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LOOK TO THE HONDURAN MAINLAND FOR THE CHEAPEST BEACH PROPERTIES IN THE CARIBBEAN
“Suban las manos, por favor.” Obediently, we raise our hands as the guard at the door frisks us. Once again, we stand out as visitors, as we have no pistol to hand over. “Pasen,” he says, and we proceed to our table, admiring the pleasant ambiance of this open-air, seaside restaurant. As we place our orders, we watch while many of the customers turn in their sidearms, which are neatly stored in a set of lockers by the door, to be returned upon leaving. (I think I ruined our image by not having a .44 magnum, like a “real” American would.) Was this unsettling? Frankly, no. To the locals, it was no more remarkable than having to turn off your cell phone at a concert. The people in the restaurant were courteous and friendly, and everyone was having a good time on this Friday night.
This is La Ceiba, a Caribbean port city on the northern coast of Honduras. Home to more than 100,000 people, it is a town that has everything – a pleasant central square, a large, modern mall, new supermarkets, food markets, a cinema, fast food restaurants, and waterside dining. They even have a North American-run real estate office right on the town square. The lush cloud forest is just a few miles to the south, with an awesome peak known as Pico Bonito overlooking the region. The Caribbean beaches stretch from La Ceiba for more than 100 miles to the west and almost 300 miles to the east. This is why so many expats come to the Honduran mainland, for the beach properties that you can still find for less than in the rest of the Caribbean, including nearby Roatan.
In the coastal region, the real estate market is a mixed bag. Buyers here are Hondurans, North Americans, and Europeans. There is a variety of properties on offer. A little more than a mile east of the harbor in La Ceiba, there is a three-bedroom, two-bathroom, octagonal concrete house for sale at $149,000. It has great sea and mountains views, and comes with deeded access to the beach out front. On the road between El Progresso and Tela, there is a 90-acre mountain property with a solar-energy system, valley view, African palms, and coffee priced at $150,000.
One of the finest attractions for those buying on the north shore are the cays (pronounced “keys”) and islands within easy boating distance of the coast. Nine miles offshore from Nueva Armenia, the two islands of Cayos Cochinos sit like jewels in the turquoise waters, surrounded by a small group of cays. Here you will find some of the world’s best fishing, snorkeling, and diving so good that dive trips even come here from Roatan. Just a few miles away from Cayos Cochinos, we explored a cay called Chachauati, and not far from Chachauati sits Upper Long Cay, an island of about 4 acres ringed with sparkling narrow white-sand beaches and clear turquoise waters. There are five, ¼-acre lots available here (of an original 10 lots) for an asking price of $94,000 each. Except for working cell phones this island is “off the grid”, as evidenced by the solar panels and water collection systems on the two homes already built here.
There is more to mainland Honduras than the Caribbean coast, and this country of almost 7 million people is one of the most diverse you will find anywhere. Honduras – not Costa Rica – is the most forested country in the region, with 47% of its land still a wooded area. Its rushing rivers draw whitewater rafters from around the world, and the cloud forests host a staggering array of flora and fauna. The climate is temperate in the mountains, and subtropical in the coastal areas. A well-maintained highway takes you from the lowlands into the sierra. Tegucigalpa (the capital) has some exclusive and stately neighborhoods – comparable with any you would see in the world – as well as areas of poverty, crime, and ramshackle buildings. But the city has everything you could want, from exciting nightlife to fine restaurants, culture, malls, and an international airport. The food in Tegucigalpa – and throughout mainland Honduras – is great. Would I live in there? Honestly, no. There are other Third World cities that would be higher on my list. But there were some surrounding areas where I would be glad to settle.
Not far from Tegucigalpa in the Valle de Angeles (Valley of Angels) is the small town that bears the valley’s name. This artisan village – with its souvenir shops, coffee houses, and stately colonial church overlooking the town square – is surrounded by 100-mile views of the most dramatic mountain scenery. Like much of the mountainous areas around Tegucigalpa, the tall pines and hills are reminiscent of the Rockies or the Sierra Nevadas around Lake Tahoe. The altitude of about 5,000 feet provides for moderate weather year-round. At first, I assumed that property prices would be high, given the beauty of the valley and its proximity to the nation’s capital. But, I found them to be reasonable. For example, a large, 2,400-square-foot home in El Chimbo, with three bedrooms and two bathrooms, a high front porch, as well as mango, banana, coffee and lemon trees, was listed for $70,000.Link here.
PANAMA: SO HOT RIGHT NOW
Retire in paradise for pennies a day! Could there be any sweeter-sounding words to a baby boomer pondering an exit from the fast lane? The first wave of 79 million U.S. boomers is turning 60 this year. Boomers are retiring earlier than did previous generations. They have unparalleled spending power. They are looking for the Next Great Place. And some tour operators are happy to show them the way. Which is what has brought Darby Ragle, 45, and Tom Singer, 57, of Vienna, Virginia, and 50 or so other kindred souls to these red-tile-roof model homes in a treeless gated community on the outskirts of Panama City. “We’re trying to get away from the politics. The rat race,” says Singer, who is retired from IBM. “And terrorism,” says Ragle, the owner of a printing business who plans to retire in five years. “Prices are going up. There’s this feeling that we’ve got to do it now.”
Indeed, there is a sense of urgency among many of the 160 or so mostly North Americans attending a three-day “Live & Prosper in Panama” seminar. This trip is not about visiting the Panama Canal, hiking the jungle or lazing on the beach. Instead, they will be riding up construction elevators for a peek at condominium units still in a mostly skeletal state, surveying yet-to-be-constructed golf course communities, and hearing sales agents telling them Phase I is already sold out … but they are taking names for Phase II at 5% off until Friday for conference attendees!!! International Living, the seminar/tour’s sponsor, is not the only company delivering potential investors to foreign developers. But it is arguably the largest, with 70,000 subscribers to its monthly newsletter, and offices in five countries. Besides membership and seminar revenue from attendees and conference exhibitors (bankers, insurers, real estate agents and the like), International Living earns “referral fees” when attendees purchase real estate. The “Live & Prosper …” events are offered about 30 times a year in 12 countries.
And one of the hottest spots now is Panama. The promise? Live better for less. The country is supplanting Costa Rica as the Central American country where retired North Americans are seeking their place in the sun. An attorney seminar speaker explains the ease of getting a “pensioner’s” visa and the tax advantages to be had here. A physician announces that medical care is good and drugs cost about 50% less than in the USA. An American expat real estate agent says he lives like a local (albeit in a 4,000-square-foot house) on about $500 a month. Attendees learn that Panama is fairly safe. Panamanians like Americans (never mind that military action in 1989 against former leader Manuel Noriega). You do not have to bother with changing money, because the currency is the U.S. dollar. In short, it is different here, but not too different.
There is no definitive count of Americans who have retired to Panama, but one U.S. Embassy estimate says 25,000 to 30,000 are living there. It is just part of a larger U.S. population shift to Mexico, Central America and the Caribbean, says Bob Adams. His company, New Global Initiatives, sponsor of a recent study by the Migration Policy Institute, estimates that at least 1 million Americans live full- or part-time in the region. One booming retiree haven in Panama is Boquete, a town in the highlands near Costa Rica. The coffee-growing area has been transformed in recent years by housing developments designed to appeal to North Americans. In Panama City, a forest of high-rise condos crowd Panama Bay’s shorefront, where ships waiting to transit the canal appear ghostlike in the distance. Construction cranes dominate the landscape, and newer buildings sport amenities such as indoor meditation gardens and ornate balconies that look like wedding-cake trim.
There are visible impediments to living here. Still, to hear it from the sellers, demand is outstripping supply. Three years ago, 70% of the customers of one developer’s condos were local, says Manlio Vasquez of Empresas Bern, a developer of condos and hotels. Now 90% of clients are North American and prices have doubled in some spots. At any rate, there is rarely a finished project to look at. Attendees eye blueprints and architectural models and use their imaginations. Idaho real estate developer Joe Russell, 50, has come to the conference to scout investment property that he will eventually live in. “I like the political climate, the lack of hurricanes, the U.S. dollar as currency.”
On the tour there are dreamers and there are planners. And if some are still vague about the shape and price of paradise, others have a clearer vision. After sitting through the three-day seminar, Robert Prager, 54, and Munsell McPhillips, 49, both semi-retired engineers, are taking off on their own for a week to scour the countryside. Hurricane insurance on their home in Florida doubled last year, and not only do they want to live where fixed costs are more predictable, but they also want to do something idealistic. “I could do a lot of good in this country,” McPhillips says. “But I’m not interested in living in a gated community, and I’m not remotely interested in the properties (International Living) is showing. We’re going to shop in the market and speak the language and be part of the country.”
Ragle and Singer, on the other hand, are looking for something with a gate and a beach. They settle on a $236,000 three-bedroom house on a quarter-acre in a gated beach development. The house is scheduled to be completed in a year. “If we need an American fix, we can knock on the neighbors’ door and have a brewksi and some steamed crabs,” Singer says. “If we make a mistake, we can move on.”Links here and here.
