Offshore News Digest for Week of September 25, 2006

GLOBAL LIVING & BUSINESS

GOT WHAT IT TAKES TO BE AN ISLANDER?

The act of moving to an island is a bit like falling head over heels in love. We are swept away by beauty, a sense of otherworldliness, and a natural high that really rattles the endorphins. In such a state, we feel blessed, joyous, excited, thrilled even. Just like love, if it is real we learn to love things about the other person (or island) that are deeper than surface appearances and the relationship puts down roots, blossoms, and endures for a long time. Living on an island is like being with someone you are madly in love with. It is important to pay attention to reality while we are floating on the pink cloud that will, inevitably, evaporate and bring us back to earth.

So you have found your perfect island paradise, far from the freeways, shopping malls and general madness we call civilization? Before you pack, there are several lessons that I would like to share learned from more than 15 years of living on islands – St. Thomas, U.S. Virgin Islands and Vashon Island, Washington. Although both islands are part of the U.S. (St. Thomas is a U.S. possession) and share a common currency, they are as different as, say, Duluth, Minnesota and Tippo, Mississippi. But they have something else in common as islands with all the quirks and delights that make island life fascinating and challenging. They demonstrate that becoming an islander is as much a state of mind as it is a physical address.

Despite the familiar eye-popping photos of the Virgin Islands with ice clear waters, snow white beaches, and gently swaying palm leaves, do not be fooled about St. Thomas. It is a bustling, throbbing hub of frenetic life that never rests. True, there are serene beaches, such as Magen’s Bay, not too far from Charlotte Amalie, where cruise ships from all over the world regularly visit. In terms of serenity, St. John with its protected national park status is probably the gold standard in the American Virgins. St. Croix, just a short seaplane ride from Charlotte Amalie, is large, mostly flat, and agricultural.

Thus, lesson number one is to be prepared for the unexpected when relocating to an island. There is a powerfully seductive force that islands exert on mainlanders so powerful at times that it can overwhelm what is sometimes referred to as “reason” in otherwise rational folks. Real estate agents, of course, are familiar with this giddy vulnerability which is why it is probably a good idea to rent somewhere before buying, particularly if you have not already spent a lot of time visiting your island destination.

Having made that Serious Point, I must confess that when I arrived by ferry at Vashon Island after a mere 15 minute ride from Seattle, I was so captivated by its lush greenery and peacefulness, I muttered to my wife as we approached the dock: “We’re home.” Then we proceeded to buy a house on a cliff overlooking Puget Sound after just one day of scouting island properties. I certainly have not regretted my decision, but if I had made such a sudden move in my days as a reporter on the Virgin Islands and bought property on St. Thomas, I would have lived to regret it.

One reality that I have found to be true in both my island experiences is the stigma attached to newcomers. When our heads are in the clouds, or the hibiscus, we may well be oblivious to this at first. But when I moved to St. Thomas as a white “continental”, I was in a racial and cultural minority. It was definitely eye opening to be in a barely tolerated racial minority for the first time. And when I moved to Vashon Island years later, I was stigmatized because I came from California. There lingers a resentment against Californians who cash in their Golden State mortgages and use their ill-gotten gains to buy expensive island properties thus inflating the local economy and making life tougher for the struggling natives. I solved the problem of discrimination in the case of St. Thomas by moving back to the states with my wife and infant daughter, and chalking my Caribbean venture up to “experience”. I have coped with the California stigma by simply hanging in and becoming a part of the community long enough to be accepted.

Moving to an island, we confront a strange duality in our natures. The same need that impels us to seek solitude, serenity, and the peaceful healing we imagine an island will provide, also produces isolation. If you are a monk, you have pretty much made a vow that holy isolation is your chosen path. If you are just another frenzied American who wants to get away from the rat race, you need to be prepared to deal with isolation – some of it consciously chosen and some that results from xenophobia. Isolation can be nurturing for the soul or drive us mad, depending on how we handle it. That is why it is a good thing to consider before making your move what kind of community or support network you would like to develop on the island. You will need your support system as much, or more, after making your move.

Since you wanted an adventure in moving to an island, don’t freak out when unexpected “adventures” occur. It is important to develop a Zen way of dealing with daily life. And then there is the business of “island time” versus mainland time. Since everyone else moves on island time, the newcomer needs to become quickly familiar with this unique island characteristic. Although it will eventually dawn on you if you live on any island long enough, it is helpful to know when you arrive that while the island may be a quaint paradise to you, to the natives it is their home.

VANUATU LAND SUMMIT HEARS CALLS FOR CURBS ON FOREIGN OWNERSHIP

Vanuatu’s first land summit since independence a quarter of a century ago got underway this week, with the government urged to change the existing land laws to favor the indigenous peoples of Vanuatu. The conference, entitled “Sustainable Land Management and Fair Dealings to Ensure Progress with Equity and Stability”, was convened to discuss how land laws can allow development to take place on the islands while respecting Vanuatu’s customary land tenure system, based on communal ownership.

By allowing foreign investors to take up long term leases on pieces of land, tribal leaders argue that government land policy has breached the spirit of the country’s constitution which seeks to protect the indigenous land tenure system. According to Ralph Regenvanu of the Vanuatu Cultural Centre, two thirds of coastal land on the main island of Efate is now controlled by foreigners through long term leases, while land on the island of Santo, where the country’s second-largest urban zone is located, is also going the way of foreign ownership. “There is a view that this is going on and we need to intervene before it goes too far,” he argued. The week-long summit is expected to eventually lead to new proposals on land ownership law from the government.

CENTRAL AMERICA WANTS U.S. RETIREES

High in a downtown San Francisco hotel, Nicaraguan folk dancers twirl in lacy white dresses, their bare feet creating rhythms on the wooden stage, giving their buttoned-down audience a bit of tropical warmth on a foggy afternoon. Their flounce and easy smiles before a roomful of travel experts are part of an effort to promote Nicaragua to Americans who might choose to retire there, attracted by its pristine beaches and colorful culture. Then there are the tax breaks and other incentives, which baby boomers may find even sweeter than the tropical fruit the dancers carefully balance in baskets on their heads.

“They’re a growing market with disposable income looking for a place to live, and Nicaragua has that,” said the country’s young minister of tourism, Maria Rivas. In spite of the country’s gorgeous coastline and undisturbed forests, Rivas’s job has its challenges. Mention of Nicaragua and other Central American countries still is more likely to conjure images of dictators and guerrilla warfare than of cozy retirement homes. And glitches remain, such as uncertainty over upcoming elections and occasional power outages. Rivas said tremendous growth has taken place in recent years under the democratic government.

Seeking a warm and inexpensive place to retire is nothing new to Americans. Costa Rica and Mexico long have laid out a welcome mat to retirees. Several nations have sought to increase their appeal by passing laws meant to attract retirees, investors and others who can pump cash into the economy. In Nicaragua, anyone older than 45 who earns at least $400 a month can import their out-of-country earnings and household goods tax-free. It is even easier to invest. Those willing to put money into the country’s tourism industry, such as setting up a seaside cafe or resort, qualify for tax breaks of up to 100% on everything from construction material to furniture for up to 10 years. Honduras and Belize have passed similar measures. Panama sweetens the deal by throwing in discounts of up to 50% on all the comforts an American abroad could desire – movies, restaurants, airline tickets, even prescription medication and hospital stays.

The number of Social Security checks drawn abroad has risen steadily, from 188,000 in 1992 to 255,000 in 2004. And a growing number of retirees have been seeking out Central America and the Caribbean. More than 15,000 Americans drew their Social Security checks there in 2004. And the number of people who spend part of the year in the region is probably much greater, experts said.

Why would have people choose Panama? Lower cost of living is the overriding consideration.

I am here to discuss how businesses can profit from the growing number of Baby Boomers considering Panama as a place to live or invest. Over the past several years, there has been a lot of discussion concerning the “Baby Boomers” and what affect this group will have on Panama in general and the business community specifically. I think everyone here understands the importance of this generation and the incredible impact it will have on the long standing notions of what it means to be retired. However, I am not here to speak in general terms about whether or not this trend will affect Panama. The short answer to this is unquestionably it will. Rather, my brief presentation today will attempt to quantify the characteristics of this generation and share some of our observations of how you, the business community in Panama, can benefit from this coming trend by identifying just exactly who these people are and what they want.

Over the past 8 months, our company has developed a database of approximately 2000 people who have subscribed to one of our Prima Panama programs. With this in mind, we recently conducted a survey of our members to determine their motivations, attitudes and preferences and to get a better idea about the processes they use in considering their move or investment in Panama. It is important to note that our marketing is primarily Internet based, so our products and services are accessible to virtually anyone in the world. We also conducted a second survey asking many of the same questions to foreign residents currently living in Panama. Members from 21 different countries participated in our member’s survey. The vast majority of the survey participants came from North America with over 95% coming from the U.S. and Canada.

One of the most important things we wanted to find out was what motivates people to consider coming to Panama. From the data we collected, it is clear that the perception of the lower cost of living is the overriding consideration. All other factors were significantly less important. As a follow up to this question, we asked our survey participants to rank these various factors in order of importance. The cost of real estate was, by far, of greatest importance. When taken in combination, these data are very important. The overall factor driving people to Panama is the perception of substantially lower costs. When you ask about the factors that give Panama a competitive advantage over other countries (US$ based economy, proximity to their home country, taxes and even security) they do not rank nearly as important.

