Customs and could lead to hefty tax bills, plus interest and penalties,” warns Matt Coward Director of Private Client Tax Services at PKF Accountants.

Besides income tax, there are a number of other tax traps that could ensnare the unwary expat, even if they have been abroad from some considerable time.

Besides income tax, there are a number of other tax traps that could ensnare the unwary expat, even if they have been abroad from some considerable time. These include National Insurance contributions, which can continue for a year after leaving the UK; capital gains, which can be captured upon a temporary resident’s return to the UK if they have been out of the country for less than five years; and inheritance tax, for which an emigre remains liable for three complete calendar years after they have left the country.

“Just staying overseas and counting days spent in the UK is not enough. It is essential to be able to demonstrate a decisive break.”

“Recent Court decisions on residence have generally gone against the taxpayer and HMRC is actively pursuing cases where, in its view, the taxpayer has not done enough to demonstrate that they have ceased to be UK resident,” Coward continues. “The key to proving that you have become non-resident for tax purposes is to sever as many ties with the UK as possible – just staying overseas and counting days spent in the UK is not enough. It is essential to be able to demonstrate a decisive break.”

PKF recommends that expats take the following measures to ensure that they truly severe their ties with Blighty as far as the Revenue is concerned.

UK property UK business Other UK connections Taxes Finances Cars Your new country of residence “The overall pattern of your life must reflect your declared non-resident status and the fact that you have left the UK for the foreseeable future.

Coward concludes: “The overall pattern of your life must reflect your declared non-resident status and the fact that you have left the UK for the foreseeable future. Maintaining significant links with the UK is dangerous and could prove costly, as HMRC will argue that you have not quit the UK. The best way to keep your taxes down is to cut most UK ties when you go overseas. That does not mean you can never come back for events or to see your family, but just that you need to establish yourself conclusively as non-resident before you start making such visits.”


A “bittersweet” moment for the BVI.

The British Virgin Islands has an agreement in principle with New Zealand which will put it over the threshhold for number of bilateral data-sharing pacts necessary to escape the OECD’s “grey list” and achieve “white list” status.

The BVI’s signed a tax information exchange agreement (TIEA) with the U.S. in 2002. At the time the agreement was a pioneering example of that sort of deal. TIEAs have now become standard fare. Of course the “exchanges” are lopsided: The BVI “exchanges” its information on its U.S. taxpayors for U.S. data on BVI taxpayors. The content of significance contained in the later amounts to somewhere between zero and infinitesimal.

The BVI says it will sign a data sharing pact with New Zealand, winning the Caribbean money center a place on the global “white list” of countries committed to catching tax dodgers.

The G20 group of leading industrialized and emerging market countries agreed in April to crack down on countries that failed to help out in cross-border tax evasion cases. Countries that had not signed at least 12 bilateral tax information exchange agreements in line with standards set out by the [O.E.C.D.] were put on the OECD’s “grey list”.

The BVI signs its 12th pact on Thursday (August 13), with New Zealand, so that it will achieve “white list” status. It will also help BVI counter any accusations of being too soft on tax evaders.

Sherri Ortiz, executive director of BVI’s International Finance Center, said it was a “bittersweet” moment. The island has pushed for several years to sign enough bilateral deals after its first agreement, with the United States, in 2002, Ortiz said. “At that time, tax information exchange agreements were not heard about and not encouraged as people saw them as something that opened up a Pandora’s Box and hampered your client relationship,” Ortiz told Reuters.

The tiny country of 25,000 people has some 450,000 foreign companies registered there, helping to make the wider Caribbean region the world’s 4th largest banking center.

Separately on Tuesday Britain and Liechtenstein signed a similar agreement. [See story in “Short Takes” below.]

Ortiz said the G20 pledge in April has made other countries more willing to sign bilateral deals and BVI expects to seal a few more in coming months, starting with the Netherlands. BVI has already supplied tax information to the U.S. but not yet to Australia and the United Kingdom, two countries is sealed agreements with in late 2008.

The global financial crisis sparked a slowdown in company registrations up to about four months ago. “Since then we have seen a constant improvement in the numbers once again. We are seeing certain areas of the economy from various jurisdictions coming out of recession and there is quite a lot of evidence we have seen the worst of it,” Ortiz said.