The Golden Goose
Having passed the 2006 halfway mark the country is booming, seemingly at full speed. The Panama Canal has been described as a cash cow that can become the equivalent of Texas oil wells that will continue to pump income into the national treasury for years to come. We have a stable democracy and we are receiving foreign investments that in turn have attracted residential tourism and expanded the base of our commercial infrastructure. Our weather patterns do not include hurricanes or severe earthquakes and our unique biodiversity provides us a rare opportunity to offer something different to the everyday traveler regardless of origin. Panamanians are friendly in general and exude a certain “calor humano” that visitors find invigorating and comfortable.
In fact, the many attractions that the country of Panama has to offer have been compared to the fabled Golden Goose. Panama keeps producing those golden eggs year after year and the word has finally gotten around. Most of the major U.S. newspapers have featured stories and even spectacular articles on Panama and several of the travel magazines have referred to Panama as one of the top 10 places in the world to retire. Our pensionado benefits are legendary. Just about every province of Panama is showing increased growth and our future looks bright. Many in the business community I speak to expect this boom to continue for 5-10 years. Our two most popular attractions after the tropical paradise, are low prices and low taxes.
What can we do to preserve our Golden Goose? The answer sounds too simple. Three rules beg to be heard. (1) Keep our environment attractive (clean up the bay, etc.). (2) Maintain the low prices. (3) Keep taxes low. Once again the focus is on our politicians. They have the power to make or break the Golden Goose.Link here.
How many Americans will retire in Panama?
A recent report by the GOA comes out posing the question, “What will the affect of the many boomers retiring have on the stock market?” Well, first we must assume that there is nothing else that is going to take the market down, like a collapse in the housing market. Let us assume, as the GOA does, that the market continues to be vibrant over the coming decade (misplaced optimism) and look at the most striking finding of the study, which applies to developing in Panama. They say that 95% of the boomers do not have assets to lose and are not in the market to begin with! Ouch. The study shows only 5% of all the 77 million soon to be boomers have assets of any significance. On top of that, most of those with assets have them in their primary home appreciation (we must set aside the collapse in housing scenario for now).
That certainly brings down the number of potential clients we will see in Panama for first or second home market. Now a quick calculation reveals that of the 77 million boomer’s retiring over the next 10 years, there are less than 4 million or 400,000 each year with the money to retire here (or anywhere for that matter). OK, how many will consider moving away from their home country to live in Panama? That is the question of the day.
Many developers in Panama wrongly assume that most Americans are rich and many would consider coming to live in Panama. My experience of marketing and selling property to Americans over the last 6 years has shown a different psycho-demographic of the market than most expect. The persons coming here are certainly in the 5% of those with assets, but as a whole they are not millionaires and are conservative individuals who do not have a lot of debt. They are concerned about the direction their government and country is going and they seek a different lifestyle, one that reminds them of a world they grew up in almost 50 years ago.
The Americans who chose to live outside their home countries are a unique blend of conservative, nostalgic, independent thinking with a pioneering spirit. The one common trait they all have is that they are seeking value. This is the most important message I can give developers in Panama and in Latin America in general. If you are pricing your products for millionaires you will be sadly disappointed. The vast majority is very price point conscience. They are seeking value in a home and in day-to-day cost of living. This message seems to be lost when I look over the many new projects being built or proposed in Panama. I still believe that we can acquire 35,000 retirees over the next 8-10 years even with the limited number of people with money to do so. Those 17,000 home buyers will have a dramatic economic impact to the country, but they will come only if they perceive value.Link here.
COSTA RICA TOURISM IN A NUTSHELL
To most Americans, even those who have never been there, Costa Rica is their favorite tropical destination. But although everyone wants to visit it, hardly anyone has any notion of what exactly you do once you arrive. That is what this column hopes to correct.
You fly into the capital city of San Jose (home of the area’s only international airport) and stay overnight. It is then that you make a choice among four longer-stay locations that are basically made up of either superb beaches or else various highlights of mountain tourism.
Monteverde, the “Green Mountain”, is the first of the renowned ecotourism locations. At once remote and connected (a four-hour drive northwest from San Jose), it is best known for its “cloud forest” reserve, a primordial jungle whose misty humidity makes it amazingly fecund and otherworldly. The Arenal Volcano, next in preference, is a bit more accessible from San Jose than is Monteverde. Its main lure is the nighttime shows put on by the majestic high-altitude cauldron as it spectacularly sputters glowing lava on a semiregular basis. All the volcanic activity has given rise to elaborately landscaped hot springs and baths.
Manuel Antonio is another treat. It is Costa Rica’s original Pacific Ocean beach town, and while the coast farther north, in Guanacaste, has become better known and increasingly colonized by condos and big resorts, I prefer (as do the residents of Costa Rica) this popular getaway, which is a 3-hour drive from San Jose. It boasts a national park with powdery sands, lovely islets and lots of wildlife. And finally, the beaches at Limon – on Costa Rica’s Gulf of Mexico coast – do not get nearly the attention the Pacific side does. Yet you will find beautiful, unspoiled sands; breathtaking ecotourism opportunities such as excursions to see giant sea turtles lay their eggs in the sand; funky little beach towns and nighttime cafes; and above all, the fascinating mosaic of Latin, Afro-Caribbean and Indian cultures. The main town is the very laid-back Puerto Viejo, a 3½-hour drive from San Jose, where lodgings tend to be cheaper (and simpler) than at other tourism centers in the country.
Even with all the tourists heading to these four locations, you can still roam this tiny country and find yourself in another world, whether in a seaside fishing village or a primordial rainforest.Link here.
A THIRD OF BRITONS WANT TO RETIRE ABROAD (TIMING OF PLANNED RETIREMENTS NOT SO CLEAR)
The trend of Brits buying up property abroad is set to continue long into the future, as one in three Britons have said they would like to spend their retirement years on foreign soil. The new research, published by Clerical Medical, overwhelmingly showed the place future retirees wanted to spend their later years the most was Europe. The continent was to the top place for 49% of respondents to retire to, with 9% saying they would move to Australia and 6% to the USA. 36% had not made up their mind, or wanted to head for more exotic locations such as Asia and South America.
However, while many respondents were keen to make the move overseas, the exact timing of their plans was unclear. Paul Shelley of Clerical Medical said, “Our research found 72% would like to retire by the age of 60 but only 46% thought they would actually be able to retire by 60. More than half of respondents said they think they will keep working to 65 or beyond.”Link here.
HEWLETT PACKARD TO EXPAND COSTA RICA CALL-CENTER OPERATION
U.S. computer firm HP recently announced a major expansion of its call-center operation in Costa Rica, which already employs 3,300 staff. HP handles IT support, payroll and accounting services for its clients, which include Proctor & Gamble, with a $3 billion contract. The call-center can work in English, Spanish and French. HP expects staff levels to double. The company will construct a new building to house the expanded work-force, which already handles 70,000 support calls a day. HP has been consolidating its own service centers under new CEO Mark Hurd, announcing plans to concentrate 85 data centers into just six locations. The company recently sponsored a report which says that the future of offshoring is not the destructive race to the bottom lamented by so many commentators, but a search for the right skills at the right price.Link here.
WARMER CUBA-CARIBBEAN TIES
In sharp contrast to the bitter U.S.-Cuba divide, relations between the Cuban government and the rest of its neighbours have never been warmer – a situation highlighted by reactions to the surgery that required Fidel Castro to relinquish power temporarily. Caribbean leaders, even from nations that had Cold War differences with Cuba, sent “get well soon” messages to Castro, while the U.S. government offered encouragement to the ailing leader’s opponents and Cuban exiles danced in the streets of Miami. “We pray for President Castro and we wish him God’s blessings,” said Prime Minister Kenny Anthony of St Lucia.
The friendly relations stem in part from small state admiration for Castro’s defiance of the U.S., which also has strong ties throughout the region. But there is also gratitude for Cuban assistance, in medical care and education, to Caribbean nations despite the communist government’s financial struggles. “Cuba has been a long-standing friend to the entire Caribbean,” said Barry Collymore, spokesman for Grenadan Prime Minister Keith Mitchell.
Cuba has not always been regarded with such benevolence in the region. In 1983, President Reagan ordered the invasion of Grenada, seeking to oust a leftist government allied with Cuba and the Soviet Union. Seven Caribbean nations, including Dominica and Trinidad and Tobago, sent troops in support of the invasion, in which 24 Cuban advisers were killed. Now, Grenada has a centrist government and has received help both from Cuba and the U.S. after the island was devastated by Hurricane Ivan in 2004. Last December, when Castro made one of his increasingly rare trips abroad, the Cuban leader was received with near reverence from regional leaders during a Caricom trade bloc summit in Barbados.
The communist country has also become a destination for those seeking medical treatment. An exception to the pro-Castro sentiment in the region is in Puerto Rico, home to a large population of Cuban exiles who retain their anger and sorrow over their losses in the revolution. Some in the U.S. island territory also fear that a Cuba without Castro – if the U.S. ever lifts the embargo – would siphon away investments and tourists from Puerto Rico. Puerto Rican Governor Anibal Acevedo Vila dismissed that concern earlier this month, saying the Spanish-speaking island could train the Cubans “how to work in a free market” and an increase in tourism to the island would spur overall Caribbean tourism.Link here.