What does this mean? What this means is that the decision to consider a foreign country has become commoditized. If the cost/value proposition is not compelling enough, if the perceived value of moving to Panama is not high enough, people will not consider Panama or will look at other destinations offering better value. When asked about the amount of money they are willing to spend on a home purchase, 2/3s of the respondents said they wanted to spend less than $250,000. And nearly 48% of the people indicated they wanted a home for less than $200,000.

As a country, Panama is well positioned to take advantage of the growing number of baby boomers that will consider living outside their home countries. But Panama’s competitive advantage will only be maintained if the cost of living remains far below their home country and the price of real estate stays affordable.

Condo building bubble in Panama?

As my partner and friend, Paul McBride, and I attended the Expo CAPAC exhibition last night, we both were left speechless regarding what we had witnessed. Booth after booth of condominium towers and master planned communities were on display. I believe these builders have not done their homework regarding the demographics of the immigrants who they think will be buying these condos. I for one will be seeking a single family home perhaps in a Planned Unit Development, perhaps not. But it seems to me that their reliance upon the 50+ story condo skyscraper is misplaced. I foresee a different kind of real estate “bubble” for Panama … one that will “pop” due to overbuilding of the wrong kind of housing, and perhaps an over-reliance on their own “hype” as to the number of foreign immigrants who will be moving to Panama.

THE WORLD’S MOST COMPETITIVE COUNTRIES

Being a small European country with snow is conducive to economic growth. More correlation than causality, no doubt, but the three countries topping the World Economic Forum’s latest Global Competitiveness Report are Switzerland, Finland and Sweden – habitual winners all. Denmark, Singapore, the U.S., Japan, Germany, the Netherlands and the U.K. round out the top ten. OK, forget the snow, size and location. Soundly run government, being business-friendly and plowing back money into innovation, education and public health are more of what really matter.

The WEF compiles its annual competitiveness rankings (there is a separate one for business competitiveness) to pinpoint why some countries are able to grow consistently while others stagnate or see an erosion of living standards. At the bottom of the ranking of 125 industrialized and emerging countries, in worst to only slightly less bad order, are Angola, Burundi, Chad, Timor-Leste, Mozambique, Ethiopia and Zimbabwe – a gazetteer of economic blight. No prizes for guessing why Switzerland and some Nordic nations have consistently better long-term growth prospects than some of Africa’s most woeful countries. But what gives them the edge in the WEF’s indexes over the U.S., their larger European neighbors and the East Asian tigers?

All indexes reflect their components. This year the WEF has changed its methodology to give more weight to human capital and social factors that weigh on business in a way that its chief economist, Augusto Lopez-Claros, says reflects the global economy’s evolution since the index was first conceived in 2001. Its three broad criteria – macroeconomy, institutions and technological readiness – have been expanded to nine broad measures that score a country for the quality of its institutions, infrastructure, macroeconomy, health and primary education, higher education and training, market efficiency, technological business sophistication and innovation. Switzerland wins its No. 1 ranking (up from what would have been 4th last year on the new methodology) because of high scores for the quality of its institutions, efficient markets, and high levels of technological innovation. The country has a well-developed infrastructure for scientific research, intellectual property protections are strong, and its companies spend generously on R&D.

The U.S., which would have ranked at the top last year on the new methodology (although it was second on the old one), continues to score well for being business-friendly, having efficient markets, and for its world-class technology development. But the overall score was pulled down to 6th this year, by its budget and trade deficits. Any disorderly adjustment of such macroeconomic imbalances, the WEF warns, risks knocking the U.S. further down the ranks. Nordic countries, with Finland (2nd), Sweden (3rd) and Denmark (4th) all among the top 10 most competitive economies, have been running budget surpluses and have lower levels of public indebtedness, on average, than the rest of Europe. Finland, Denmark and Iceland have the best institutions in the world (ranked 1, 2 and 3, respectively) and, together with Sweden and Norway, hold top 10 ranks for health and primary education. Finland, Denmark and Sweden also occupy the top three positions for higher education and training.

But while the Nordic countries continued to fare well, Old Europe is another story. Its big economies appear to be losing their competitive edge, with Britain slipping one place to 10th, Germany falling two places to 8th, France down four places to 18th and Italy moving four places lower to 42nd. Other losers included Russia (62nd, down from 53rd), where the private sector has serious misgivings about the independence of the judiciary and the administration of justice, the WEF says. Property rights are weak and getting weaker. China fell from 48th to 54th. Buoyant growth coupled with low inflation, one of the highest savings rates and manageable levels of public debt meant the country scored well on macroeconomic measures. But the WEF sees the largely state-controlled banking sector as a structural weakness. By far the most worrisome development, the WEF says, is a marked drop in the quality of China’s institutions, with poor scores across all 15 institutional indicators, and spanning both public and private institutions.

India moved up two places to 43 on the list. It scored well for innovation, use of technology and rates of technology transfer. But insufficient health services and education and poor infrastructure are limiting a more equitable distribution of the benefits of India’s high growth rates, the WEF finds. Meanwhile, the country’s public sector deficit is one of the highest in the world.

FORMER SENIOR CARIBBEAN DIPLOMAT WARNS CARIBBEAN STATES AGAINST EU

Sir Ronald Sanders said that Governments and financial sector authorities in the Caribbean should be very watchful of the EU’s attempt to broaden the scope of the Savings Tax Directive. Earlier this month it was reported that EU Commissioner for Taxation, Laszlo Kovacs, is seeking to extend the Directive to Hong Kong, Singapore, Japan, Macao, Bahrain, Dubai, Canada and the Bahamas.

The move comes amid growing evidence that European investors have easily outwitted EU tax collectors by shifting their assets to locations not covered by the directive. The legislation, which extends to a number of “third countries” such as Switzerland, the Channel Islands and Caribbean offshore territories, was introduced in July 2005. It facilitates the exchange of information between EU tax authorities on certain types of savings and investments held by EU residents in their territory so that interest earned can be taxed in the resident investor’s home state. The legislation also allows some jurisdictions to apply a withholding tax, currently 15%, instead of exchanging information. However, these jurisdictions have reported relatively paltry withholding tax revenues, prompting the EU to take action to plug the directive’s many loopholes.

Although there are several ways for investors to escape the directive, such as switching assets to vehicles not covered by the legislation, perhaps the most obvious avoidance strategy is for investors to simply shift their money to more tax-friendly jurisdictions. Anecdotal evidence suggests that Dubai, Hong Kong and Singapore have been major beneficiaries. Sir Ronald says that the Bahamas is named because, apart from Cayman and the BVI, which are already captured in the EUSD, it has the most financial institutions in the region. He recalls the campaign waged by the OECD against Caribbean jurisdictions prior to the introduction of the Directive, saying that its “naming and shaming” campaign did great harm to several Caribbean countries which lost both earnings and employment as many financial institutions closed their doors. Indeed, Sir Ronald himself played a prominent part in the defence mounted, more or less successfully, against the OECD’s campaign.

Now he says, “Caribbean countries should be alert to the need to guard their financial services sector against further unnecessary erosion at a time when many of their economies are reeling from the loss of preferential access to the EU market for their exports such as bananas and sugar.”

ANTIGUA AND BARBUDA TAKES E-GAMING FIGHT TO WASHINGTON

America’s hard-line stance on the issue of internet gambling is likely to be at the top of the agenda during the visit by a delegation from the government of Antigua and Barbuda to Washington this week. The delegation, led by Minister of Finance Dr. Errol Cort, has been holding a series of meetings with representatives of the U.S.US Department of State, the U.S. Trade Representative, the Department of Justice and with Members of Congress, in an attempt to resolve the impasse over the American government’s refusal to comply with a WTO ruling against U.S. actions preventing banks from processing transactions from online gaming firms based in the islands.

As one of the world’s most popular e-gaming domiciles, the issue is viewed as crucial to the tiny jurisdiction’s economic survival. Antigua-based operators are thought to account for 25% of the estimated $12 billion wagered online by American punters every year. Subsequent developments will also have alarmed Antigua, such as the June 1st indictment against BetonSports, effectively shutting down the company which ran its U.S. internet business from Costa Rica and Antigua, and the approval by the House of Representatives of an internet gaming prohibition bill, which toughens sanctions against companies offering online gaming services from offshore locations. According to supporters of this bill, online gambling sucks huge amounts of money out of the U.S. while providing a poteital avenue of funding for money launderers, criminals and terrorists.

While the delegation may be powerless to influence the U.S. judicial authorities in their apparent crackdown on internet gambling, which cannot be conducted across state and international boundaries under existing legislation (although the situation regarding e-gaming is far from certain legally), perhaps his only hope in the short term will be to try and persuade Washington to refrain from further action against Antigua while the WTO Dispute Settlement Body considers its complaint against continuing U.S. non-compliance with a previous ruling.