Much of the rekindled activity is in the funds market and in the use of BVI as a home for holding companies to conduct business elsewhere or for sophisticated operations such as mergers or joint ventures, Ortiz said.


Aims to to stop U.S. affiliates of foreign-based reinsurance entities from expatriating “excessive amounts of reinsurance to strip those premiums out of the purview of the U.S. tax system.”

Buying insurance from related offshore entities is one of many ways of moving profits from onshore to offshore. As U.S. Congressman Richard E. Neal bluntly characterizes it, the idea is to move profits “out of the purview of the U.S. tax system.” In effect companies self-insure while dedecting the premium they pay to “themselves.” Reinsurance is the preferred policy type for the strategy – companies can reinsure many different primary policies by bulk-ceding blocks of premiums.

We would first note that this arrangement is entirely legitimate. It is not pure form, containing a full measure of economic substance. Any self-insuring company will eventually sustain deductible losses, e.g., property damage or liability claims. The juggling of entities to effect premium deductions merely smooths out the loss experience of the insurance buyer. The the degree it is desirable for accounting to reflect economic reality this is good. Of course with insurance being the ultimate non-physical product – money – it is easy and therefore tempting to run the operation from a low-tax jurisdiction.

Neal proposes to put a stop to this alleged outrage via a bill – stimulated by “concerns” expressed by U.S.-based reinsurance companies – which would disallow deductions for “excess non-taxed reinsurance premiums” paid by U.S. risks to offshore affiliates. According to Neal, the market share of direct premiums written by non-U.S. groups has grown from 5.1% to 10.9%. Even more significantly, during that time the percentage of (primary policy) premiums ceded to non-U.S. companies has grown from 13% to 67%. No wonder the domestic insurers are “concerned.”

We have commented on similar efforts to tax offshore affiliated earnings many times. Every government worker should obey the commandment: “Thou shalt not engage in static tax analyis.” Implement the bill and companies will adjust. “Affliliates” will become informal rather than formal. Products which act like insurance but do not fit the formal definition in the the U.S. Code will appear. Those being drained have more imagination, smarts, and incentive than the bureaucrats.

Congressman Richard E. Neal has resubmitted legislation in the House of Representatives that seeks to curb tax advantages for reinsurance operations based offshore.

The bill, H.R. 3424, would amend the Internal Revenue Code to “disallow the deduction for excess non-taxed reinsurance premiums with respect to United States risks paid to affiliates,” and was referred to the House Committee on Ways and Means on July 30.

Neal, who chairs the Ways and Means Select Revenue Measures subcommittee, introduced the same bill in the previous Congress last September, but the legislation did not progress beyond the committee stage.

“I am pleased to come before the House to introduce legislation ending the use of excessive affiliate reinsurance by foreign insurance groups to strip their U.S. income into tax havens, avoid tax, and gain a competitive advantage over American companies,” the Massachusetts Democrat stated during his floor statement. “In the past, I have offered a number of bills to limit offshore tax avoidance. Today’s bill follows on that trend but focuses specifically on one area of the financial services sector.”

Some members of Congress are arguing for a change in the law because foreign insurance entities, unlike their domestic competitors, can use related party reinsurance to reduce their tax liabilities on investment income. This may be accomplished when a U.S. subsidiary writes the initial insurance policy and then reinsures the policy to its foreign parent corporation, or related party, which is located in a low or no-tax jurisdiction. The U.S. subsidiary deducts the premium and the foreign parent company does not pay U.S. or local tax on the premium while earning investment income subject to low or no tax.

The Senate has been studying similar proposals that seek to ensure that offshore reinsurance entities are taxed “appropriately,” so as to limit any competitive advantage they may currently hold over American companies, and last December, Senate Finance Committee Chairman Max Baucus released a discussion paper addressing “related party” reinsurance, especially cases where a parent company headquartered offshore reinsures a policy written by its U.S. subsidiary.

While measures are already in place under Section 845 of the U.S. Tax Code to permit the Treasury to reallocate items and make adjustments in reinsurance transactions in order to prevent tax avoidance or evasion, Neal argues that these have failed to stem the offshore tide.