ISLAMIC INDICES ALL THE RAGE AS DEMAND FOR SHARIAH INVESTING GROWS
Bursa Malaysia has become the latest bourse to express an interest in launching an Islamic index allowing investors to invest in companies adhering to Shariah principles. More than 85% of the stocks listed on the Malaysian exchange are Shariah compliant, meaning that they are not involved in certain practices thought unethical, such as the arms trade, the selling of alcohol, gambling, the selling of pork-related products and the sale of conventional financial services.
Meanwhile, the Stock Exchange of Thailand has also announced its intention to tap into the growing appetite for Islamic investing with a new Islamic index. Setaput Sutiwart-Narueput, an SET VP, has stated that the exchange would work with global index providers such as the Dow Jones, FTSE, Standard & Poor’s and MSCI to launch a co-branded index. Another exchange which has recently launched Islamic style indexes is the Singapore Exchange (SGX) which in partnership with FTSE and Yasaar Research, launched the FTSE SGX Asia Shariah 100 Index last February. This index is made up of 100 Shariah-compliant stocks, from Japan, Singapore, Taiwan, Korea and Hong Kong. Last month, Dow Jones Indexes announced its intention to expand its Islamic offering with the launch of a new index focusing on companies in certain emerging markets that comply with the criteria laid down for Islamic investment.Link here.
CAYMAN’S FINANCIAL SECTOR PRAISED
eading finance industry publication The Banker has given a ringing endorsement to the Cayman Islands as an international financial center, and outlined an upbeat assessment of the jurisdiction’s outlook across a range of sectors. A special report on the Cayman Islands in the July issue of the magazine singled out Cayman’s strengths in hedge funds for particular praise, describing the Caymans as the “undisputed jurisdiction of choice” as a hedge fund domicile. However, the publication also stated that the Caymans were a leading location for financial services across the spectrum, including captive insurance, structured finance special purpose vehicles, banking, trust and corporate services sectors. The developments and growth at the Cayman Islands Stock Exchange were also recognized.
The report also discussed how Cayman has strengthened regulations to deter criminal activity and improved overall supervision, as well as winning praise for the measures it has undertaken to meet and go beyond international standards. “As such a respected publication, The Banker’s special report on the Cayman Islands is particularly welcome,” commented David Roberts, a director of the Cayman Islands Financial Services Association (CIFSA), the body dedicated to the promotion the jurisdiction’s financial services sector. “It details our leadership in a number of different sectors and demonstrates just how well regarded the overall financial services industry is in Cayman.”
The report went on to predict that the critical mass that Cayman has developed, both in terms of business and in professional services, will ensure that the jurisdiction is able to prosper in spite of competition both from both the offshore and the onshore world.Link here.
SOUTH AFRICAN INVESTORS KEEN ON MAURITIUS
South Africa have expressed keen interest in doing business in Mauritius, according to Mauritian Deputy Prime Minister and Minister of Finance and Economic Development, R. Sithanen. The Minister spoke after his recent return from a promotional trip to South Africa, accompanied by a delegation of Mauritian businessmen and members of the Board of Investment.
Sithanen said he met with a “good response” from major South African investors attracted by Mauritius’s low taxes and open economy, among them FirstRand Merchant Bank who have expressed an interest in the insurance sector. Other substantial investors showing an interest in Mauritius are Investec and Standard Bank, both of which already have operations in Mauritius and wish to broaden the scope of their investments there. Sithanen also said that South African investors are ready to invest across a variety of economic sectors, for example hospitality, leisure, property development, land based oceanographic industry, aquaculture, textile and ICT. “Foreign investment will help to restructure the economy, bring experience and innovation in several sectors,” the Minister stated.Link here.
CHINA STARTS TO SHIP HIGHER COSTS ABROAD
During 20 years in the toy business, Anthony Temple has reveled in the bounty of inexpensive stuffed animals, coffee mugs and resin figurines on sale in China. But a buying trip this year for his company, Rainbow Designs, based in London, brought a rude awakening. Traveling through the Pearl River Delta north of Hong Kong, Temple found that cost increases – for raw materials, but above all, for labor – dominated every discussion he had with suppliers.
Far from being eager to underbid each other, Chinese companies talked about marking up their prices from 5% to 10% so consistently that Temple, whose company owns the British distribution rights to such cuddly creatures as Paddington Bear and Jemima Puddle-Duck, became convinced that these were not simply negotiating gambits. “When I went over there, I was under the belief that China is a bottomless pit of cheap product,” Temple said. “When I left, I was not.”
As the Chinese economy races forward, signs are multiplying through the global flow of goods from suppliers to manufacturers – and deep in some statistical tables – that the Asian giant is beginning to slow its exporting of something dear to the hearts of the world’s central bankers – lower prices. For at least a decade, China has provided a welcome tail wind for inflation fighters in Europe and the U.S. by supplying inexpensive goods that depressed overall price levels. But more and more this year, China’s role in global disinflation – as the phenomenon is known to economists – has toughened the agenda for central bankers. Striking anecdotes and evermore statistical evidence suggest that China’s contribution to low prices may be ebbing.
And that, combined with more expensive raw materials like oil, means that central banks once again could be stuck with the painful dilemma that they faced in the early 1980s: to stop inflation by tightening credit, despite the potentially negative effects on economic growth and unemployment. After discussing the “China effect” this spring, the European Central Bank pledged to increase research into the phenomenon. Top officials of the U.S. Federal Reserve have begun speaking out about it. China’s role in global inflation is also likely to be an important topic at the annual conference of central bankers in Jackson Hole, Wyoming, which starts Friday of this week.
China’s development has brought it to this point, economists said. Low-cost labor and easy access to a world-class port in Hong Kong allowed China to flood the world with inexpensive goods. But now, atop high prices for raw materials, Chinese workers are starting to demand higher pay, creating the classic conditions for rising export prices. The good news for consumers is that rising costs in China are not feeding into higher prices on store shelves yet.
Not all economists buy the overall notion that Chinese prices will soon pump up inflation rates in the industrialized world. Skeptics tend to focus on the ability of China and its customers to adapt. As Chinese costs increase, foreign investors can set up shop in lower-cost manufacturing centers like India and Bangladesh. Other companies will investigate China’s vast interior to escape rising labor costs on the coast. “The global labor arbitrage is alive and well,” said Stephen Roach, chief economist at Morgan Stanley. “It still pays very much to relocate production and employment to China to keep your labor costs down.”Link here.
Chinese banks facing losses on dollar assets as yuan rises.
Major Chinese banks, with an estimated $80 billion in foreign currency assets, will face losses if the yuan keeps rising in value, bank executives said. Banks holding U.S. dollars would “definitely suffer losses as the Renminbi, or the yuan, continues to appreciate,” Pang Xiusheng, said the China Construction Bank’s chief finance officer. The Bank of China (BOC) would pay close attention to the yuan’s exchange rate and its effect on financial management, said Zhu Min, a BoC executive assistant president.
The number two state lender, listed in Hong Kong and Shanghai, planned to “further reduce” its foreign exchange holdings by the end of the year, Zhu said. The BoC’s foreign currency assets, believed to be the biggest among major domestic banks, were a longtime concern for its stock investors, especially with the yuan rising by greater margins lately. Under China’s currency controls, banks have been forced to buy the majority of foreign currency earnings by domestic exporters, piling up hefty U.S. dollar and other foreign currency-denominated assets.
U.S. manufacturers argue the yuan is undervalued by as much as 40%, making Chinese goods cheaper in the U.S. and American products more expensive in China and hurting the U.S. job market. In July 2005 China revalued the yuan by 2% against the U.S. dollar and abandoned its peg to the dollar in favor of a restricted float against a group of foreign currencies. The yuan has since risen by 3.7% against the U.S. dollar. Its appreciation was typically sharp last week, rising 123 basis points last Wednesday. On Wednesday of last week, the official exchange rate was at 7.9703 per dollar.
A China Banking Regulatory Commission report says as the yuan appreciates, though slowly, banks are finding it increasingly difficult to find foreign currency buyers to hedge risks through currency swaps and other financial tools.Link here.
YUKOS BANKRUPTCY APPEAL REJECTED
The Moscow Court of Arbitration has, somewhat predictably, rejected an appeal by the beleaguered Russian oil company Yukos against an earlier bankruptcy ruling. The ruling seemingly seals the fate of Russia’s once-largest private oil company, which was feted for its western standards of corporate governance, but which got on the wrong side of a government keen to consolidate the company’s energy infrastructure under its own wing.
The politically charged affair began with the arrest of former chief executive Mikhail Khodorkovsky on what many consider to have been trumped-up charges of tax evasion, fraud and embezzlement. Khodorkovsky had been a vocal critic of President Putin’s energy policy and had also harbored political aspirations of his own. He is now serving an eight-year sentence in a Siberian jail. The company itself was then run into the ground following a series of back tax claims totaling about $28.5 billion. By June 2006, Yukos had paid about $14.5 billion of this tax bill.