NETHERLAND ANTILLES BREAK UP MAY BEGIN IN JULY 2007

The transition process towards the dismantling of the Netherland Antilles could begin in July 2007, according to the Dutch Council of State. However, acknowledging that the target date is only 10 months away, the Council, or RvSt, has warned the constituent islands against too much optimism about the date. The RvSt stated, “There are great risks to a de facto dismantled Netherlands Antilles without having the legal and organisational structures in place. A decent and multi-annual transition plan is vital.”

The current process has its origins in a constitutional crisis which erupted in 2004 due to irreconcilable differences between the constituent islands, and a joint Commission appointed by the Netherlands and the local government concluded that the jurisdiction should be broken up, with the islands of Curacao and St. Maarten becoming autonomous countries alongside the Netherlands and the Caribbean island of Aruba, while the remaining three islands – Saba, Bonaire and St. Eustatius – should be brought under the direct control of the Dutch government in The Hague. This was approved by the Dutch cabinet in December 2004.

The RvSt is also proposing a “Legislation Bank” of the Netherlands Antilles, and the five island territories which would facilitate a complete overview of all laws that are applicable on July 1, 2007. From this date, Dutch laws for the three smaller islands will begin to be implemented. However, the council warned that achieving country status for Curacao and St. Maarten, and direct ties for the other islands, would be a “considerable, complicated and lengthy operation,” with both national debt and individual island debts to consider. The jurisdiction’s total debt, which stands at NAF5 billion ($2.8 billion) will be restructured with the assistance of the Dutch government, according to the 2005 Roundtable Agreement.

BELIZE CLOSE TO DEBT DEFAULT

Although Belize has undertaken savage fiscal cut-backs under Prime Minister Said Musa, reducing a deficit of 9% of GDP to 3% in just two years, the government had to admit last week that it was close to default, and will have to restructure its debt. Mr. Musa denied that he is planning a devaluation, but market rumors suggest a “haircut” for existing debt holders of 25% to 50% of their loans. Standard & Poor’s recently lowered Belize’s sovereign credit rating from CCC- to CC and said that a punitive debt swap would reduce the rating to SD, for Selective Default.

Currently, Belize has outstanding international bonds totaling $338 million and $253 million in commercial loans. A further $116 million is accounted for by domestic debt. It is thought likely that all external debt will be swapped for a new bond issue. Belize bonds were trading at 72 cents on the dollar last week, and bond yields on the 9.75% coupon bond due in 2015 reached nearly 16%. Musa blamed four tropical storms which hit Belize between 1999 and 2003 for the country’s woes, also mentioning a major infrastructure investment program and rising oil prices.

INTERNATIONAL COMPANIES FAVOR HONG KONG, SURVEY SUGGESTS

According to a survey released by Hong Kong’s Census and Statistics Department, the SAR continues to be the preferred base for international companies to oversee their regional operations. The number of regional operations and local offices in Hong Kong operated by overseas and Mainland companies reached its highest-ever level this year, topping 6,350. The Department published the results of the 2006 Annual Survey of Companies in Hong Kong Representing Parent Companies Located Outside Hong Kong.

According to the poll, there were 1,228 regional headquarters (up 61 from a year ago), 2,617 regional offices (down 14) and 2,509 local offices (up 35) in Hong Kong representing their parent companies located outside the jurisdiction as at June 1. Speaking with regard to the survey results, Invest HK’s Director-General of Investment Promotion, Mike Rowse noted that was a 5% increase in regional headquarters, despite the 0.5% dip in regional offices. “It’s not spectacular, but ‘solid’ is a way of describing the numbers,” he observed.

The survey revealed that U.S. businesses had the most regional headquarters in Hong Kong, with 295, followed by Japan’s 212 and the UK’s 114 companies. Mainland China had the highest number of local offices in Hong Kong, with 449, followed by Japan’s 437 and the U.S.’s 391 companies. Among the factors affecting the choice of location for setting up regional headquarters or offices, 71% of companies considered a low and simple tax system most important. Other factors in Hong Kong’s favor included free flow of information, absence of exchange controls, infrastructure, free port status, corruption-free government, geographical location, availability of business services and professional support services, rule of law and independent judiciary, political stability and security, and availability of financial services.

Hong Kong to continue with U.S. dollar peg.

The U.S. dollar continues to be the appropriate anchor for the Hong Kong dollar for the foreseeable future and no change is needed to the Linked Exchange Rate System, a Hong Kong Monetary Authority study has found. With the renminbi not being a freely convertible currency nor a reserve currency, it is technically not possible for it to be a currency anchor, the HKMA has concluded.

The study noted that co-movements of business cycles in Hong Kong and the Mainland have increased steadily since the 1990s. There has also been a significant rise in the synchronisation of business cycles among the economies of the Mainland, Hong Kong and the U.S. since 2000. However, the authority’s Chief Executive Joseph Yam said that despite increasing integration between the Hong Kong and Mainland economies, co-movements of business cycles between the two are mainly explained by developments in the U.S. affecting both. The analysis suggested that over 60% of the variations in output shocks and over 45% of the variations in price changes in Hong Kong can be explained by U.S. shocks, whereas Mainland shocks explain over one-third of Hong Kong’s price movements. There is also little correlation between the components of the business cycles attributable to domestic shocks in Hong Kong and the Mainland.

ROMANIA AND BULGARIA TO JOIN EU IN 2007, SAYS EC

The European Commission adopted its final monitoring report on the preparedness of Bulgaria and Romania for EU membership. Based on the solid progress achieved, the EC considers that both countries will be in a position to take on the rights and obligations of EU membership on January 1, 2007. To address the limited number of areas where further work will be necessary, the EC has proposed a package of rigorous accompanying measures. On 25 April 2005, Bulgaria and Romania signed the Treaty of Accession, which foresaw their joining the EU on 1 January 2007.

NEW DEAL AUGURS EASIER LIFE ON GIBRALTAR

Walk into Gibraltar airport and the departure gates offer just one destination. Britain. Stroll across the border into Spain and your cell phone dies. These irritants, imposed by Spain to make things difficult for Gibraltarians as part of its 300-year-old case for recovering the Rock from Britain, are supposed to vanish under an historic three-way accord announced last week. The agreement promises in the next three months or so to breathe new life into the tiny relic of the once-mighty British empire. Among various concessions by all sides, it calls for easier access to and from Gibraltar, and an end to Spanish telecommunications interference that prevents Gibraltar cell phones from functioning on Spanish soil.

Esmeralda Valerga is thrilled. She moved from Gibraltar to Spain for cheaper housing, and commutes by scooter to her waitressing job on the 2.25-square mile Rock. “For me the deal is great. It’ll mean more work, more money and a faster ride home after work,” she said. At present her ride is a slow-motion nightmare because Spanish border police deliberately take their time.

Spain ceded Gibraltar to Britain in 1713 but never relinquished its claim to it. Gen. Francisco Franco, the Spanish dictator, shut the border in 1969 and it did not fully reopen until 1985. As long as Spain was a dictatorship, Britain could make a moral case for keeping Gibraltar, a democracy. But Spain and Britain are both democracies now and both belong to the EU, which would like to see this ancient feud settled for good. Some among Gibraltar’s 28,000 people fear they have let in a Trojan horse. “Basically, and I think I speak for most Gibraltarians, I just don’t trust the Spanish,” said businessman Jose Bocio. “We think they will stop at nothing just to get Gibraltar back, and we will never agree to give up our independence.”

Gibraltar is largely self-governing, with its own court system, but imports its food from Spain and Britain. The Royal Navy runs the port, a key source of revenue. The people are British citizens but do not vote in British elections. Instead they elect a 15-member legislature. People speak impeccable English and swear allegiance to Queen Elizabeth II, but are also fluent in Spanish. Policemen in British bobby uniform pound the beat, and Asian, Arab and Jewish stores and restaurants fill the alleys. While Bocio worries Spain’s nice-guy attitude is a ploy, others are pleased that this time, a treaty was reached not over their heads but with their government’s full participation.

Gibraltarians say that for too long they have lived under siege – borders abruptly closing or the water supply from Spain being cut off any time things turned nasty on the diplomatic front. Because Spain has refused to run more land phone lines into the colony, many Gibraltarians have to depend on a single line for their phone, fax and Internet. The shortage has become more acute as Gibraltar has become a center for online gambling sites. Besides, Gibraltar is a crowded place. It is so small that traffic has to stop for incoming and outgoing flights, because the runway crosses the main road. The new deal will open the doors to investment, especially in tourism and gambling-related business, said business consultant Peter Hulme.

TAXES

FOR U.S. WORKERS ABROAD, TAX BILL PROVES A HANDICAP

For Americans overseas, one subject just will not die down these days. Taxes. In May, President George W. Bush signed a bill passed by Congress that sharply raises tax rates for overseas citizens with salaries plus taxable benefits totaling $93,000 a year or more. The biggest effect so far has been on businesses. The new law taxes much more of the rent assistance provided by companies for employees abroad.

The U.S. is the only developed country that taxes its citizens while they are overseas, so nationals of countries like Canada, Britain, Australia and New Zealand can often afford to work for less and do not need to ask employers for costly tax assistance. “The concern is universal between the companies, where they feel they’re losing their competitive advantage if they hire Americans,” said Harley Seyedin, chief executive of First Washington Group, a power company, and president of the American Chamber of Commerce in Guangzhou. “Most companies are looking outside the U.S. if they need to hire.”