According to Neal, since 1996, the amount of reinsurance sent to offshore affiliates has grown from a total of $4 billion ceded in 1996 to $33 billion in 2008, including nearly $21 billion to affiliates in Bermuda, where corporate tax is 0%, and over $7 billion to Swiss affiliates. “Use of this affiliate reinsurance provides foreign insurance groups a significant market advantage over U.S. companies in writing direct insurance here in the U.S.,” he said.

Neal also notes that in the last decade there has been a doubling in the growth of market share of direct premiums written by groups domiciled outside the U.S., from 5.1% to 10.9%, representing $54 billion in direct premiums written in 2006, with Bermuda-based companies representing the bulk of this growth, rising from 0.1% to 4%. During this time, the percentage of premiums ceded to affiliates of non-U.S. based companies has grown from 13% to 67%. Switzerland is also proving popular for foreign reinsurers due to “the security of a network of tax treaties, among other benefits,” Neal observed.

A coalition of U.S.-based insurance and reinsurance companies was formed “to express their concerns to Congress.”

“Recently, a coalition of U.S.-based insurance and reinsurance companies has been formed to express their concerns to Congress,” Neal said, referring to these trends. “With more than 150,000 employees and a trillion dollars in assets here in the U.S., I believe it is a message of concern that we should heed.”

Under H.R. 3424, the excess amount will be determined by reference to an industry fraction, by line of business, which will measure the average amount of reinsurance sent to unrelated parties by U.S. companies. The bill allows foreign groups to avoid the deduction disallowance by electing to be treated as a U.S. taxpayer with respect to the income from affiliate reinsurance. “Thus, the bill merely restores a level-playing field, treating U.S. insurers and foreign-based insurers alike,” Neal explained.

In addition, the legislation provides the Treasury Department with powers to carry out or prevent the avoidance of the provisions of this bill.

”My colleagues may be thinking that this sounds similar to another provision in the code, and they would be right,” Neal said. “The tax code currently tries to limit the amount of earnings stripping – that is, sending U.S. profits offshore through inflated interest deductions – by disallowing the interest deduction over a certain threshold. In the reinsurance context, U.S. affiliates of foreign-based reinsurance entities may be sending offshore excessive amounts of reinsurance to strip those premiums out of the purview of the U.S. tax system. My bill limits the deduction for those premiums to the extent the reinsurance to a related party exceeds the industry average.”

Ultimate incidence of higher taxes may fall on consumers.

However, according to some in the insurance industry, America’s consumers may pay a high price for a level playing field, in the form of higher insurance premiums. Earlier this year, the Coalition for Competitive Insurance Rates (CCIR) released a study carried out by the Brattle Group, a Massachusetts-based economic consulting firm, which concluded that Neal’s proposals would cost consumers an additional $10-12 billion per year to maintain their current insurance coverage.

Legislation “represents a punitive and unnecessary tax aimed at benefiting some competitors at the expense of others.”

“We urge members of Congress to reject this legislation, as they have twice before,” said Bradley Kading, president of the Association of Bermuda Insurers and Reinsurers, a CCIR member. “Only a handful of very large, very profitable U.S. insurance companies would benefit from this bill. In contrast, the economic data make clear that American consumers and businesses would pay a steep price if Representative Neal’s proposal becomes law. This legislation represents a punitive and unnecessary tax aimed at benefiting some competitors at the expense of others.”

The Competitive Enterprise Institute, a free market think tank, is also dismissive of the proposals, maligning Neal’s bill as an “awful, awful idea.”

The CEI says that the Neal bill would impose a special 25% tax on the offshore affiliated reinsurance – transactions which already taxed under a federal excise tax – and would reduce the supply of reinsurance and increase insurance rates. “This is the last thing that disaster-prone homeowners need,” said Eli Lehrer, Director of CEI’s Center for Risk, Regulation, and Markets.

Lehrer also believes that the legislation would not raise any significant amounts of tax revenue for the Treasury.

“Those who hope for a revenue windfall are hoping in vain. If this bill becomes law, it is likely that tax revenues will probably fall as companies stop using offshore affiliated reinsurance,” he concluded.


Cash-strapped companies have found a way to get more from their charitable bucks.

Companies with more labor capacity than work, but who are reluctant to downsize, are putting their surplus labor to work in creative ways. Forbes notes a trend where pro bono work by architects, lawyers and corporations has been growing during this recession. This “enlightened opportunism ... is a way to put idle employee hands to work, to network and to get greater bang from a firm’s charitable bucks.”

