Automatic Exchange of Tax Information to Deal With Tax Avoiders

Ernie Kovacks and Edie Adams

The OECD information exchange ‘dating game’
Tax Justice Network October 25, 2016 Automatic Information Exchange allows tax authorities to share information about bank accounts across borders. The idea is that if dating someone from Germany has a bank account in Switzerland, the German tax authorities will be automatically informed, vastly reducing the potential for people to hide their money. The system of Automatic Information Exchange is being developed by the OECD, a group of more developed economies, but any country can participate. more…

Freshly minted yen

Tokyo seeks wider scope to target tax avoidance
Nikkei Asian Review Sept. 29 2016 Japan is moving to clamp down harder on companies that shelter their income from domestic taxes offshore, even in China, South Korea and other jurisdictions with tax rates of 20% or higher. Under its existing tax haven countermeasures, income at shell companies registered in jurisdictions with a tax rate below 20% is added to the income of their Japanese owners and taxed in Japan. This goes for both corporate and individual taxpayers. more…

Synthetic tax havens attacked by BEPS.

A private beach in a tax haven

Private Beach in Belize

“To a wise man, the whole earth is open, because the true country of a virtuous soul is the entire universe.” – Democritus

Unsurprisingly, colloquial use of the term “tax haven” has little to do with the facts.  Political use of the term is even more divorced from reality.  Fortunately the OECD has defined what a tax haven is so let’s start there.

To be a tax haven, a country must meet these criteria:

• no taxes at all, or nominal taxes – such as a fixed annual corporation tax charge of €100. Income tax and inheritance tax usually exempt;

• secrecy, especially bank secrecy;

• no exchange of any information;

• absence of any activity to take advantage of lower rates of tax.

Keep that in mind and you’ll understand that there are many fewer tax havens than politicians and the press would have you believe.

Synthetic Tax Havens

Take, for example, the structure known as a “Double Irish with a Dutch Sandwich”.  Many governments and the media would have you believe that both Ireland and the Netherlands are tax havens because many companies, including Google and Apple, have famously avoided so much taxation using this structure.

However, neither Ireland nor the Netherlands intentionally devised the laws to be used to turn the countries into tax havens. Indeed, any investigation at all can only lead to the conclusion that neither country is a tax haven under the OECD’s definition.  What is happening is merely that sharp international tax accountants and tax lawyers have figured out how to take advantage of peculiarities in the Irish and Dutch tax laws to create a zero or near-zero tax regime by combining them.

Synthetic Tax Havens Under Attack

This sort of tax avoidance may be coming to an end, though, because the OECD has launched its (Tax) Base Erosion and Profit Shifting initiative which, although it is a multi-year international effort, aims to ultimately have the laws of all the participating countries harmonised so that there will be no gaps that allow the Apples and Googles of the world to cut their taxes by tens of billions of dollars.

For today that is less problematic than the simple reporting of information that has the potential to disrupt the lives of everyone reading this blog if they maintain an account other than in the country where they reside for tax purposes. Odds are, if you are reading this blog, that description fits you and the time to get your tax residence and banking in order is probably now.  Please contact us now.

A Topsy-Turvy Offshore World

Offshore:the faster you go, the behinder you get.

“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else—if you run very fast for a long time, as we’ve been doing.”

“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

Lets get right to it… most everything you thought you knew about how to protect your assets and perhaps your privacy by using offshore companies and bank accounts is being overthrown. You’ve passed through the looking-glass without even noticing it and now the world is different.