Americans living overseas, particularly those facing high taxes on employer-provided benefits like housing assistance and tuition for children in school, are wondering not only whether they can afford to stay, but also whether their employers will try to transfer them home. Tax experts said that in poring over the two main changes enacted in May – higher marginal tax rates and higher taxes on housing assistance – they had found several features that were not obvious at first. Initial discussions of the tax increase in Washington focused on its cost to corporations, notably oil companies, which often help pay their overseas employees’ tax bills. But many companies demand that Americans become employees of their overseas subsidiaries and give up their expatriate benefits, including tax assistance, if they settle down and stop moving to another city every several years.

Another wrinkle coming to light is that the tax increase also applies to non-Americans who carry green cards, which allow them to work in the U.S. Green card holders must pay American taxes even when they live and work outside the U.S. Tax experts urge them to reconsider whether it makes sense to retain the cards. And Americans living in fairly high-tax countries in Western Europe may find that they are no longer paying enough taxes overseas to avoid owing taxes in the U.S. as well. Many foreign tax codes may have higher marginal tax rates than the U.S. but allow more deductions and exemptions.

The interaction of the increased effective tax rates and the higher taxes on housing assistance will have the sharpest effect on the tax bills of overseas Americans who earn less than $500,000 a year, especially those with corporate benefits worth nearly as much as their salaries. Overseas families receiving free flights home for leave, generous medical benefits and subsidies for American-size apartments and houses suddenly find themselves facing federal tax rates as high as 35% on these benefits. Congress passed the increase to offset part of the cost of broader legislation that extended tax breaks for capital gains and dividends for investors at home and abroad. Senator Charles Grassley, the Iowa Republican who is chairman of the Finance Committee, is a longtime critic of tax breaks for expatriates, whom he has depicted as living in mansions paid for with tax-deductible dollars.

Until this year, the first $80,000 earned overseas was excluded from taxation in the U.S., with the next dollar earned overseas treated as though it were the first dollar of income and scarcely taxed. The new law increases the exclusion to $82,400, but the next dollar of income is now being taxed as though it were the 82,401st dollar of income. Until this year as well, only the first $11,894 in housing assistance was taxed, even if a company was providing more than $100,000 in rent assistance, as has been common in financial centers like Hong Kong, Tokyo and London. Under the new law, the first $13,184 a year of housing assistance is taxed, the next $11,536 is not, and any further housing assistance is taxed. It is common for housing assistance to be provided in costly cities not only to bankers and top executives but also to teachers at international schools, sales managers, and U.S. newspapers’ foreign correspondents.

BY STANDING STILL, U.S. FALLING BEHIND ON TAX, MANUFACTURERS CLAIM

Soaring non-wage costs, particularly taxation, are putting U.S.-based manufacturers at a competitive disadvantage to other major industrialised nations and risking the nation’s long-term economic health, the National Association of Manufacturers (NAM) has claimed. The study analyzed five structural, non-production costs – corporate tax rates, employee benefits, legal costs, natural gas prices, and pollution abatement. The corporate tax rate was both the highest burden in absolute terms and the largest contributor to the increase in structural costs, responsible for more than one third of the increase in the cost burden, the study found.

While America’s corporate tax rate has remained the same since the last study, the gap has widened because some trading partners have lowered their statutory tax rates, the report concluded. “By standing still, the United States is falling behind,” said John Engler, the NAM’s president. The report also finds that U.S. manufacturers have also lost a considerable competitive advantage in other costs, particularly natural gas prices, which were 30% lower than America’s nine major trading partners in the mid-1990s but just 0.7% lower in 2005.

OECD CLAIMS SUCCESS AT ABOLISHING “HARMFUL” [TO WHOM?] TAX REGIMES

The OECD claims to have made significant progress in persuading its members to abolish harmful tax regimes since the publication of its 2000 report on global tax cooperation. In its 2006 progress report, which follows on from a similar report published in 2004, the OECD said that of the 47 preferential tax regimes identified in 2000 as being “potentially harmful”, 19 regimes have been abolished, 14 have been amended to remove their potentially harmful features, and 13 were found not to be harmful. Only one was still considered harmful, which was part of Luxembourg’s 1929 holding company regime. The Committee reviewed holding companies and similar preferential regimes in a number of member countries and determined that the regimes of Austria (as amended), Belgium, Denmark, France, Germany, Greece, Iceland, Ireland, Luxembourg (participation exemption), Netherlands, Portugal and Spain were not harmful.

Concerning the Luxembourg 1929 holding company regime, the Committee noted that amendments to the regime had been made in 2005, but concluded that the amendments did not address the concerns of the Committee relating to the harmful feature of lack of effective exchange of information and that the regime was therefore still considered “harmful”.

Paolo Ciocca, Chair of the OECD’s Committee on Fiscal Affairs, said that the latest progress report shows how the group has made “real progress” in it mission to stamp out harmful tax practices on a global scale. “OECD countries embarked on a difficult challenge when we commenced our work on countering harmful tax practices and this report reflects the success we have had in bringing about change," he commented. However, he indicated that the OECD does not yet consider its mission complete. “Further work is required to fully implement the standards we have set so that national tax laws in countries large and small can be fairly and effectively enforced. I look forward to more rapid progress in this area,” he stated.

AUSTRALIA “SIGNIFICANTLY ASSISTED” BY OTHER COUNTRIES IN OFFSHORE TAX PROBES

Australia’s largest tax fraud investigation, Operation Wickenby, was launched after the Australian Taxation Office discovered high-profile people were using offshore credit and debit cards to access overseas wealth. Tax commissioner Michael D’Ascenzo said information on 1069 debit and credit cards linked to offshore accounts used for tax avoidance had come out of a “spontaneous information exchange” between the member nations of the Joint International Tax Shelter Information Centre (JITSIC). “In following up this information on the 1069 debit/credit cards, we found that some of these credit cards were being used to repatriate funds to Australia from tax havens,” Mr. D’Ascenzo said.

International companies often open headquarters in low-tax countries such as the Channel Islands and Bermuda to lower corporate and personal taxes. Mr. D’Ascenzo told a luncheon of the American Chamber of Commerce in Sydney that shared information on cross-border tax risks had “significantly assisted” Australia “in the care and management of a fair tax system.” The JITSIC forum – Australia, Canada, France, Germany, Japan, Britain and the U.S. – had agreed to set up a database on a wide range of tax-scam promoters and schemes.

Tax administrators from 35 countries, including Australia, have agreed to a global push to clamp down on international tax evasion. Over the next year, the ATO will be part of a drive by the OECD countries to uncover tax scams, identify their promoters, train officers and examine corporate governance standards. More use would be made of information exchanges to track down tax haven misuse. In the Pacific region, the ATO has had initial discussions with Samoa, Vanuatu, Cook Islands, Marshall Islands and Nauru.

Mr. D’Ascenzo said the ATO was seeing examples of several tax minimizations arising from cross-border financing, where global organizations were enjoying duplicate tax benefits, such as deductions or credits across countries. “The transactions typically use hybrid entities and hybrid financial instruments,” he said. “While the efficacy of such arrangements is ultimately a question of law, transactions such as these warrant scrutiny.”

LOW-TAX BERMUDA SET TO LURE MORE U.K. INSURERS

More London-based insurers are likely to follow Hiscox P.L.C. and Omega Underwriting to Bermuda in a bid to compete with rivals already based in the tax haven. The firms’ announcements they are moving their headquarters has reignited the debate over whether London can resist the growing challenge from the tiny Atlantic island, which has quickly transformed itself into a leading insurance center. Despite the London insurance market’s attempts to overhaul its business practices to make itself a cheaper and more attractive venue, the simple issue of lower tax is an incentive for businesses with international reach, which can be conducted anywhere, to move offshore. “I think it’s inevitable others will follow us,” said Bronek Masojada, chief executive of Hiscox.

While Mr. Masojada said the company’s decision was prompted primarily by the fact that over half the group’s business now comes from the U.S. and Bermuda, he agreed that “the tax and regulation issues are a combined second.” The logic of moving overseas is simple and compelling. Moving to Bermuda means you can cut your tax rate to close to 10% from around 30% in the U.K. “More than halving your tax rate obviously has a fairly substantial effect on your net earnings and your value to shareholders,” said Gerald Farr, insurance analyst at Seymour Pierce. A move to the tax haven could boost your company’s value to shareholders by up to 20%, said Mr. Farr.

Moving to Bermuda would only make sense for those companies that specialize in international reinsurance or big-ticket corporate insurance, with an emphasis on business from the U.S., as a thriving market for these kinds of risks has developed on the island in the past 20 years. In fact, remaining based in the U.K. puts these kinds of insurers at “quite a significant competitive disadvantage” to Bermuda-based rivals, according to Stephen Catlin, Chief Executive of Catlin Group Ltd., the specialist insurer that moved its headquarters from London to Bermuda in 1999. Not only does being based in Bermuda make it easier to attract new capital, but it also means companies can often charge lower premiums as well, partly because brokers charge less money to do business there than in London.

“If I were a pure reinsurance operator I would not locate my business in the U.K., full stop,” said Mr. Douetil. His company had considered relocating but decided that its big U.K. operation meant it did not make sense to move abroad.