Rosneft, Yukos’s state-owned rival, currently holds about $4.5 billion worth of claims in the company, and next month will reportedly seek to add an additional $8.5 billion to these claims, making it Yukos’s largest creditor. After a rescue plan was rejected by the company’s creditors last month, a panel of three judges at the Moscow Court of Arbitration assigned Yukos assets in Russia to a court-appointed manager who has a year to auction them to pay creditors. Rosneft and state gas monopoly Gazprom appear poised to acquire Yukos’s remaining production assets in Russia.Link here.
IRISH HOUSING MINISTER URGES MEASURES TO CURB PROPERTY SPECULATION
Irish Minister for Housing and Urban Renewal, Noel Ahern, has called upon the government to introduce measures to curb speculation in the country’s property market, within which prices continue to rise apace. Commenting on the release by his government department of new house completion figures for the first seven months of the year, Ahern urged Finance Minister Brian Cowen to consider the issue of Ireland’s runaway property market when he presents his 2007 Budget.
Although Ahern, who is brother of Prime Minister Bertie Ahern, did not give specific details of measures he would like to see introduced, it is thought they could involve the reintroduction of taxes on properties which are rented out, and higher stamp duty on investment properties. However, Minister Ahern made it clear that tough measures should be directed towards investors who snap up property prior to completion with the sole intent of keeping it off the market until its value increases. Despite the fact that there was a 24% increase in the amount of new house completions in the first seven months of 2006 compared to the same period last year, prices continue to soar, and most first time buyers struggle to get a foothold on the market in Ireland. Overall, prices have risen by about 10% per year on average since 2000, prompting a recent warning from the IMF that the Irish housing markets risks becoming “overvalued”.Link here.
U.S. COURT STRIKES DOWN LAW TAXING DAMAGE AWARDS
Could encourage more challenges to the tax code on constitutional grounds.
The U.S. Court of Appeals for the District of Columbia Circuit has ruled that a law taxing compensation awards for emotional injury is unconstitutional, a ruling which may open the door for future challenges to U.S. tax laws. The ruling concerned the $20,665 in tax paid by Marrita Murphy on a $45,000 emotional distress and $25,000 injury to reputation payout, awarded after she blew the whistle on the New York Air National Guard with regard to environmental hazards at an air base. While legal compensation for physical injuries is tax-free under a 1996 statute, monies awarded for mental anguish and injury to reputation are not.
However, the three-judge panel unanimously decided that the award was not taxable income under the Constitution’s 16th Amendment because it did not compensate for lost wages or earnings. Although the ruling affects only plaintiffs in D.C., jurists and tax law experts predict that it will encourage more challenges to the tax code on constitutional grounds. Some also worry that it could result in more “frivolous” claims that income tax in general is unconstitutional. The government has yet to announce whether it will challenge the ruling, but an appeal to the Supreme Court is thought likely.Link here.
TREASURY, IRS ISSUE PROPOSALS ON CAPITALIZATION VS. EXPENSING OF TANGIBLE ASSETS
The U.S. Treasury Department and the IRS issued proposed regulations designed to clarify the treatment of expenditures incurred in selling, acquiring, producing or improving tangible assets. If adopted as proposed, the regulations should reduce the amount of controversy between taxpayers and the IRS in this area.
According to the Treasury, “For many years, there has been controversy about whether taxpayers are required to capitalize certain expenditures as an improvement or take an immediate deduction for the expenditures as necessary repair and maintenance expenses. There has been debate on how to apply the tests used to determine the tax treatment of these types of expenses.
“The proposed regulations provide an overall framework that expands the standards in the current regulations by drawing on principles developed through case law. Specifically, the proposal provides exclusive factors for determining whether amounts paid to restore property to its former working condition must be capitalized as an improvement.”
The proposed regulations also provide guidance concerning the economic useful life of a unit of property and activities that substantially prolong the economic useful life. Additionally, the proposed regulations provide rules for determining the appropriate unit of property to which the rules should be applied To reduce the administrative and compliance costs associated with this section of the tax code, the proposed regulations provide several safe harbors and simplifying assumptions. Although the regulations do not provide a de minimis rule in which small cost items are exempt from capitalization, the preamble solicits comments on whether such a rule should be adopted in final regulations.Link here.
PRICEWATERHOUSECOOPERS FACES IRS AUDIT; ISSUES INCLUDE PENSION PLAN, TRANSFER PRICING
PricewaterhouseCoopers LLP, the world’s largest accounting firm, is being audited by the IRS for potential violations in reporting its own taxes, according to IRS and company documents. The IRS is evaluating the timing of tax deductions, PWC’s pension plan, and how the firm moved profits between international units, said a person briefed on the audit. The review may be completed later this month and the IRS is expected to reach its conclusions by the end of the year, PPWC’s tax partner Samuel Starr said in a June letter to the New York-based firm’s 2,000 U.S. partners, who could be liable for any back taxes.
Additional taxes or penalties could damage the reputations of the firm and the industry, which have been under increased scrutiny since the 2001 collapse of Houston-based energy trader Enron Corp. and the demise of its auditor, Arthur Andersen LLP. The IRS review may cost partners at PWC “scores of millions” of dollars, said Robert Willens, a tax and accounting analyst at Lehman Brothers Holdings in New York. “If the pension plan were to be disqualified, the results would be potentially nuclear,” said Richard Susko, a pension attorney and partner at the New York law firm of Cleary, Gottleib, Steen & Hamilton. PricewaterhouseCoopers could lose deductions it took on contributions to the pension plan, though the IRS probably will “work out something less draconian,” he said.
PWC audits some of the world’s biggest companies, including Exxon Mobil, Ford, and JPMorgan Chase & Co., the No. 3 U.S. bank by assets. It employs more than 130,000 people in 148 countries. Accounting firms rarely get audited because they are experts in tax matters and would probably avoid taking deductions that could raise a red flag at the IRS, said Tom Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants, the industry trade group in Washington. “Between saving a few dollars and being squeaky clean, I’d think they’d want to be squeaky clean,” he said.
At PricewaterhouseCoopers, the IRS is examining so-called transfer pricing, where global companies sell goods and services between divisions, often to take advantage of lower tax jurisdictions, said the person briefed on the audit, who declined to be identified because the matter is confidential. The IRS claims GlaxoSmithKline Plc, Europe’s top pharmaceutical maker and a longtime PWC client, owes more than $5 billion in taxes and interest. The tax agency alleged its U.S. subsidiary reduced taxable income by overpaying the British parent for drugs. Glaxo denies the claims and the case is set for a trial next February in U.S. Tax Court.Link here.
IRS EYES THE eBAY CROWD
Facing a $345 billion tax gap, the IRS has set its sights on a new target – the rapidly expanding world of online business. In an effort to crack down on under-reporting by individuals and businesses that sell goods online, an IRS official said the tax agency is discussing creating new tax reporting requirements. While no details have been given, the new reporting requirements could mean big changes for stand-alone Web retailers as well as individuals selling family heirlooms through popular online auction sites such as eBay Inc. Retailers generated $87 billion dollars in online sales in 2005, according to the Census Bureau, up 22% from 2004.
The changes, which have been bandied about by the IRS for some time, are part of a larger IRS initiative to narrow the tax gap, or the difference between what taxpayers should have paid and what they actually pay. Under current tax law, an individual who sells an item online and collects more money than its purchased value is expected to report that money as income on their tax return. If an item’s original purchase value cannot be determined it is typically valued at $0 under current tax law.
The IRS’s attempts to promote better reporting of online profits has been stymied by the fact that most online transactions leave behind very little evidence for the tax man to track, especially if shoppers do not use a credit card or opt for an online payment system such as PayPal, which is also owned by eBay. One remedy the IRS is considering is third-party reporting, or having an outside source, such as an online auction site, report information to the IRS. Representatives from eBay stressed that maintaining their clients’ privacy was of the utmost importance, but that they would turn it over to if the government request were accompanied by a subpoena.
At the same time, third-party reporting could prove to be a giant headache. “It will be an administrative nightmare to figure out who has to report and what has to be reported and trying to track these millions of people that buy and sell on the Internet,” says Cindy Hockenberry, a tax information analyst at the National Association of Tax Professionals.Link here.
IRS delves into award show gift bags.
The IRS announced the beginning of an outreach campaign to the entertainment industry, regarding the taxability of gift bags and promotional items distributed in conjunction with appearances by the stars at award shows and other gatherings. Such bags can include luxury trips, jewelry and electronics. Dozens of award shows take place each year. The effort follows an agreement announced last week between the IRS and the Academy of Motion Picture Arts and Sciences.