For a few years, non-U.S. citizens were laughing at the poor Americans who, because of the long arm of their tax authority, the IRS, and the grasping nature of their government found that they weren’t even welcome to walk through the doors of most banks around the world, and most especially, the highly reputable ones.  Throughout the world financial institutions discovered that because of FATCA, the U.S. Foreign Account Tax Compliance Act, dealing with Americans was just too troublesome and the penalties for non-compliance with the U.S. regulations were too high. So most Americans found themselves with real problems when trying to open an offshore bank account (i.e. non-U.S.). more…

Pakistan Politicians Giddily Greet Panama Papers

Pakistan PM Nawaz Sharif explains his Panama Papers connection.
News item: PM to appear before SC if summoned in Panama papers case
Minister for Planning and Development Ahsan Iqbal on Saturday said that Prime Minister Nawaz Sharif would appear before the Supreme Court if summoned in Panama papers case. more…
Pakistan's Premier smells blood.
News item: PM welcomes start of Panama Papers proceedings
The Premier said since the beginning of Panama reports and even before any demand made by the Opposition, he had announced a Commission comprising retired honorable judges of the Supreme Court, with the spirit of bringing actual facts before the nation, through transparent inquiry. more…

Tax and the Next Switzerland or Cayman Islands

corner of Broadway & Wall Street, tax haven, USA

News Item: Fallout from U.S. Refusal to Automatically Exchange Tax Information?
Bloomberg BNA. Sept. 27 — U.S. reluctance to commit to the OECD’s international standard for the automatic exchange of banking information is a problem, but that doesn’t mean the country will be “the next Switzerland,” the organization’s top tax official told Bloomberg BNA.

Argentine Congress Building tax capital of Argentina

News Item: Talk-talk Aside, U.S. Unlikely to Cease Being a Tax Haven
Buenos Aires Herald Sept. 27
Neither yesterday’s meeting nor the one between teams of experts announced by Lew for next week are likely to finally cut off the US as an offshore haven, and the success of the amnesty remains open-ended even as the outgoing official committed Washington to continued co-operation.more…

Where’s That Global Financial Crisis?

Financial pundits have been forecasting a crash of the global economic system as bad as or worse than the Global Financial Crisis (GFC) of 2007 through 2009. Interest rates on savings dropped to historic lows and stayed there and even declined below what was once called the Zero Bound.  Central Bank interest rates, it was thought, could never drop below zero. And yet in Europe and Japan they have.

Selected PPP GDP/Capita 2000-2017 (source: IMF & Google Analytics)

Selected PPP GDP/Capita 2000-2017 (source: IMF & Google Analytics)

Economic growth since the GFC has been, to put it nicely, horrible. Whether you are in business for yourself or are an employee, the situation makes no real sense to you.  If you save your money in a bank, you receive next to nothing for it.  Even in money market accounts you’ll make far less than inflation is taking away from you.  So your only option seems to be to invest in things that the pundits say can crash in value at any time.

Confusion is rational post & pre Global Financial Crisis

If you aren’t rather perplexed by what is going on, you probably don’t understand the situation.  If you are reading this, you almost certainly do understand the situation, are perplexed and are looking for a bit of light. Today, perplexity is the name of the game and, as Aristotle rightly said, perplexity ties your mind up in knots.

Aristotle also said that in the midst of perplexity we should first turn to philosophy. Philosophy doesn’t give us answers but it can put us on the road to finding answers.  I don’t propose to delve into metaphysics here, but I do want to restate a question asked by Eric Fromm forty years ago: to have or to be? That is the question.

What do you actually want from life?

Practically speaking, any decision you make will  be somewhere on the hedonic scale between having and being.  Where you want to should be your decision, not society’s default for you.  The decisions that you make now in preparation for the next GFC will very much affect the rest of your life.  To make those decisions you need to know where on the have/be scale you want to be.

John Lennon on happiness

Assume that you are very high on the “have” side of the scale and invest in securities.  You may want to stay invested in the markets until it turns, short the market and then reinvest during recovery. You don’t want to see your idle money collapse in value. I.e. you’ll want U.S. Dollars.

If you are instead at the “be” end of the scale, you are likely to be far more interested in asset protection. The craziness of the market from day to day or week to week isn’t of great concern to you. But you still don’t want your savings to collapse – you, too need a U.S. Dollar account.