IRS TO ADDRESS ISSUES RAISED BY TRIANGULAR REORGANIZATIONS INVOLVING FOREIGN CORPORATIONS

The U.S. Department of the Treasury issued a notice announcing that, in conjunction with the IRS, it will issue regulations to address certain triangular reorganizations involving foreign corporations. The notice responds to comments and requests for guidance regarding certain triangular reorganizations that are designed to avoid U.S. tax, including tax on the repatriation of a subsidiary’s earnings.

The notice describes the transactions as involving a parent corporation (P) and a subsidiary corporation (S) where S transfers property to P in exchange for stock of P and then uses the P stock as consideration in an exchange to acquire the stock or assets of another corporation in a triangular reorganization. Taxpayers take the position that S’s transfer of property to P for P’s stock is treated as the purchase of P stock, and not a distribution from S to P, thereby effecting, in most cases, a tax-free transfer of S’s earnings to P without U.S. income tax.

The notice provides that the regulations that will be issued will apply only where P or S (or both) is a foreign corporation. Further, the regulations will make adjustments with respect to P and S such that the property transferred from S to P in exchange for P stock will have the effect of a separate distribution of property from S to P. When issued, the regulations will apply to transactions occurring on or after the date the notice was released for publication, or instances where a transaction was entered into pursuant to a written agreement which was binding before the publication of the notice and all times thereafter.

CALIFORNIA MULLS NEW TRANSFER PRICING RULES FOLLOWING PRESSURE FROM UK

The government of the United Kingdom and a number of multinational companies have joined forces to successfully persuade the Californian tax authorities to overturn a transfer pricing rule that would have cost foreign firms hundreds of millions of dollars in tax. According to a report in the Financial Times, companies including Barclays, Nestle and Sony had argued that the rule, which had been in place since the 1990s but was only recently enforced, unfairly discriminated against foreign firms with subsidiaries in California. Opponents had said that the rule would have made it more expensive for U.S. subsidiaries of foreign companies to borrow money or acquire licences from their parent companies, and warned that such a rule could deter foreign investment at a time when California was seeking to boost investment from overseas.

The decision by the California Franchise Tax Board followed closely a vote by the Washington-based Organization for International Investment – which represents foreign companies operating in the U.S. – to support a petition for a change. The Board is now said to be working on alternative language that will form the basis of an amended rule.

U.S. TREASURY SEEKS TO REDUCE TAX GAP

The U.S. Treasury Department unveiled a comprehensive strategy for reducing the tax gap. In a statement, the Treasury’s Office of Tax Policy explained that, “In fiscal year 2005, Federal receipts totaled over $2.2 trillion. More than 95% of net receipts were collected by the [IRS] through its administration of the income, transfer and excise tax provisions of the Internal Revenue Code. The vast majority of these receipts is collected through our voluntary compliance system, under which taxpayers report and pay their taxes with no direct enforcement and minimal interaction with the government. The overall compliance rate achieved under this system is quite high. … Nevertheless, an unacceptably large amount of the tax that should be paid every year is not, requiring compliant taxpayers to make up for the shortfall and giving rise to the ‘tax gap’.”

The strategy document published yesterday outlines an aggressive strategy for addressing the tax gap. The more detailed elements of the tax gap strategy are, in part, contingent upon the budget process for fiscal year 2008 and beyond. Four key principles guided the development of the strategy, namely, (1) Unintentional taxpayer errors and intentional taxpayer evasion should both be addressed. (2) Sources of noncompliance should be targeted with specificity. (3) Enforcement activities should be combined with a commitment to taxpayer service. (4) Policy positions and compliance proposals should be sensitive to taxpayer rights and maintain an appropriate balance between enforcement activity and imposition of taxpayer burden.

SERVICE TAX BRINGS BUMPER REVENUE CROP FOR INDIA

An increase in the tax rate and the number of services covered by the service tax net will push revenue from this levy to R50,000 million ($10.9 billion) during the current fiscal year against the targeted figure of R40,000 million, according to industry body Assocham. Assocham President, Anil K. Agarwal revealed this week that the service sector has registered substantial growth in the last couple of years and this trend will continue to yield high revenue collections for the government.

However, according to Assocham, service tax evasion has been “significant” and tax officials have begun to increase search and seizures. Meanwhile, the Chamber reported that multinational companies and large corporations have been voluntarily paying off their dues “for fear of being caught.” The Chamber has also pointed out that since the intention of the government is to move towards Goods and Services Tax by 2010, it is important that all states should introduce VAT at the earliest opportunity. It has also called on the central government to bring all services under the tax net, barring basic essentials and public utilities.

ASSET PROTECTION / LEGAL STRUCTURES

THE REAL ART OF ASSET PROTECTION

Summary. A couple made transfers of property to a trust at a time that they had no current creditors, for the stated purpose of protecting their assets against the claims of future unknown creditors. When later they had incurred a federal tax liability, the court held that the fact that they had done asset protection planning to defeat the claims of future unknown creditors was enough to satisfy the actual intent element of the Washington fraudulent transfer laws as to the IRS. The court also held that the trust to which the couple transferred their assets was in fact their nominee and alter ego, where the couple made no rent payments to the trust while continuing to live in the home that had been transferred, and where the affairs of the trust and the couple were so liquid and intertwined as to be indistinguishable.

The Townleys had owned their personal residence since 1977. In 1990, the couple borrowed against the equity in their personal residence to purchase an interest in investment property. In 1995, the Townleys created the Beaver Valley Trust and conveyed their personal residence and interest in the investment property into this new trust. Although the Beaver Valley Trust has an independent trustee and their children were the beneficiaries, the Townleys were made the “Trust Managers” for an indefinite period and given the power to handle all trust affairs. Of course, they still lived in their personal residence, but did not pay any rent to the trust or even make the utility payments. By 2000, the Townley had gotten themselves into tax trouble and had been assessed nearly $175,000 in unpaid taxes, interest and penalties.

In 2001, the Townleys filed for bankruptcy to attempt to wash out their federal tax liability. Although the Townleys’ objection to the IRS’s claim was denied, the Townleys were given a discharge and the bankruptcy trustee reported that there was no unsecured property available for distribution. The IRS then filed suit in U.S. District Court to reduce the federal tax assessments to judgment, set aside the transfers to the Beaver Valley Trust as fraudulent, and to foreclose on the federal tax liens. The Townleys claimed that they did not make the transfers to defraud the IRS, since the IRS was not even their creditor at the time. Instead, they created and transferred property into the Beaver Valley trust to protect their assets from unknown future creditors.

The District Court held that since the Townleys transferred their property to the Beaver Valley Trust before the IRS became a creditor, they would be considered a future creditor of the Townleys under Washington law. Far from exculpating the Townleys from a fraudulent transfer, the District Court held that their admission that they made the transfers to protect against unknown future creditors was a veritable confession of their actual intent to hinder, delay or defraud all creditors, including the IRS. The District Court then noted that in addition to satisfying the actual intent test, the “Badges of Fraud” that constructively prove the Townleys’ intent to defraud creditors were also satisfied by their admissions. The District Court further held that a trust may be considered an “insider” for purposes of a Badges of Fraud analysis, and additionally a trust may be considered an “insider” where it for the benefit of the debtors’ children, since children would be considered an insider as well.

The court found other factors that indicated that the transfers were fraudulent. The Townleys had also retained possession and control of their personal residence by continuing to live in it after the ostensible transfer, but did not make any rent payments or pay the utilities. The Townleys had transferred substantially all of their assets to the trusts (thus not giving them the ability to pay their tax bills as they came due). Finally, the Townleys had received no consideration for the transfer of their properties when they gifted them to the trusts. The District Court also adopted an alternate theory – the trust amounted to the nominees of the Townleys, and thus its assets were available to satisfy their creditors under a nominee or alter ego theory.

Based on all the foregoing, the District Court entered an order granting the IRS summary judgment and allowing them to directly foreclose upon those assets.

A myth has persisted in the asset protection world that as long as you do planning when there are no creditors around, it will ipso facto be safe. If you do planning with the intent to defeat the rights of any future creditors who may later appear, regardless of who they are, then that intent will be applied to set aside the transfer as to any particular creditor who does in fact appear later. Thus, there is nothing in the nature of a safe harbor simply because the planning was done when no creditors were present IF the planning was done with the intent to defeat any creditors, including future unknown creditors.

Planning must be done for non-asset protection reasons. Except for recognized homestead and statutory exemption planning, and some business entity planning and spendthrift trust planning, you should not conduct asset protection in its own name. As this case shows, that the clients engaged in transfers to protect assets from unforeseen future creditors had the practical effect of a sworn confession that they had the intent to fraudulently transfer assets as to all creditors who came later. You cannot make this confession, which means that you cannot admit to engaging in planning for the purpose of defeating ANY creditors of any kind. If a creditor gets possession of any documents that talk about asset protection, that will be evidence of actual intent to hinder, delay or defraud creditors, even if the creditor who does appear later was totally unforeseen.

There is nothing in the law that authorizes asset protection planning generally, except as allowed by some statutes. But there is plenty that prevents it, including primarily the fraudulent transfer laws. By and large, the legislatures and the courts want to see creditors get paid on their judgments and they have not given unconditional approval to planning that has as its stated purpose the shielding of assets from creditors. If one cannot stand up and give a straight-faced reason why the planning was done for legitimate other purposes than to lessen the rights of creditors, that planning will be in grave danger until the fradulent transfer laws Statute of Limitations have run.