According to the IRS, “The Academy and the IRS reached a mutually satisfactory agreement that will resolve outstanding tax responsibilities with respect to Academy Awards gift baskets. … Under the closing agreement, the Academy and the IRS have settled the tax obligations with respect to gifts given through 2005. Recipients of this year’s gift basket will be issued appropriate informational tax forms by the Academy and will be responsible for satisfying their income tax obligations. … The gift basket industry has exploded, and it’s important that the groups running these events keep in mind the tax consequences. There’s no special red-carpet tax loophole for the stars. Whether you’re popping the popcorn, sitting in the audience or starring on the big screen, you need to respect the law and pay your taxes.”Link here.
COMPANIES SHIFT INCOME TO AVOID HIGH-TAX GERMANY
The German Finance Ministry has confirmed a report that companies are escaping €65 billion ($82 billion) in German taxes annually by shifting profits abroad. The claims are based on an internal Finance Ministry report which studied the discrepancy between the overall economic balance sheet and revenues from corporate tax. They have been confirmed by a spokesman for the Ministry.
With one of the highest combined corporate tax rates in the developed world, it is perhaps no surprise that companies operating in Europe’s biggest economy are keen to cut their tax bills by shifting income to lower tax jurisdictions. Presently, large companies pay almost 40% of their income in corporate tax, based on a 25% federal corporate tax and regional corporate tax of about 13%. The grand coalition of Chancellor Angela Merkel is seeking to remove the incentive to dodge German taxes and attract more investment in the country’s flagging economy by slashing the combined corporate tax rate to less than 30%, through a cut in the headline corporate tax rate from 25% to 12.5% from 2008.
However, the tax cut, while welcome, may do little to lessen the overall burden on German companies as the government seeks to claw back lost revenues through other measures, such as a controversial proposal to tax interest payments as part of the corporate tax plans. This proposal is designed to stop large companies based in Germany from drawing loans from subsidiaries in low-tax countries and booking interest payments as operating costs in order to minimize their tax bills, but it has reportedly split the German cabinet. Last month, Economics Minister, Michael Glos, openly criticized the Finance Ministry’s plan to tax interest, saying it could defeat the object of the corporate tax measures by leading to capital flight, particularly among private equity investors.Link here.
Read Merkel’s lips: “No new taxes” … after this coming January anyway.
German leader Angela Merkel has assured taxpayers that there will be no more increases in taxation other than the planned increases in value-added tax and income tax from January 2007. “I view tax increases as the wrong signal,” Merkel told a press conference, as economic data showed that the German economy is at long last growing again. VAT is due to be increased from 16% to 19% from January 1 in order to help reduce the government’s budget deficit and meet EU rules underpinning the stability of the euro currency. However, critics of the VAT hike have warned that the move threatens to snuff out early signs of a recovery in Europe’s largest economy, which has been stuck in the doldrums for a number of years.Link here.
COSTA RICA PROPOSES NEW TAX ON CORPORATIONS
A new tax on corporations has been proposed as part of the comprehensive tax reform plans currently before Costa Rica’s legislative assembly. The $200 tax will apply to all personas juridicas, or legal persons, and will be payable within ten days of the start of a new tax year, which will run from January 1 to December 31, A.M. Costa Rica reports. Such corporations are popular with expats and non-resident property owners who use them to apply for basic services, such as cellular telephone services, in Costa Rica.
Failure to pay the tax under the current draft of the legislation will result in the Registro Nacional refusing to file any papers relating to the company. According to the report, this will require that the Registro workers check with the Ministerio de Hacienda each time there is a transaction to make sure the tax is paid. There will also be other penalites against non-payers. In addition, a smaller tax based on the net worth of a company is set to continue. The new tax is being proposed to reduce the number of companies being formed with the sole intent of avoiding taxes, a summary attached to the legislation explained. It is uncertain if and when the tax bill will be passed into law.Link here.
EXPERTS SOUND WARNING OVER UK TAX AUTHORITY’S DESIRE FOR POLICE POWERS
The UK’s tax authority, HM Revenue and Customs, should not be given powers that exceed those of the police when investigating tax crime, says PKF Accountants & business advisers. PKF’s warning follows the publication by HMRC of a shopping list of new criminal investigation powers it would like to have, highlighting how the use of police powers would boost its fight against tax evasion and organized crime.
HMRC is currently seeking views on applying the relevant provisions in the Police and Criminal Evidence Act (PACE) across all its activities. Currently, those powers and their associated safeguards are only available for specific taxes and duties. According to the agency, having the same law apply across the board will be clearer for those under investigation and will increase the effectiveness of HMRC’s investigations.
However, according to PKF Tax Investigations partner, John Cassidy, HMRC is hoping to pick and choose which parts of the PACE laws it can use, and in certain circumstances wants to exceed the reach of these laws, for example, by retaining its existing power to search any person on the premises it is raiding without having an arrest warrant for that person. “I have repeatedly called for HMRC’s powers to be in proportion to the seriousness of the offence. This proportionate approach should be enshrined in law, not left to the discretion of overstretched and, possibly, overzealous tax investigators seeking a quick win against suspected tax fraudsters,” Cassidy stated. “As originally suspected, HMRC is trying to take this opportunity to ‘level up’ the powers of its officers so these proposals would see a substantial increase in HMRC’s powers in dealing with the individual taxpayer.”
Cassidy said that giving the HMRC such “draconian” new powers carries with it “significant risks,” and he warned that these powers could be used against relatively minor offenses, such as sole trader under-reporting income, as well as against the organized criminal gangs and serious tax evaders for which these powers are primarily intended. “HMRC claims it will use the new powers proportionately but our experience suggests its officers often take an unnecessarily heavy-handed approach with some taxpayers who are eventually proven to be innocent.”Link here.
HM REVENUE & CUSTOMS TARGETING CHANNEL ISLANDS?
At a presentation held recently by PricewaterhouseCoopers, Joanna Klaentschi, of the company’s London-based tax team, told delegates that Revenue was concentrating on clamping down on tax evasion and avoidance, believing that not enough “profit” was being returned to the UK from Guernsey’s finance industry. She said hedge funds were being particularly targeted and that there were rumous it would turn its attention next to the offshore private equity industry.
PWC director Tony Connelly said the Revenue would make greater use of the International Co-operation Act 1990, of which the Channel Islands are signatories, to improve the efficiency and speed of exchange of information. “This allows revenue authorities to share information with other authorities and it is not limited only to fraud cases,” he said. “It has already been used by the Revenue in the Channel Islands and it is an area they are looking to use more to combat tax avoidance.” Delegates were also warned that HMRC was making greater use of online information. Firms had to be aware that if they have a physical presence in the UK and had computer systems administered there, the Revenue might be able to request data.Link here.
TONY BLAIR ALLY CALLS FOR ABOLITION OF THE U.K.’S INHERITANCE TAX
Stephen Byers, a former Labour cabinet minister and close ally of Tony Blair, has called for the abolition of the UK’s Inheritance Tax, calling the levy a “penalty on hard work, thrift and enterprise.” Writing in the Sunday Telegraph, Byers labeled the IHT as “unfair and punitive” and a form of “double taxation” because it taxes assets acquired with income which have already been taxed. Currently, the 40% levy kicks in on estates worth more than £285,000, but the threshold at which the tax becomes payable has only kept pace with retail price inflation, not house prices, which have increased by 129% between 1997 and 2004. Consequently, the number of estates dragged into the IHT net has roughly doubled since Labour came to power from 3% to 6%.
The Treasury has issued an unequivocal riposte to Byers’s statement, pointing out through statements published in various press reports that the tax is both fair, affecting only a small percentage of estates, and an integral part of the Chancellor’s budget. IHT is expected to yield about £3.6 billion in revenues this year, the equivalent of a penny on the rate of income tax.
The timing of Byers’s assertion is significant because some within the Labour Party are interpreting his remarks as a veiled challenge on Chancellor of the Exchequer Gordon Brown, whose remit includes taxation and who is widely expected to succeed Blair as Prime Minster in the next year to 18 months. With many observers suspecting that Brown will take the party back towards the left, Byers argued that abolishing IHT would show that the party would remain “relevant and meaningful” to the middle classes.Link here.
U.K. inheritance tax debate heats up.
It appears that Blairite MP and former cabinet minister, Stephen Byers may have opened a bigger can of worms than at first anticipated with his recent assertion that IHT should be abolished in the UK. Recent research conducted by the Halifax building society, based on data from HM Revenue and Customs, has shown that the total number of estates paying IHT rose by 72% over the five years to 2003-04 to more than 30,000. As the IHT threshold, currently £285,000, fails to keep pace with increasing house prices, the government’s own estimates suggest that the number of estates caught in the IHT net will rise by a further 22% by the end of 2006-07.
Halifax’s research also found that the less affluent households are being hit harder than the wealthy. The number of estates with a value of less than £500,000 paying IHT rose by 75% over the five years to 2003-04 to 21,750. These estates now account for 71% of all estates paying IHT. During financial year 2005-06 the government collected £3.3 billion in IHT revenue and projects £3.6 billion in revenue in the current financial year. Over the past five years there has been a 49% increase in IHT revenue. IHT is expected to yield about £3.6 billion in revenues this year, the equivalent of a penny on the rate of income tax.