This sounds like an intelligent approach to things, especially when the company employees have undergone a lot of firm-specific training, explicitly or by osmosis, or otherwise demonstrated that they are a good fit with everyone else.

As Forbes notes and concludes in an accompanying article: “Law firms have long realized that pro bono work, when done right, can be a way to showcase legal brilliance, drawing in more business than the pro bono case costs the firm. Successfully establishing means to quantify pro bono’s hidden business benefits to large corporations could ultimately be the key to making volunteerism a routine part of the skilled worker’s corporate duties.”

In March, Seattle’s cast architecture and the nonprofit Urban Sparks developed a pitch for a $35 million community center in the city’s quirky Fremont neighborhood, known for its statues of Lenin and an 18-foot troll crushing a Volkswagen Beetle. The proposed Fremont center would offer environmentally friendly subsidized housing, a health clinic and day care.

With paid work slow at the 4-man architecture firm, the volunteer project fit in nicely, and Matthew Hutchins, a Cast principal, is hoping it might eventually lead to a paid design contract for the center. “We view pro bono, besides giving back to the community, as a means to do research and development and market our firm,” he says. Cast’s past pro bono projects – a shed for a community garden and a public park – have helped it develop contacts and expertise in new areas. The public park, for example, got Cast on a preferred provider list for the city’s contracts.

Pro bono work by architects, lawyers and even corporations has been growing during this recession. That is in contrast to past downturns and seems to reflect an enlightened opportunism. It is a way to put idle employee hands to work, to network and to get greater bang from a firm’s charitable bucks.

The Pro Bono Institute in Washington, D.C., which coordinates and studies attorneys’ volunteer work, estimates that lawyers at big firms increased their volunteer hours by 13% in 2008. One reason is that firms have discovered the virtue of deferred job offers. Having lined up the most desirable law school graduates, they do not have enough business to justify their $160,000 starting salaries. So they typically pay the recruits 1/3 of that to go off and do good deeds until billings recover. The institute estimates 1,000 novice lawyers are now occupied this way.

Corporations have been stepping up the volunteer pace as they cut dollar contributions. A study by Giving USA and the Center on Philanthropy at Indiana University says that corporate giving fell an inflation-adjusted 8% in 2008 to $14.5 billion. While it is doubtful pro bono has made up for the decline in corporate giving, it clearly is on the upswing.

Capital One, Pfizer, Gap, Target, GE, IBM and Merck have all recently started formal programs to give paid employees time for volunteer work. The Taproot Foundation, which was formed to match individual professional volunteers to nonprofits, last year took note of the trend and created the Pro Bono Action Tank to support large corporate programs. “Because of the economy, those companies that are engaged in pro bono services are finding they can give a lot more, even though their budgets have been cut back,” says Jamie Hartman, the Action Tank’s executive director. Companies take varied approaches. Capital One lists its core skills – everything from finance to branding to information technology – and then invites nonprofit organizations to select from that menu the services they need. Gap store executives have been advising youth-focused foundations on how to improve their personnel management.

Some companies are now using volunteerism to magnify the impact of their donations. Target has long made book-buying grants to school libraries. But beginning in 2007 its building division started getting involved in rehabbing the libraries, too. This year, with advice from the Heart of America Foundation, Target chose 16 schools (out of 164 that applied) for library makeovers, complete with new shelving, furniture and books. Target will not disclose how much each rehab costs but says its mass production experience – it is opening 76 new stores this year – holds down makeover costs. In the final week of construction as many as 300 Target employees descend on a school.

Impact? The efforts get a lot more attention for Target than a book shipment. More important, Belinda Green, principal of the Maxfield Magnet Elementary School in St. Paul, Minnesota, says book borrowing by her largely African-American students has increased 10-fold since the Target-renovated library there reopened in April.

“Pro bono work is about solving real problems and issues in the world,” says Laysha Ward, president of Target’s community relations.


At least something good has come out of the economic crisis. It blew off the purple robes that clothed economists and exposed their naked flanks.

There are enough exposés of the ludicrousness of what passes for thinking from the government and economics profession that one can be choosy. We choose those who do it in an entertaining manner. Bill Bonner can do that in his sleep. Here is his latest.