The court repeatedly focused on the fact that the Townleys had transferred their home to the trust, but had continued to live in it while paying no rent or even the utility payments. This fact was important in determining that the trust was really just a nominee of the Townleys or their alter ego. The upshot of this is obvious. If you expect to put a personal residence into a trust have it respect for creditor-debtor purposes, it is critically important that the clients make regular rent payments to the trust and make all the utility payments. Not paying rent or utilities may work from a tax treatment standard but that does not mean that the civil courts will respect the arrangement – to the contrary, to the civil law courts the arrangement will look like a sham.

We also see in this case where alter ego law is once again being expanded to set aside an obvious asset protection scheme, where the debtors claimed that they transferred assets but continued to enjoy and control them. You simply cannot have it all ways. If you expect the trust to be treated as a legally independent entity, then you must treat it as a legally independent entity. That means an arm’s-length relationships between those benefitting from the use of trust assets and the trust must exist at all times. You cannot treat a trust like the family piggy bank and think that it will still be respected for creditor-debtor purposes.

The fraudulent transfer laws are primarily aimed at transactions that are without “reasonably equivalent value”. Why? If the debtor does not get back something of value from the transferee, there is nothing available for the creditor to satisfy the judgment. Gifts are inherently without “reasonably equivalent value” – there is no consideration for a gift. If asset protection is an issue then gifts should be avoided because they are easy for creditors to set aside.

In summary, asset protection is a very difficult planning area. There is no “safe harbor” simply because the planning was done at a peaceful time when there were no creditors on the horizon. That is a myth and one that is now exploded. You cannot do asset protection planning in its own name and expect it to survive scrutiny. Either the asset protection will be explainable for legitimate, non-creditor reasons, or it will probably fail. And, as with business entities, you must respect trusts as separate stand-alone legal entities. This includes paying rent when a home is in the trust. Finally, you must avoid making gifts where asset protection is a concern, because gifts are inherently weak forms of transfers for creditor-debtor purposes.

The real art of asset protection apparently involves creating a fundamentally sound plan that has a solid asset-protective effect, but does not appear to be an asset protection plan at all.

DUBAI’S TRUST LAWS WIN INTERNATIONAL RECOGNITION

The Dubai Financial Services Authority (DFSA), the regulator for the Dubai International Financial Center (DIFC), has been awarded “Best Government Initiative of the Year” by the Society of Trust & Estate Practitioners (STEP) for its new trusts legislation. The DFSA’s Trust Law, which provides a legal foundation for trusts to operate throughout the region, using the DIFC as their platform, has been specifically built to fit the needs and requirements of trust operators and is based on international best practice.

The DIFC is the world’s fastest-growing financial center and the hub for business activity in the MENA region. In just over one year, more than 200 top international institutions have joined the DIFC as registered firms. Assem O. Kabesh, Chief Business Development Officer and Board Member at the DIFC Authority, observed that, “The DIFC is a unique domicile, providing trust operators with zero tax, state-of-the-art infrastructure and a fully transparent, internationally-recognized legal and regulatory environment”.

TOP 5 TIPS TO NOT GET HACKED ONLINE

“Oh my God, I’m never doing anything on-line again!,” is a common reaction to one of my web application hacking presentations. Recently I have been demonstrating how easily the average website or user can be hacked. No doubt scaring audiences has a certain mass appeal and gets people to pay attention to why the right security practices are of vital importance. People frequently ask if I still bank or shop online (of course I do), or how they can protect themselves when they do. For those who are not experts in computer security, here are my top 5 tips to a safer online experience (in addition to having firewalls, anti-virus, and patching diligently).

(1) Switch your web browsers to Firefox, Mozilla, Safari, or anything else besides Internet Explorer. This is probably the single most important thing you can do to protect yourself online. (2) Add more security to your browser. NoScript (Firefox extension), Netcraft Anti-Phishing Toolbar, E-Bay Toolbar, and Google Toolbar are great products that do just that. (3) Do not click on links in email, almost ever. (4) Defend your Web Mail! The best thing you can do is use unguessable passwords, change them ever six months or so, and do not use that password anywhere else. Bonus points for deleting emails with any sensitive information. (5) Use a single credit card for online purchases. Refrain from using a debit card online since they don’t carry the consumer legal protections as credit cards.

Normally this is the part where the expert starts talking about SSL and tells you to check for the lock symbol. In my experience just about every legit website accepting credit cards is now SSL-enabled. So the better advice is to make sure you are actually on the legitimate website you think you are on. Otherwise SSL is not going to matter much anyway.

PRIVACY

TWEAKED FIREFOX LETS YOU SURF INTERNET WITHOUT A TRACE

A tweaked version of Firefox that makes Web browsing anonymous has been released by a group of privacy-minded coders. Every few minutes, the Torpark browser causes a computer’s IP address to appear to change. IP addresses are numeric identifier given to computers on the Internet. The number can be used along with other data to potentially track down a user, as many Web sites keep track of IP addresses.

Torpark’s creators, a group of computer security gurus and privacy experts named Hactivismo, said they want to expand privacy rights on the Internet as new technologies increasingly collect online data. The browser is free to download here. It is a modified version of Firefox Portable, an optimized version of the browser that can be run off a USB memory stick on a computer. The Torpark browser uses encryption to send data over The Onion Router, a worldwide network of servers nicknamed “Tor” set up to transfer data to one another in a random, obscure fashion. Internet traffic, such as Web site requests, carries information on where it came from and where it is going. But that is muddled using Tor, which has been endorsed by the Electronic Frontier Foundation, and is hard to trace back to a source.

One minor downside is that surfing with Torpark is slower than with a typical browser over the same connection. Torpark’s user interface appears similar to Firefox with a few changes. It shows the current IP address that would be seen by Web sites in the lower right hand corner, and features a special “Flush Tor” button to reset a new, random server connection.

GONZALES WANTS ISP’S TO SAVE USER DATA (IT’S FOR THE CHILDREN)

Attorney General Alberto Gonzales said that Congress should require Internet providers to preserve customer records, asserting that prosecutors need them to fight child pornography. Gonzales and FBI Director Robert Mueller have met with several Internet providers, including AOL, Corp., Google, Microsoft and Verizon. The law enforcement officials have indicated to the companies they must retain customer records, possibly for two years. The companies have discussed strengthening their retention periods – which currently run the gamut from a few days to about a year – to help avoid legislation.

During those meetings, which took place earlier this summer, Justice Department officials asserted that customer records would help them investigate child pornography cases. But the FBI also said during the meetings that such records would help their terrorism investigations, said one person who attended the meetings but spoke on condition of anonymity because the meetings were intended to be private. Testifying to a Senate panel, Gonzales acknowledged the concerns of some company executives who say legislation might be overly intrusive and encroach on customers’ privacy rights. But he said the growing threat of child pornography over the Internet was too great. “This is a problem that requires federal legislation,” Gonzales told the Senate. He called the government’s lack of access to customer data the biggest obstacle to deterring child porn.

The subject has prompted some alarm among Internet service provider executives and civil liberties groups after the Justice Department took Google to court earlier this year to force it to turn over information on customer searches. Civil liberties groups also have sued Verizon and other telephone companies, alleging that they are working with the government to provide information without search warrants on subscriber calling records.

LAW

MURPHY AND THE SIXTEENTH AMENDMENT

On August 22, 2006, the U.S. Court of Appeals for the District of Columbia decided the appeal of Ms. Marrita Murphy in her case against the IRS. For the first time in a long time the court took a serious look at the definition of the word “income” as it is used in the Sixteenth Amendment. The case centered on whether or not an award of $70,000 received by Murphy for damages she experienced was taxable. Murphy had been retaliated against because she had been a whistleblower, and the award was to “make her whole.” An administrative law judge awarded the monies for “compensatory damages …, of which $45,000 was for ‘emotional distress or mental anguish’, and $25,000 was for ‘injury to professional reputation’.”

Murphy had reported some environmental problems at the New York Air National Guard. Her whistleblower actions got her not only fired, but blacklisted too. The entire ordeal was stressful for Murphy and she sued her former employer. The National Whistleblower Center lawyers successfully prosecuted the case. The IRS wanted a cut of the award, but Murphy believed the award was nontaxable. Murphy, who must have developed faith in her whistleblower lawyers, retained them to litigate the tax case against the IRS, even though, as a firm, they had no experience in tax litigation. What was at issue was whether or not the $70,000 Murphy received for these damages was taxable. The federal District Court said, “yes”, but the Appeals Court said, “no”, and remanded the case back to the District Court “instructing that the Government refund the taxes Murphy paid on her award plus applicable interest.” The Appellate Court ruled that the monies received by Murphy were taxable under 26 USC 104 (a), but that this section of the United States Code was unconstitutional on the grounds that the monies received by Murphy were not “income” within the meaning of the Sixteenth Amendment.