Weighing in on the issue, Shadow Chancellor George Osborne revealed that the Tories are looking at ways to reduce the burden imposed by the tax, but would not go so far as to abolish it completely, arguing that it would be “irresponsible” of him to commit the Conservative Party to such a course of action, and observed that the government would be hard pushed to replace the revenue which would be lost by its abolition.Link here.
ANDORRA SET TO INTRODUCE CORPORATE TAX IN ECONOMIC SHAKE-UP
The Principality of Andorra is set to introduce corporate tax as part of new plans designed to diversify the jurisdiction’s economy, which remains predominantly reliant on tourism and banking. Legislation before parliament could introduce corporate tax at a rate of 12%, and establish a requirement that registered firms must file regular accounts to international standards. Under current legislation, there are no taxes in Andorra for companies or individuals other than modest annual registration fees, municipal rates and property transaction taxes.
Despite the widespread perception of the principality as an offshore “tax haven” there are no special regimes for offshore entities and no trusts. However, strict banking secrecy remains sacrosanct, and while strict anti-money laundering legislation stops criminal activity, tax avoidance is not a crime in Andorra, a factor that has no doubt earned it is prolonged place on the OECD’s list of “uncooperative tax havens”. Nonetheless, the jurisdiction’s government insists that the changes are being ushered in to help modernize the country’s economy rather than in an effort to improve its “undeserved” image with OECD members. “This is all about our future survival,” said Andorra’s Prime Minister, Albert Pintat. “As a European sovereign state in the western world we have to move with the times.”
Presently, income from tourism accounts for about 80% of the Andorran economy, with visitors attracted by to the principality’s resorts by its duty-free status. However, Pinant said that Andorra cannot expect to transform its economy overnight “given that it got off to a late start.” He also said that the country has no desire to join the EU, despite its drive to integrate more with Europe as a whole.Link here.
ISLE OF MAN: RADICAL CORPORATE PACKAGE FOR GLOBAL BUSINESS
A radical new company law designed to ensure that the Isle of Man corporate product is at the forefront of the creation and development of modern businesses is to be introduced this autumn. The 2006 Companies Bill – which completely revamps the way businesses are set up and run in the Island – has completed its passage through parliament and is due to receive Royal Assent before the November General Election. The new “Manx corporate vehicle” has been structured to complement the Isle of Man’s zero tax policy and present a highly competitive corporate package to international business.
The Isle of Man’s standard zero rate of business tax forms the foundation for this innovative new corporate product that will ensure the Island remains at the cutting edge of international finance and commerce. “The new vehicle is expected to have broad appeal in the specialist offshore market,” said John Aspden, Chief Executive of the Financial Supervision Commission. “In particular, the new legislation provides for much reduced and simplified reporting, the use of regulated corporate directors, and greater flexibility by moving many obligations from statute into the articles of a company, and the introduction of the role of the registered agent for retention of company records. Other provisions allow the new company to be used in protected cell form, and as a vehicle which can easily redomicile to or from the Island.”Link here.
ASBESTOS VICTIMS ARE FINDING BANKRUPTCY TRUSTS EASY PICKINGS
Amid all the disputed facts swirling around the death of Harry Kananian, one thing is certain. On June 24, 2000 the former Broadview Heights, Ohio resident died of mesothelioma, a cancer almost certainly caused by asbestos. How Kananian was exposed is a mystery he took to his grave. Was it as a teenager working in dusty factories in Cleveland? Or was it when he slept in the top bunk of a World War II troopship that had asbestos-clad pipes rattling 2 feet above his head? Or was it from smoking Kent cigarettes that were made with asbestos-containing filters for a few years in the early 1950s?
Kananian’s lawyers have made all these claims and more in lawsuits they began filing just weeks after his cancer was diagnosed in February 2000. But like a Hollywood movie with continuity issues, his stories do not mesh. Was he a shipyard worker in World War II, as he told the Johns Manville bankruptcy trust? Or was he a U.S. Army rifleman who passed through a San Francisco shipyard on his way to Japan, as he said in a deposition? The conflicting stories illustrate a dirty little secret of the asbestos-litigation industry. Even as states crack down on frivolous lawsuits by people with no symptoms at all, trusts established by bankrupt asbestos manufacturers are paying tens of thousands of claims each year based on inflated or downright false stories of how people were exposed to their products.
Most of the trusts are overseen by plaintiff lawyers. Can they be counted on to weed out double-dipping and false claims? “This is pervasive; this permeates the entire business,” says Lester Brickman, a professor of legal ethics at Cardozo School of Law in New York, who has exposed questionable practices of plaintiff lawyers in his scholarly articles and served as a paid witness for companies opposing asbestos claims. “Bankruptcy judges should be ashamed of themselves for, in effect, going along with this fraud.”
With an estimated $17 billion in assets so far and $5 billion to $10 billion more on the way, the trusts represent a huge pool of cash for potential asbestos claimants to tap. There is nothing wrong with suing more than one company or trust for the same injury (and most sue several trusts). But in the Kananian case and other lawsuits scattered around the country, defendants are uncovering a more troubling trend – double-dipping. E.g., a plaintiff sues manufacturers of asbestos-containing brake pads without disclosing that he has already collected tens or hundreds of thousands of dollars from trusts representing bankrupt producers of construction products on the theory that he was exposed to asbestos on construction sites.
Secrecy keeps this game going. Trust payments, like most legal settlements, are considered confidential and generally cannot be used as evidence in subsequent trials – which is convenient because it allows plaintiffs to hide conflicting versions of how they got sick. Plaintiff lawyers who set up the trusts and sit on the advisory boards that oversee them have fought efforts to share detailed claims information “because they don’t want the other trusts knowing what exposures they have claimed,” says Robin Carroll, who for eight years was controller of the $750 million Celotex trust.Link here.
UTAH PROMOTER JAILED IN TAX EVASION AND OFFSHORE INVESTMENT SCAM
A Salt Lake City man has been jailed for his role in promoting a tax evasion and offshore investment scam which defrauded the U.S. Treasury of $5 million, the U.S. Department of Justice and the IRS have announced. Edward T. Woodger is one of 11 individuals who promoted a tax fraud scheme that involved the use of trusts. The other conspirators included four attorneys, a CPA, and a former IRS revenue agent, all of whom have pleaded guilty in the case. The prosecution continues the five-year crackdown on the promotion of illegal tax evasion schemes by the DoJ, which recently obtained its 200th civil injuction against suspected tax fraudsters.
In his plea agreement, Woodger admitted that beginning in 1998, as a salesman of World Contractual Services, he promoted and sold a fraudulent trust scheme designed to evade federal income taxes. According to the DoJ, Woodger told customers that their tax liabilities could be lawfully reduced by placing businesses, homes, investments and other assets into a trust’s name. Woodger admitted that he and his co-conspirators caused the preparation of more than 2,000 false and fraudulent federal income tax returns. Woodger also admitted participating in investment frauds in which he claimed himself to be the “offshore money man”. The fraud resulted in customers losing between $2.5 million and $5 million. Woodger was jailed for 60 months for conspiring to defraud the U.S., and to commit mail and wire fraud in connection with the promotion of a tax fraud scheme.
U.S. District Judge Ted Stewart also ordered Woodger to pay restitution of $2,943,865 and to serve three years of supervised release upon the completion of his term of imprisonment. “Promoting abusive trusts and tax schemes for the purpose of committing tax evasion isn’t tax planning; it’s criminal activity,” said Nancy Jardini, IRS Chief, Criminal Investigations.Link here.
U.S. SENATOR’S ANTI-OFFSHORE RANT/REPORT WORRIES ST. KITTS AND NEVIS BUSINESS HEAD
U.S. Senator Carl Levin, in a damning [and basically bogus] August 1 report entitled “Tax Haven Abuses: The Enablers, the Tools and Secrecy”, listed St. Kitts and Nevis among six countries (Belize, the British Virgin Islands, the Cayman Islands, the Isle of Man and Panama) as tax havens where U.S. citizens move assets offshore and dodge U.S. taxes, adding to tax haven abuses that cost U.S. taxpayers an estimated $40 to $70 billion dollars each year.” President of the Chamber of Industry and Commerce (CIC) Franklin Brand suggested the Federation examines the matter with the U.S. government. “They are going to have to sit down with the U.S.u government. … They have to come out and clearly enunciate what exactly a small country like St. Kitts and Nevis can do to stop from being blacklisted and not be bludgeoned by this constant statements that we are tax havens for criminals from the United States,” Brand said.
Brand is worried that the report could put the Federation in the same position it was six years ago and that could be potentially harmful to the private sector. “They come to you and you take them in good faith and it turns out that they are evading taxes. If the U.S. is unable to stop them from doing what they are doing, how do they expect a country with only a fraction of their GDP to do it? That is ridiculous,” Brand stated.
According to the Levin report, St. Kitts and Nevis is home to one offshore bank, 50 trust and company service providers, 950 trusts and 15,000 offshore corporations. It said most of the offshore financial business is concentrated in Nevis. “The State Department considers the nation a major risk for corruption and money laundering, due to a high volume of narcotics trafficking and an inadequately regulated economic citizenship program,” the report added.Link here.