Still, they do not deserve the beating they are getting in the press – with snide remarks and sarcastic comments; they deserve better. A beating with sticks!

Even Alan Greenspan admitted he had “found a flaw” in his own thinking. We will have to imagine the giggles from the back of the room – if anyone had been awake. If was as if Stalin had confessed to being rude to his mother or Bernie Madoff copped a plea for shoplifting. The mea was fine, but the culpa did not seem to measure up to the facts. He, more than any living human being, was responsible for the biggest financial debacle in history. You had hope he would be a gentleman about it and hang himself.

Meanwhile, the queen of England visited the London School of Economics and had a question: Why were economists not on top of this thing?

They replied to this question last month. In a 3-page letter, they avoided the simple truth – that their trade was no more reliable than fortunetelling and marriage counseling. The letter claimed that a “psychology of denial” prevented government and financial eyes from seeing the catastrophe in front of them. It was “a failure of the collective imagination of many bright people,” they said.

In fact, it was the exact opposite – imagination run wild. Economists imagined a world without yesterday or tomorrow ... a world in which you could run up debts forever and never have to pay them back.

Last week, Timothy Geithner promised the Chinese that the U.S. economy would recover thanks to demand from the private sector. That was his way of reassuring America’s biggest creditor that the public sector would not continue to run huge deficits – practically an outright lie. But it is one thing to stiff the Chinese; it is another to stiff time.

Adjusted for inflation, the U.S. consumer’s earnings barely rose from the ‘70s. By some measures, he had actually less disposable spending power in 2007 than he had in 1973. And now his income is going down. The June number reflected the biggest drop in income in 4 years. Salaries and wages fell 0.4% in June ... the 9th drop in the last 10 months. How is it possible for him to spend more?

We pose the familiar question only to set up an unfamiliar answer. In the past, the consumer reached into the future. In many cases, he reached beyond the future, and into Never Never Land. Consumers spent money they had not earned yet ... thus bringing forward purchases that should have been made years later. The accumulated effect of this was to add $35 trillion in extra spending to the world economy – from America alone – over the course of the great credit expansion, 1945–2007. That is why we have a depression now – because consumers already spent what they would normally be spending now.

Time always gets even. Now, it is the past that is doing the reaching. The automobile bought in 2006 ... the house bought in 2005 ... the vacation taken in 1999 – the ghosts of yesteryear spending reach for Americans’ paychecks. Of course, in some cases, consumers spent more than they could reasonably expect to pay back – ever. They reached so far the poor ghosts are disappointed. Lenders realized that they would never get their money back, which is what led to the credit crunch and the collapse of Wall Street. Of the big five – Bear, Lehman, Goldman, JPMorgan and Merrill – only two survived intact. And we know now that Goldman only survived because Henry Paulson, former CEO of Goldman, then Treasury Secretary, arranged a hidden bailout. He had the government step in to save AIG, which owed Goldman $13 billion.

From one scam to another ... from bailing out Wall Street to bailing out the entire world economy, the more stimulus programs fail to bring a recovery, the more economists call for more stimulus.

What are they thinking? Since neither the private sector nor the public sector has any savings from the past, additional demand from either sector must be borrowed from the future. (Setting aside “quantitative easing” ... or Zimbabwe-style stimulus ... an even bigger fraud.)

The purest illustration of how this works is in the popular “cash for clunkers” programs. Instead, of letting the consumer buy a new car when he is ready, the feds give them money to buy now. So, he buys in 2009 and not in 2010. What good is accomplished? It is as if they did not expect 2010 to ever arrive ... as if they thought they could stop the sun and the seasons ... and the Chinese ... forever. Like moths in amber, their wings will never tatter ... nor will their faith flag. The dollar will always be strong. U.S. bonds will always be in demand. And the future will never arrive.

But the more economists try to stitch up the future; the more it gets away from them. After the 2010 sales have been moved forward to 2009, they will have to reach into 2011 ... and then 2012 ... all the way to the end of time.


Liechtenstein Opens Gate in Tax Deal with Britain

But an association of trusts in the principality vowed to “utilize all our rights” to oppose the accord.