The National Whistleblower Center’s lack of experience in tax litigation worked in their favor. They were not biased to the status quo, and instead took a fresh look at the issue. They started at the beginning of the issue, and researched the legislative history of 26 USC 104 (a). They had to as they knew nothing about tax law. Most tax attorneys do not do original research. Murphy’s lawyers questioned everything including the meaning of the word “income” as it was used in the Sixteenth Amendment. Not only did her lawyers do so, but so did the panel of three appellate judges. Since these judges normally do not handle tax cases, they were likely more open minded and not biased by the tax mantra of today.

The entire case turned on whether or not Murphy’s award represented a return of diminished capital, or an economic gain? The entire Murphy Case was about setting the boundary line between direct taxes and indirect taxes. Direct taxes are taxes on capital, indirect taxes are taxes on gains. This lack of experience of Murphy’s lawyers and the three-judge panel allowed them to do their legal research and analysis with an open mind. And these open minds, aided by their legal training, caused them to arrive at the correct interpretation of the intent of the Sixteenth Amendment as it relates to this narrow issue. The odd man out was the government. This is not surprising when one realizes that the main source of all the confusion over the Sixteenth Amendment is the government. The more confusing the tax code is, the more money that can be collected.

Murphy’s attorneys argued that her award constituted only monies that “made her whole.” The award was a return of her “human capital”. Murphy’s attorney, David K. Colapinto, who successfully argued the case, said of the government’s position, “The government had the audacity to argue that non-wage compensatory damages for emotional distress and loss of reputation can be taxed as income because the economic value of human life is zero.” Colapinto’s position is further buttressed by what some of the leading supporters of the Sixteenth Amendment had to say, in 1909, about the income tax while it was being debated in Congress. The author of the Sixteenth Amendment, Senator Brown from Nebraska, had this to say about the object of the income tax – “It is the theory of the friends of the of the income-tax proposition that [income from] property should be taxed and not individuals.” The three-judge panel was correct it its determination that it was not the framers of the Sixteenth Amendment intent to tax “human capital”. Such a tax on the “human capital” of Murphy would be a direct tax. The Supreme Court has already ruled that the Sixteenth Amendment only authorizes an excise tax, a species of an indirect tax.

Years later Congress, in 1941, reaffirmed in a couple of reports that the income tax is an excise tax. It is refreshing to see a court do what it should do all the time – rule on the law based on the evidentiary record. Murphy’s award was not taxable because such taxation would have constituted an unapportioned direct tax. An unapportioned direct tax is not allowed by the Constitution. If this case is appealed to the Supreme Court, Murphy should do well as there is an abundance of evidence in the historical record proving that there is no such thing as a “Sixteenth Amendment exception” to the apportionment rule required for direct taxes.

HOW TO ACT WHEN YOU ARE HASSLED AS A PEDESTRIAN OR THE COPS SHOW UP AT YOUR DOOR

BUSTED! How to behave when confronted by the police when you are hassled as a pedestrian. Your rights at home – how to keep the cops out of your house (Part 2 of a series.)

THE COMING CLASS ACTION BONANZA

The end of a period of cheap money and high asset prices is invariably marked by class action lawsuits and aggressive prosecutions by District Attorneys eager to make a name for themselves through opposing powerful malefactors. In 2001, the victims were management of Enron, Tyco, Global Grossing, Dynegy and Adelphia Communications. This time around, the asset bubble has not been confined to the U.S. stock markets, but has spread worldwide and to a host of asset classes. It is thus interesting to speculate on who will be the victims in the next downturn.

In the downturn after 2000, the principal harassers of bubble malefactors were District Attorneys, especially New York Attorney General Elliott Spitzer. This reflected a legal sloppiness in the late 1990s business culture that has been much less prevalent in the period since the 2002 Sarbanes-Oxley Act and the legion of internal lawyers and bean counters it spawned. Conversely the trial bar was only moderately active after 2000, partly because the Private Securities Litigation Reform Act of 1995 had preemptively prevented the type of lawsuits that would have been most popular after the crash of the NASDAQ bubble – stockholders suing because their IPO investments had turned sour. Further, for most of the 2000s so far, the Presidency and both houses of Congress have been controlled by Republicans, exercising a chilling effect on trial lawyer activity.

Once the current easy money bubble collapses, it is likely to be the other way around. Malefactors will be found to have been either unregulated or careful, so DAs will have less to get hold of. On the other hand, most investor losses will not be in the tech sector, which has always been able to gain a degree of public sympathy in the U.S. that is unjustified either by its achievements (modest) or its ethics (dubious). Instead, the principal perceived malefactors will be hedge funds, private equity funds and emerging markets funds, all less likely to win popular sympathy. Further, from 2007 it is likely that at least one house of Congress will be in Democrat hands, and from 2009 it is possible we will see a Democrat President, in which case the chilling effect of Republican hegemony on the trial bar will be absent.

The coming few years may be thoroughly unpleasant ones for investors and for the U.S. economy generally. They are however likely to prove highly enjoyable and lucrative for the trial lawyer profession!

JAILED CHINESE HACKER TO SUE YAHOO

A Chinese hacker who was sent to jail for 10 years, is suing Yahoo for stealing his personal emails and handing them over as evidence over to the Chinese authorities. According to IDC, the case, on behalf of Shi Tao, will be heard before an American court. Tao was jailed for copying a Beijing order for officials to be on guard for unrest and dissident activity ahead of the 15th anniversary of the Tiananmen Square massacre. The plaintiffs argue that Yahoo Hong Kong had no right to comply with a request from China for Tao’s personal data. Yahoo in the U.S. said it has nothing to do with them as any information would have come from Yahoo’s operations in China.

HACKER CASE WITNESS SUES FORMER U.S. ATTORNEY GENERAL

Sami Omar Al-Hussayen was accused of using his computer skills to foster terrorism, but he was later acquitted. However Abdullah al-Kidd was put in jail at the same time so that he could be a material witness in the case. He was never called and was only released under strict conditions about how he could travel. He is now suing John Ashcroft for violating his rights by “creating a national policy to improperly seek material witness warrants, oversaw the execution of such warrants, and failed to correct the constitutional violations of conducting such actions.” Al-Kidd said the investigation and detainment not only caused him to lose a scholarship to study in Saudi Arabia, but that it cost him work.

Ashcroft had said he did not have to appear because his former job gave him immunity, however the judge overseeing the case said that did not apply. Al-Kidd’s attorney, Lee Gelernt said that hopefully the court case would deter the government from using the material witness statute in the future in the way they did after September 11. Al-Kidd wants the judge to declare that the federal government’s actions were unconstitutional, to order the FBI and other agencies to clear any records relating to his “unlawful detention”.

EX-CEO NABBED IN AFRICA IN OPTIONS BACKDATING CASE

The fugitive former chief executive of leading voice-mail software maker Comverse Technology has been captured in Africa after a two-month international manhunt. Details of the arrest of Jacob “Kobi” Alexander in Namibia were not immediately available. But in a prepared statement, U.S. Attorney Roslynn Mauskopf credited local officials in the southwest African nation for assisting the FBI in the capture. “We are very grateful for the Namibians’ swift action and commend them for their vigilance,” she said. Mauskopf said she would seek Alexander’s swift extradition to face charges in federal court in Brooklyn.

The manhunt was launched in late July shortly before authorities unsealed a criminal complaint accusing Alexander and two other former top executives of secretly manipulating stock options for personal profit. Before he disappeared, Alexander, 54, an Israeli citizen and a U.S. permanent resident, allegedly transferred $57 million to Israel, fueling speculation that he may have fled there. News reports in Israel speculated that he may have been hiding out in a Sri Lankan fishing village. Two other defendants, former finance chief David Kreinberg and former senior general counsel William Sorin, surrendered in August and were released on $1 million bond each. The complaint unsealed in federal court accuses the three men of making stock options more lucrative by backdating their exercise price to a low point in the stock’s value.

BANK OF AMERICA SETTLES NEW YORK CITY MONEY LAUDERING PROBE

Bank of America Corp. has agreed to pay $7.5 million to settle a New York City investigation into the bank’s anti-money-laundering procedures. At a press conference, Manhattan District Attorney Robert M. Morgenthau said Bank of America failed to adequately assess the risk of certain customers. Morgenthau said a number of Brazilian money service businesses were conducting illegal transmittal operations through the account of a Uruguayan money remitter at a Bank of America branch on West 33rd Street in Manhattan. Between May 2002 and April 2004, more than $3 billion through the account, which most of it originating from offshore shell companies chartered in Panama and the British Virgin Islands and controlled by the illegal Brazilian money service operations, he said, adding that the owners of the Brazilian businesses are being prosecuted by Brazilian authorities.

“Unlicensed and unregulated money services businesses, both foreign and domestic, pose a threat to the integrity of our nation’s financial system and to our national security,” Morgenthau said. “The banks and other financial institutions should be our first line of defense against illegal money entering the banking system.”

Separately, Morgenthau said Wednesday that 34 individuals and 16 BVI companies have been indicted for violating state banking laws in connection with illegal money remittance operations in Manhattan. They were all associated with allegedly improper Brazilian money transmittal activity, he said. The defendants also are being prosecuted criminally in Brazil, so it is unlikely they will face trial in the U.S. However, the charges are a predicate to seizing funds associated with the operations. The DA’s office has frozen $17.4 million that was illegally transmitted from Brazil to New York, Morgenthau said. The individuals and companies allegedly conducted illegal money transfer businesses in New York using accounts at Valley National Bank. Between February 1998 and June 2002, $3.7 billion moved through these accounts, Morgenthau claimed.