PRIVACY DEBACLE HALL OF FAME
Earlier this month AOL publicly released a data trove – 500,000 search queries culled from three months of user traffic on its search engine. The company claimed it was trying to help researchers by providing “anonymized” search information, but experts and the public were shocked at how easy it was to figure out who had been searching on what. Apparently, AOL’s “anonymizing process” did not include removing names, addresses and Social Security numbers. Although the company has since apologized and taken the data down, there are at least half-a-dozen mirrors still out there for all to browse.
This may have been one of the dumbest privacy debacles of all time, but it certainly was not the first. Here are 10 other privacy snafus that made the world an unsafer place. Despite the obvious flaws of rankings, we have attempted one as follows, in descending order.
NEW INFORMATION SHARING LAWS TO HELP AUSTRALIA FIGHT OFFSHORE TAX EVASION
New legislation to be introduced in the Australian Parliament will help agencies involved in Project Wickenby to better share information to aid law enforcement, the government announced last week. Project Wickenby is a multi-agency taskforce investigating internationally promoted tax arrangements allegedly involving tax avoidance or evasion, and in some cases large-scale money-laundering.
In addition to this first step, there will be a larger project to improve the laws that protect taxpayer information and allow disclosures to help deliver entitlements and meet law enforcement and integrity provisions. In this regard, the Treasurer announced last week the release of a Treasury discussion paper on the Review of Taxation Secrecy and Disclosure Provisions. This paper looks across all the existing tax secrecy and disclosure provisions from around 30 tax Acts, and proposes to standardize the provisions into a new framework in a single piece of legislation. This will provide increased certainty for taxpayers, tax officials and users of tax information, such as government departments and agencies.Link here.
U.S. AUTHORITIES HAD (AND STILL HAVE?) FREE REIN OVER WORLD’S BANK TRANSACTION DATA
The U.S. Treasury program of snooping on international banking transactions to track terrorist funding had unfettered access to the world’s private financial details as much as five years. A spokesman for Society for Worldwide Interbank Financial Telecommunication (SWIFT) said it had won restrictions on the Treasury’s power to see its data, which consists of records of financial transactions between 7,800 of the world’s financial institutions, starting 120 days ago.
But the Treasury’s snooping on international financial records, begun by subpoena in the wake of the September 11 terrorist attacks, was being done without oversight while SWIFT negotiated to protect the privacy of the international data it held. “Over time we’ve narrowed down the scope of those subpoenas … the whole process has been refined,” said the spokesman. But he could not say how long it had taken to put the checks in place, nor how many records the Treasury had seen before its dogs were put back on the leash. SWIFT was keen to keep the Treasury’s nose out of its records because its clients would not take kindly to having their transactions scrutinized by a foreign government.
It managed to persuade the U.S. authorities to have their investigators restrained. They agreed they could only take limited batches of data, rather than scan the whole lot freely. These batches could then be searched only for specific transactions that could be demonstrated to have links to terrorism. These searches were to be audited by both SWIFT and an external auditor, Booz Allen. However, Privacy International said these were not enough, and has filed a complaint to the British data protection body, the Information Commissioner. PI is worried that the Treasury was fishing through international financial records in the hope of turning up terrorist finance records. It also feared the data could be used for other purposes, including espionage. SWIFT’s CEO, Leonard Schrank, flew to London to meet PI last week. Simon Davies, a PI director, said he had told Schrank he wanted to see proof that the Treasury was only able to see records that it knew contained details of terrorist financial transactions.
The way in which international business operates its IT infrastructure has given the U.S. government unprecedented power to view international financial records. SWIFT has an unspecified number of data centers around the world, each one storing every one of the 11 million daily transactions it handles, being mirrors of one another as backup in the event of one of them failing. This means that a U.S. subpoena of records kept in SWIFT’s U.S. data center will gain access to financial transactions made in over 200 countries.
Stuart Levey, under secretary for terrorism and financial intelligence at the U.S. Treasury said no-one would have known about this program if details had not been leaked to the U.S. papers. He said secrecy was one of the program’s strengths. But Republicans have complained that even Congress was not aware of what was going on. The Washington Post likened the program to the NSA’s mass surveillance of international telephone and Internet communications without a warrant, which was recently found by a U.S. judge to be illegal. It said the U.S. government was also building “unprecedented” government databases of private transactions of people unrelated to terrorism.
Levey also said SWIFT did not supply it with individual bank account information. This is not strictly true. Each of the “messages” on SWIFT’s database is a record of a financial transaction. When the Treasury investigators get inside the encrypted electronic envelopes they get to see the individual bank account details of the payer and the beneficiary, including the amount being transferred.Link here.
THE BUSH POWER-GRAB SCORECARD
A ruling in Michigan against the government’s telephone and internet surveillance program is only the latest in a series of blows to the Bush administration’s anti-terrorism policies, and its overarching assertion that the executive branch should have wartime powers that rise above the law and congressional oversight. In June, for example, the Supreme Court ruled that special military commissions set up to try detainees at the Guantanamo Bay Naval Base in Cuba violate the Geneva Convention and other laws – although the court left the door open to proceed with the military trials if the administration gets special permission from Congress. The government has faced a number of other legal challenges to its anti-terrorism policies since September 2001, not all of which it has lost. Below is a roundup of the major challenges so far.
In an effort to combat some of the challenges to its authorities, the administration has lashed out at critics and whistleblowers alike. President Bush and Vice President Cheney denounced The New York Times after it published a story in June about the government’s surveillance of financial transactions. Congressman Peter King (R-New York), chairman of the House Homeland Security Committee, also denounced the article and called on Attorney General Alberto Gonzales to prosecute the reporters and editors responsible for the piece.
Although the Justice Department has not initiated any action against the Times yet, it has impaneled a grand jury to try and track down those who leaked information about classified projects to reporters, with the possible intent of prosecuting such whistleblowers under the Espionage Act. Last month the grand jury subpoenaed former NSA analyst Russ Tice who spoke with The New York Times before it published its December story. Tice has admitted to discussing the issue of warrantless surveillance with the Times, although it is unclear whether he was the source for the specific information that the paper published.Link here.
READINESS EXERCISE 1984: FEMA’S BLUEPRINT FOR MARTIAL LAW IN AMERICA
The Cheney/Bush administration has a plan which would accommodate the detention of large numbers of American citizens during times of emergency. The plan is called REX 84, short for Readiness Exercise 1984. Through Rex-84 an undisclosed number of concentration camps were set in operation throughout the U.S., for internment of dissidents and others potentially harmful to the state. The Rex 84 Program was originally established on the reasoning that if a “mass exodus” of illegal aliens crossed the Mexican/U.S. border, they would be quickly rounded up and detained in detention centers by FEMA.
Existence of the Rex 84 plan was first revealed during the Iran-Contra Hearings in 1987, and subsequently reported by the Miami Herald on July 5, 1987: “These camps are to be operated by FEMA should martial law need to be implemented in the United States and all it would take is a presidential signature on a proclamation and the attorney general’s signature on a warrant to which a list of names is attached.” And there you have it. The real purpose of FEMA is to not only protect the government but to be its principal vehicle for martial law. This is why FEMA could not respond immediately to the Hurricane Katrina disaster, because humanitarian efforts were no longer part of its job description under the Department of Homeland Security.
It appears Hurricane Katrina also provided FEMA with an excuse to “dry run” its unconstitutional powers in New Orleans, rounding up “refugees” (now called “evacuees”) and “relocating” them in various camps. “Some evacuees are being treated as ‘internees’ by FEMA,” writes former NSA employee Wayne Madsen: “Reports continue to come into WMR that evacuees from New Orleans and Acadiana [the traditional 22 parish Cajun homeland] who have been scattered across the United States are being treated as ‘internees’ and not dislocated American citizens from a catastrophe.”
We are dangerously close to a situation where if the American people took to the streets in righteous indignation, or if there were another 9-11, a mechanism for martial law could be quickly implemented and carried out. The Cheney/Bush administration will stop at nothing to preserve their power and their ongoing neocon mis-adventure and they have currently proposed having executive control over all the states National Guard troops in a national emergency. Governor Tom Vilsack of Iowa, called the proposal “One step away from a complete takeover of the National Guard, the end of the Guard as a dual-function force that can respond to both state and national needs.” The provision was tucked into the House version of the defense bill without notice to the states, something Vilsack said he resented as much as the proposal itself.Link here.
VACCINES ARE SCARCE. WHY?
In the standard telling, the development of the polio vaccine was a triumph of public initiative. Within a generation polio had disappeared from the U.S. But most vaccine manufacturers disappeared with it. Their slow suffocation began on the day the authorities took charge of competition. In the case of the polio vaccine the authorities moved too quickly and carelessly. They would atone by slowing everything to a lawyer-clogged crawl. The ensuing lawsuits established new standards that made it much easier to sue vaccinemakers. Case by case, liability claims came to dominate the industry’s economics. Junk claims overtook legitimate ones and then eclipsed them completely. When liability problems threatened to cut off the supply of some vaccines, Congress imposed a broad-based tax on vaccines to fund an alternative compensation system.