The agreement has an apparent loophole in that account holders have a chance to move their funds elsewhere and anonymously – for all the good that may do them. The deal will affect about 5,000 British investors with an estimated £2-3 billion pounds ($3.30 billion) in Liechtenstein bank accounts, according to the Financial Times. British clients voluntarily disclose their Liechtenstein accounts would be offered “favourable conditions” in the settlement of their tax arrears. Trust them.

OECD spokesman Jeffery Owens claims the agreement indicates that “the era of bank secrecy as a shield for tax evaders is coming to an end. ... This confirms Liechtenstein’s willingness to position itself as a legitimate financial center which is prepared to compete on the basis of the services that it provides.”

Of course what constitutes “legitimate” in the OECD’s and HMRC’s eyes may differ from the perspective of, e.g., financial center clients.

Germany Unveils New Anti-Offshore Legislation

Higher taxation and withdraw tax allowances on companies operating in non-compliant countries.

Germany has underlined that it will continue its tough stance on non-compliant “tax havens” into 2010. German Finance Minister Steinbrueck has announced that the government has drafted proposals to impose higher taxation and withdraw tax allowances on companies operating in countries that it considers are not cooperating in the shift towards transparency and information exchange. The new law is expected to enter into effect from 2010, providing it gains parliamentary approval.

Steinbrueck stated that the law aimed to penalize companies that failed to disclose financial information to the German government.

Steinbrueck also disclosed that a German delegation would travel to Berne for discussions with the Swiss government this month. Switzerland has concluded 12 Tax Information Exchange Agreements but will not be deemed to be a territory that has “substantially-implemented” the agreed standards until the treaties are ratified and brought into effect.

Stanford Requests New Prison Cell with Air Conditioning as His $7 Billion Fraud Trial Is Delayed

Texas financier R. Allen Stanford wants to be moved from a private prison because he has been without air conditioning and shares a cell with up to 10 other inmates. Stanford is jailed on charges of operating a $7 billion Ponzi scheme. He has been held at Joe Corley Detention Facility since being arrested and brought to Texas from Virginia last month.

Stanford’s attorney Dick DeGuerin says in court filings that conditions are “intolerable.” He says Stanford’s cell was without power for part of last week and did not have air conditioning for at least a week. The facility is run by Boca Raton, Florida-based GEO Group. Spokesman Pablo Paez declined to comment on the prison’s conditions.

The Houston Chronicle reports DeGuerin is requesting Stanford be moved to the Federal Detention Center in downtown Houston. Meanwhile his $7 billion fraud trial in Texas has been delayed by a federal judge in Houston.

Stanford, who denies all wrongdoing, faces life in prison if convicted of the most serious of 21 counts of conspiracy, fraud and obstruction stemming from what the government says was a Ponzi scheme involving the sale of certificates of deposit through Antigua-based Stanford International Bank Ltd. Dick DeGuerin, Stanford’s attorney, declined to predict when a trial might begin. He previously said it might take him a year to prepare the case for trial. Stanford is being held without bond in a federal jail in Conroe, Texas, while awaiting trial.

Stanford will be tried alongside Chief Investment Officer Laura Pendergest-Holt, Chief Accounting Officer Gilberto Lopez and Mark Kuhrt, his global controller, all of whom have entered pleas of not guilty. Antigua’s former top banking regulator, Leroy King, has been accused in the same case of accepting bribes and participating in the scheme. He has not appeared in a U.S. court.

Stanford security employee Bruce Perraud, who was charged in Miami with destruction of evidence, has a trial date of August 24. He too has pleaded not guilty. Stanford’s 2nd-highest-ranking executive, finance chief James M. Davis, was charged in a separate criminal complaint that accuses him of participating in the fraud. [See posting here.]

UK Gaming Company Exodus Begins

Gross Profits Tax, VAT, Betting Levy, corporate income tax add up to too heavy a burden.

We find it amazing (not really) how obtuse governments are when it comes to taxation. Static analysis is clearly inappropriate even without easy mobility by the target. Those darned humans always adjust to thwart any best laid plans. But when attractive competitive tax regimes in a viable alternative jurisdiction are so clearly available, heavy tax impositions constitute slow fiscal suicide.

In last week’s digest we posted a piece concerning Costa Rica’s considering imposing a new tax on online gambling companies located there. The article recommended that Costa Rica learn from Great Britain’s mistakes, which resulted in the ongoing exodus covered here. As predicted, Ladbrokes has announced it will follow William Hill to Gibraltar.