If, instead of being a securities investor you own your business, given the way the global economy has been acting you’ve probably been finding it difficult to grow.  Owners of growing businesses have had to struggle to make it happen. For those whose business is shrinking, the way forward isn’t obvious.  The next GFC could do you in.  For you, asset protection looms large. You, too need a U.S. Dollar account.

Which comes first?

Company. Self. Family.  Which comes first? Which comes second? Today? Tomorrow?  Don’t cop out but putting everything as top priority. The next GFC will likely make you pay later for not thinking things through now. Your actions today give you the answer as to which is more important to you.  List them as they are. Are you satisfied? Reorder them and then review them every day. Manage your life, don’t let it manage you. Then you can manage your way through the next Global Financial Crisis.

The craziness of negative interest rates

I’ve mentioned the coming GFC but I haven’t mentioned another major trend that is almost certainly going to affect your life if you are reading this.  Governments throughout the world are running massive deficits and are doing everything possible to increase their tax income without increasing their tax rates.  If you live in an important economy, your government wants all your money that it thinks it deserves.  And no matter where you live, it wants to find a way to get it.

Governments are grasping at straws

You want your money to pay your bills and to invest.  Your government wants your money to pay its bills and to invest. And they are moving to make that happen. Governments are giant boulders, shifting around as they settle down to a new normal and you are a tiny mouse trying to find your way between them without being crushed.

Americans were the first to feel the sting of this when FATCA was imposed by their government on the global financial community.  As the U.S. is the centre of global finance and issues the world’s primary reserve currency, it had the clout to issue demands and make them stick.  The result is that for Americans, opening bank accounts outside the U.S. is quite problematic, particularly if they want to use a strong, international bank.

First it was FATCA, now it is CRS, AEOI, BEPS and TIEA

Now the rest of OECD has gotten in on the act.  Using FATCA as their model, they are implementing a program call the Common Reporting System (CRS) which provides a standard, FATCA-based reporting format for exchanging data between countries. In many cases they are also implementing the Automatic Exchange of Information (AEOI) which means that tax information will be exchanged between countries automatically. These programs come under the overall rubric of BEPS (Base Erosion and Profit Shifting) which is government-ese for “me first, you later”. There’s a limit to how much of your income you want to share with your government.

BEPS programs are nearly universal

Almost all countries formerly thought to be tax havens have signed on to this convention. All in all, so far one hundred and eleven countries have signed on for implementation in 2016 or 2017. Those folks who were formerly laughing at the poor American expats are themselves casting about for solutions.  There aren’t many, although you’ll encounter many companies that purport to have solutions for you. One that I’ve encountered charges $250 for an e-book that gives the names of a number of banks that you could use, but to which I wouldn’t even entrust my enemy’s money.  Just sayin’…

Asset preservation is key

Whether you are at the “Have” or the “Be” end of the hedonic scale, you will first and foremost want to preserve your money.  To the degree that you gravitate toward the “Have” end of the scale, you’ll want to be able to make your money work for you. Generally speaking, the options that you have for banking abroad do not provide the opportunity for growing your wealth unless you can come up with the minimum of five million dollars that you’ll need for a placement with a private bank.  But even then, only certain private banks will be able to provide you with the asset protection that you are looking for.

Selected GDP 2000-2020 in Constant Dollars (source: IMF & Google Analytics)

Selected GDP 2000-2020 in Constant Dollars (source: IMF & Google Analytics)

So whether you are looking to bank five thousand dollars or five million dollars, your asset protection choices have dropped dramatically. The collapsing Euro makes it imperative that you move some or all of your Euros into U.S. Dollars. Hilda Loe Associates can help you with super-safe banks in super-safe jurisdictions. Don’t settle for less.

While you are thinking about where you might want to put some of your funds as part of your Asset Protection & Growth strategy, take a look at the GDP and GDP/capita charts above.  They may lead you in an unexpected direction.

F. Bouman