The government’s role in buying and distributing vaccines expanded in parallel. Federal agencies began funding childhood vaccination programs soon after the polio vaccine was commercialized. The government now buys over half of all vaccines used in the U.S., at prices it effectively dictates. As the government’s role advanced, the private sector retreated, to the point where this segment of the industry now looks and operates much like a public utility. Developing vaccines is much easier today than it was half a century ago. It does not happen because no drug company wants to market them.Link here.
LUXEMBOURG’S JEWISH COMMUNITY SEEKS PAYMENT, RECOGNITION FOR WORLD WAR II LOSSES
Visitors to Luxembourg’s modern city history museum might be surprised to find Torah scrolls, Havdalah spice boxes, silver Shabbat candles and other Jewish ritual objects. After all, this wealthy little country in the heart of Europe has only 1,000 Jews – and ever since World War II, when the Nazis nearly decimated its Jewish community, Jews here have kept a low profile. But lately the community has begun demanding answers – and unspecified compensation – for the heirs of Jews whose assets were seized by the German occupiers and their accomplices.
A recent exhibit at Luxembourg’s Musee d’Histoire, entitled “Le Grand Pillage”, is part of a new awareness in Luxembourg that the country has never really come to terms with its past. “In 2002, Luxembourg decided to set up a commission to look into the fate of material losses during the war,” said human-rights lawyer Francois Moyse, a prominent member of Luxembourg’s Jewish community. Moyse told JTA that some 4,000 Jews were living in Luxembourg just before the outbreak of World War II. About half were refugees from neighboring Germany. In 1940, Nazi troops invaded and ordered Luxembourg’s Jews to leave. All except 700 were able to escape, but those who remained were deported to concentration camps – only a handful of which survived the war.
Moyse said that in 1959, Luxembourg received 18 million Deutschmarks from Germany as compensation for its Jewish citizens. “For sure, some Jews have never been compensated for their suffering,” said the lawyer, one of four Jews on the 25-member commission. “These were foreign Jews, and only Luxembourg Jews were entitled to compensation by the Luxembourg government. The commission was supposed to make recommendations, but it has been over three years and there hasn’t even been an interim report.”
French and German are the predominant languages in the country of 450,000 people spread over 999 mountainous square miles. Luxembourg hosts large numbers of expatriates due to its status as a financial center and home to E.U. institutions such as the European Investment Bank and the European Court of Justice.
“I’m not saying anybody here helped kill the Jews, but in Luxembourg, only one Jew was hidden. We as the Jewish community are not only interested in payments to heirs, but also in history, because this story has never been written in Luxembourg,” said Moyse, who declined to speculate on the monetary value of losses or who exactly should be held accountable. “We are not blaming anybody because that’s not what we’re looking for. But people had losses and must be compensated.”Link here.
WHAT WE KNOW AND DO NOT KNOW ABOUT 9/11
I received a number of intelligent responses from readers of my August 14 column, “Gullible Americans”. The letters deserve a reply. Moreover, some contain important points that should be shared with a wider audience. Most readers from whom I heard understand the difference between loyalty to country and loyalty to a government. They understand that to support a political party or a government that is destroying the U.S. Constitution and America’s reputation in the world is, in fact, an act of treason.
I will begin by stating what we know to be a solid incontrovertible scientific fact. We know that it is strictly impossible for any building, much less steel columned buildings, to “pancake” at free fall speed. Therefore, it is a non-controversial fact that the official explanation of the collapse of the WTC buildings is false. We also know for a fact that the Air Force somehow inexplicably failed to intercept the alleged hijacked airliners despite the fact that the Air Force can launch jet fighters to 29,000 feet in 2.5 minutes. We also know that the two co-chairmen of the 9/11 Commission have just written a book that reveals that the U.S. military lied to the Commission about its failure to intercept the hijacked airliners.
There are various explanations for this second fact. The military could have lied to cover up complicity or to cover-up its incompetence. However, no investigation has been made to ascertain the true explanation for the failure. This leaves us with the incontrovertible fact that buildings cannot “pancake” at free fall speeds. The only explanation known to science for the free fall collapse of a building, especially into its own footprint, is engineered demolition, which removes the supports for each floor of the building at split second intervals so that the debris from above meets no resistance on its fall. To call this explanation a “conspiracy theory” is to display the utmost total ignorance. Any physicist or engineer who maintains that buildings can “pancake” at free fall speed has obviously been bought and paid for or is a total incompetent fool. The WTC buildings are known to have collapsed at free fall speed into their own footprints. This fact does not tell us who is responsible or what purpose was served.
Since the damning incontrovertible fact has not been investigated, speculation and “conspiracy theories” have filled the void. Some of the speculation is based on circumstantial evidence and is plausible. Other of the speculation is untenable, and it is used to protect the official explanation by branding all skeptics “conspiracy theorists”. I would not be surprised if some of the most far-out “conspiracy theories” consist, in fact, of disinformation put out by elements in the government to discredit all skeptics. But I do not know this to be the case.
How could government complicity be kept a secret? It can be kept a secret, because so many Americans are scientifically ignorant and emotionally weak. Also, many anti-war and anti-Bush online sites are scared of being called “crazy conspiracy kooks”. They protect their sites by staying away from the 9/11 issue. Of all the online subscribers to my column, only two had the courage to post my column. Even antiwar sites serve as de facto gatekeepers for the neocons.
We know nothing about alleged suicide flyers led by M. Atta except what the government has told us – a government that has lied to us about everything else. According to reports, 6 of the alleged suicide hijackers are alive and well in their home countries. I do not know if the report is true, but I do know that the report has been ignored and there has been no investigation. Both the U.S. government and the U.S. media have turned a blind eye. We have no way of knowing if Atta and his named accomplices hijacked the planes, or, if they did, whether they were dupes of intelligent services that pretended to be a terrorist cell and organized the cover for the engineered demolition. The fact that we do not know any of these things, and the fact that the 9/11 Commission co-chairmen now tell us that their report is flawed, are good indications that we have no documented information of who was behind the plot, why it occurred, or how it operated.
Despite the dark days in which we live, some readers find optimism in recent polls that show more than one-third of the U.S. public now disbelieve the official account of 9/11 despite the Bush regime’s propaganda faithfully trumpeted by the U.S. media. Bush’s own rock-bottom polls show that Americans, like the Russians of the Soviet era, can read between the lines of the propagandistic U.S. media. Many Americans can still spot a liar and a cheat when they see one.Link here.
REAPING INFLATION’S WHIRLWIND
We find we do our best thinking when we are asleep. While we were dozing, our brain must have gone to work on the theme of the article like a Pakistani policeman on a “jihadi”. We awoke in the middle of the night to find it reduced to a bloody pulp, and blabbing about one simple and horrible crime – the destruction of the American middle class. But, the culprit is no pawn of jihad. No splinter faction or 5th columnist, no mole, no collaborator, no revolutionary cell skulking in basements. No, in the U.S. in the early 21st century, as in the Weimar Republic, the saboteurs are the financial chiefs ensconced in the capital itself. They are the nibs whose faces grace magazine covers, who give speeches, win honorary degrees, and chivvy consumers. Can you believe it? All to avail themselves of every latest innovation from the financial industry … such as adjustable rate mortgages.
Remember that although the value of the dollar was whittled in half during his tenure at the Fed, Alan Greenspan enjoys his retirement today like a portly bishop, basking in a job done well. And, was it not the same Alan Greenspan who was knighted by Queen Elizabeth II, shortly after he won the prestigious Enron Prize?
The inflation of the mark in Germany led to disorder. It then led to sorrow. The inflation of the dollar, over the last quarter of a century, leads in the same direction. Winding through bubbles, busts, ARMs and Neg Am mortgages. In the last four years alone, debt in the U.S. has gone up by an amount equal to 100% of the GDP. There are now an estimated $300 trillion worth of derivative contracts outstanding, in a world economy only worth $55 trillion. And, it takes five to six dollars of additional debt to create one single dollar of additional GDP. The typical ratio is usually about two dollars of debt to one dollar of GDP.
But it is the bust in residential real estate that creates the most disorder and the most sorrow, because it has got the middle and lower classes caught in a steel trap from which they cannot escape. “No Money Down Disaster”, reads a headline in this week’s Barron’s. The author notices what we have been saying for months that adjustable rate mortgages are on the verge of ruining the marginal borrower and dragging down the entire economy, too. For, now, says Barron’s, residential real estate is threatening to revert to the mean, which may indicate a 30% drop in prices that will wipe out the equity of millions of homeowners.
Either they will end up paying more than they can afford – why did they go for “no money down” in the first place? – for something worth less than they paid for it (that is what happens in a bear market). Or, they will lose their houses. When that happens, the world they thought they understood, will give way beneath their feet. As Dr. Paul Cantor writes about the 1920s, “A society composed of embittered people … is soon going to face major political problems, as the rise of fascism in Germany was to show.”Link here.
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