Meanwhile, Morgenthau said his office has uncovered more than $19 billion that moved illegally by Brazilian money service operations through banks in Manhattan from 1997 to the present. He said his office suspects a good deal of the money is coming from a “tri-border” region between Brazil, Paraguay and Argentina where terrorist organizations are known to operate. However, his office has not been able to directly tie any of the illegal money transfers directly to terrorist groups.

OPINION & ANALYSIS

THE DEBT BURDEN OUR CHILDREN WILL PAY – HA! HA!

The estimated future burden of the unfunded liability grows like cancer day by day. Because of this, the Federal government does not officially report on this figure – at least not where the media can get at it. (Because of this, one publisher spotted an opportunity.) There are various private estimates, several of them in excess of $50 trillion. How will this be paid off? It will not.

I was warned in the spring of 1959 that the Social Security system would go bankrupt in my lifetime. My high school civics teacher made that statement. I believed him. He did not tell us that our generation would impose a massive debt burden on our own children. He said the system would go bankrupt – not our children. I hear about the terrible burden that we are placing on our children – tens of trillions of dollars of additional debt. I have read that every two American workers in 2020 will be required to support a retiree. To which I answer, “So the gray heads think.” All this talk about our overburdened children would be amusing if it were not so personally suicidal … but not for them.

People under age 65 constitute the overwhelming majority of voters. It is true they are not organized nearly so well as the old folks are. But when voting machine push comes to lobbyist shove, the geezers are about as safe as the old person on the chunk of ice that the tribe has placed him on, along with two days of blubber.

I was guaranteed that at age 65, I would be entitled to full retirement benefits. Then the law was changed. Now I must be 65 and eleven months. This is what political scientists call “a broken social contract.” It is what politicians call “responding to the will of the people.” I call it “stiffing the geezers.” What can be done once without political repercussions can be done again. And again. And again. Of course, the entrenched special interest groups will resist. They will say that this burden is too great to bear for older people. To which the younger generation will respond, “Stuff it, granny. The gravy train is over.” When the middle-aged workers see that their time to get at the trough is being extended, they will do their cost-benefit analysis. There will be a move toward the exits. Each extension of the date of full retirement, each reduction in benefits, will lead to additional defections in the ranks of the still-employed trough-seekers. The welfare state’s spiral upward, which culminated with Bush’s prescription drug benefit, seems to have reversed course. That unfunded liability hike was in all likelihood the last hurrah of the catheter set.

We should not feel too sorry for our children and grandchildren. They will learn what makes politicians jump. There is a burden, and it is massive. It consists of estimates based on laws that can be changed. They are based on promises that can easily be broken. They are based on assumptions that are naïve. They are based on a welfare state morality that is no more secure than a cost-benefit analysis by a few million taxpaying voters.

THE UNITED STATES OF BARBARISM

The U.S. Senate is cutting a deal with President Bush to make America a banana republic. Last week, three senators reached an agreement with the White House that will de facto permit the CIA to continue torturing people around the world. And the deal will prevent anyone – including Bush administration officials – from being held liable for the torture. This is latest sign that our elected representatives in Washington believe that the federal government deserves absolute power over everyone in the world.

Former Secretary of State Colin Powell warned recently that Bush’s efforts to gut the Geneva Conventions would cause the world to “doubt the moral basis of our fight against terrorism.” But more important, the Senate-White House torture deal should cause Americans to doubt the moral basis of their entire government. After 9-11, many Bush administration officials seemed determined to use any and every means to bludgeon people suspected of terrorism or terrorist intent. The Justice Department delivered to the White House a memo in August 2002 explaining why Bush was not bound by the War Crimes Act or the Anti-Torture Act.

The memo began by largely redefining torture out of existence. It then explained why even if someone died during torture, the torturer might not be guilty if he felt the torture was necessary to prevent some worse evil. The memo concluded by revealing that the president has the right to order torture because he is above the law, at least during wartime (even if Congress has not declared war). The memo’s absolutism would have brought a smile to despots everywhere – “As the Supreme Court has recognized … the President enjoys complete discretion in the exercise of his Commander-in-Chief authority and in conducting operations against hostile forces. … we will not read a criminal statute as infringing on the President’s ultimate authority in these areas.” Thus, the “commander-in-chief” label automatically swallows up the rest of the Constitution. Yet, as Yale Law School Dean Harold Koh observed, “If the president has commander-in-chief power to commit torture, he has the power to commit genocide, to sanction slavery, to promote apartheid, to license summary execution.”

The details of the torture deal vivify how our politicians no longer give a darn about maintaining even a pretense of due process. The agreement will permit the use of coerced confessions in military tribunals – turning the judicial clock back to the 1600s. The Washington Post noted that the agreement permits “defense attorneys to challenge the use of hearsay information obtained through coercive interrogations in distant countries only if they can prove it is unreliable.” Thus, there is a presumption of correctness to whatever accusation is bludgeoned out of people in secret prisons around the world. And it will be almost impossible to disprove an accusation when a defense lawyer is not allowed to question – or perhaps even know – who made the charge. But that is fair enough for the U.S. Congress.

The torture scandal shows what happens when politicians and political appointees are permitted to redefine barbarism out of existence. If the government can effectively claim a right to torture, then all other limits on government power are practically irrelevant. What would it take to make the public acquiesce to the torture of Americans? Would simply applying an “odious” label (such as “cult member” at Waco, or “Muslim” with John Walker Lindh) to the victims be sufficient?

AN ESSAY IN CULTURAL PSYCHIATRY

Letters pour in from desperate readers (or would if they did) saying, “Fred, explain America today. Say something tendentious and irritating about what is going on in this curious country. Why do we do what we do? Sock it to us.” All right.

The U.S. is an uneasy, frightened country, yet aggressive, truculent, and looking for trouble – which it finds. Fear. Terrorists are everywhere, like cockroaches and governmental cameras. Citizens should watch each other on the subway and rat out suspicious behavior, such as speaking a language other than English. People need to go through metal detectors in county courthouses, because the government is scared of them, and get spied on by the government to protect them against the ever-present danger of … of, well, the unspeakable and unspoken angst of existence. And so, in the customary manner of large scared bullies, the country lashes out, at Iraq, Iran, Syria, North Korea, Afghanistan, Venezuela, wherever.

The U.S. does not look real happy just now. It is a lower-middle-class country with an upper-middle-class income, except the credit cards are maxed out and people are in debt up to their gills. They do not read much. The cultural center of gravity is the black ghetto with its irremediable anger. Americans tend to equate social class with income, but Archie Bunker in an SUV is still Archie Bunker. And his job, no matter how air-conditioned the office, is probably as rewarding as screwing lug-nuts on cars passing on the assembly line.

It is a purely consumer society. There is not much to life out there except buying things. You do not buy a house because you love it, because of the lush vegetation thereabout and ancient trees and an enchanting air of calm and antiquity. No. You buy a “starter house” with the intention of unloading it when you make partner. Then you buy a shoddy McMansion, exactly like 300 others surrounding it. Then it is home theater and granite counter-tops and more-complex iPods and, just maybe, one day, a Hummer, that most thunderous of motorized codpieces. A suspicion dawns that something somehow isn’t right. Yep.

Women dominate domestic politics and so we have the Fear State. With them security security security trumps liberty or taking chances of any sort. We must fill in the deep ends of swimming pools and fear second-hand smoke and things that go bump in the night. I suspect a lot of this vague anxiety stems from the lack of a settled and satisfying place in society. Men run foreign policy, and do it with the ardor and brainless territoriality of retarded pit bulls. This division of irresponsibility leads to contradictions. In school, low-IQ teachers try to make little boys into girls and expel them if they play soldier and say Bang. Then the Pentagon recruits these transvestite artifacts and sends them off to shoot people they have barely heard of. What a plan. What clarity of vision. What consistency.

A thing about society now is that nobody knows the rules any longer, if there are rules. In the past, from about the lower middle class and up, women behaved as ladies and men as gentlemen, concepts now identified with oppression. Even the lower classes were usually courteous after their fashion. The arrangement had its uses. When general agreement enforces consideration of others, life is better. You can go for days without wanting to strangle anybody. Today, many people are civil, but many are not. You do not know what to expect. Do you respond to abuse by being abusive in return? Or get walked over? That is the question.

Americans are not social climbers, but social descenders, rappelling deliberately into the grubby depths. Ah, but the chief rule of discourse today is that one must never offend the offensive. You must never suggest that they straighten up and mind their manners, mouth, grammar, and work ethic.

The pervasive overregulation adds to the national edginess. The government decides what and whether your children will learn in school, and makes it nearly impossible to flee. Getting on an airplane requires a strip-search by federal dimwits. A sense arises of being trapped. Many hate it. Add it up. A frightened people over-controlled, having no communal roots, blocked by government from raising their children as they see fit, parlously indebted, sexually confused, and lacking a sense of permanence or of a connection with the natural world, both of which have since time immemorial mitigated a certain emptiness in human affairs. Like a dog tormented by evil children, the country is ready to bite. And it does.