Ladbrokes has announced that it will follow suit with William Hill and relocate to Gibraltar by the end of the year, in order to maintain international competitiveness.

Currently, Ladbrokes’ sportsbook operations are based in London and incur 15% Gross Profits Tax and 15% VAT on input costs, as well as corporation tax. British-based bookmakers must also pay a Horserace Betting Levy of 10% of profits on British horseracing. Ladbrokes expects that moving offshore will substantially reduce its tax liabilities – offshore regimes typically offer a corporation tax rate of between 1% and 2%, with no requirement to pay the UK’s horseracing levy.

Christopher Bell, Chief Executive Officer of Ladbrokes, commented: “Our award winning sportsbook is the biggest in the UK market but faces aggressive competition from offshore operators who hold a very significant cost advantage by operating from low tax jurisdictions. Operating from the UK has become unsustainable and we will relocate by the year end.”

The announcement was disclosed within Ladbrokes half-year results, released August 6, which noted that profits had declined due to slower growth and increasing levels of competition from offshore operators.

While Ladbrokes will relocate its online operations to Gibraltar, it will retain its call center operations for telephone betting in the UK. “A number of cost reduction measures are being taken to safeguard the future of the business including redeploying staff and utilising new technology to reduce costs per call,” noted Ladbrokes interim results.

It would appear that William Hill, which on August 4 announced its decision to move offshore, has triggered a mass exodus. Betfair, another online UK gambling company, in an interview with The Guardian newspaper, underscored that it had not ruled out a similar move, noting that the UK’s tax regime was “not ideal” and put it “at a competitive disadvantage.”

U.S. Drops Further Behind in Corporate Tax Race

Only Japan has higher corporate tax rate among OECD countries.

The trend towards lower corporate tax rates continued in several countries around the world this year, distancing the United States even further from the pack with its combined federal and state rate of 39.1%.

Canada, the Czech Republic, South Korea, and Sweden all cut their corporate tax rates in 2009, and the U.S. remains 2nd only to Japan for the highest corporate tax rate among nations in the Organization for Economic Cooperation and Development.

A Tax Foundation analysis of new OECD data finds that 2009 marks the 12th consecutive year in which the U.S. corporate tax rate is higher than the average rate among non-U.S. OECD nations—and roughly 50% higher than that of a mid-ranked country such as Sweden.

“America’s high corporate tax rate should be a red flag to U.S. lawmakers worried about the country’s flagging economic growth, slow wage growth, and our overall global competitiveness,” write Tax Foundation President Scott Hodge and Summer Fellow André Dammert in the report “US Lags While Competitors Accelerate Corporate Income Tax Reform.”

South Korea enacted the largest rate cut this year of 3.3% points, followed by Sweden and Luxemburg, which cut their rates by 1.7% and 1%, respectively.

Even the UK, which has seen a flurry of corporate defections over a perceived lack of certainty in its corporate tax regime, is transitioning toward a more “territorial” tax system that taxes firms only on the profits earned within the country’s borders, the Foundation finds. By contrast, the Obama administration is seeking to raise more than $220 billion in new corporate taxes by making the U.S. world-wide tax system tougher.

Dubai International Financial Center to Become Payment Processor for Banks and Clients

Once done a transaction will not be revokable, unlike under the previous system.

DIFC is aiming to become a payment processing centre for banks and their customers. The announcement follows the introduction of a law to help make automated payments between parties in real time, the DIFC said in a statement ... The first such law in the Gulf region, it paves the way for transaction processing at the DIFC for banks and their customers in Dubai and the wider Middle East.

The law will also help GCC-based companies to make and receive “legally sound payments” without having to use third parties that are often based outside the region and in different time zones. “The new system will execute all interbank transactions including cheques, credit cards, securities or shares, and it will be regulated by the Central Bank of the UAE,” said Wissam Dagher, a senior associate with the law firm Habib al Mulla in Dubai. ...

Dr Nasser Saidi, the chief economist at the DIFC, said the system would ensure payments went through. “Once the transaction is done it cannot be revoked, which could have been a possibility under the old system,” Dr Saidi said.

Established in 2002, the DIFC is home to more than 800 investment banking, brokerage and advisory firms.