June 11, 2010
Santiago, Chile

As I mentioned in yesterday’s subscribers-only letter, I’ve been to Chile numerous times, and I like it more each time I’m here. For this trip, which is unfortunately short, I wanted to survey the countryside to see the extent of the earthquake damage.

It’s easy to have already forgotten February’s 8.8 earthquake in Chile, roughly 500x stronger than Haiti’s.  That’s because there was scant media coverage, limited outpouring of international support, and no celebrity telethon.

While most of the world was fixated on Haiti, Chile got down to the business of picking itself up, dusting itself off, and putting itself back together… mostly by itself.

As I discussed yesterday, I think the manner in which Chileans got back to work and started functioning normally again is a real testament to how advanced and civilized this place is.  I’m absolutely convinced that the country has a very bright future.

I’ll be in Brazil later this weekend, taking in the World Cup games with some local friends and sorting out some immigration issues that I hope to be able to tell you about soon.

For now, let’s move on to this week’s questions.

First, Pat asks, “Simon, I am very interested in using a law firm outside US to start the process of internationalizing myself. I’ve run across several firms online that provide such services, but I’m curious to know whether they are legitimate.”

I’ve worked with a lot of these firms over the years, mostly because I wanted to test their integrity and competency. Some are certainly legitimate, while others are crooks. But here’s the honest truth about the whole thing-

Generally, when dealing with offshore service providers, whether they be lawyers, real estate agents, etc., the firms which come up in the top listings in Google are competent at search engine optimization, but little else.

They specialize in factory-style solutions, churning out cookie-cutter products and services that only scratch the surface of your situation.

The best offshore service providers out there keep a low profile and don’t really advertise, especially in mainstream venues. To get in the door, you have to know someone, and do a lot of homework on the ground. I’ve personally burned through dozens of offshore lawyers alone, just to be able to find the gems.

The last thing you should understand is that most of the law firms you’ll work with can’t provide the comprehensive services that you’re looking for. An attorney may be able to build a trust, but doesn’t know anything about foreign property.

Similarly, a foreign real estate agent may be able to find you a great property, but doesn’t know anything about second citizenship… and a passport facilitator doesn’t know anything about where to store your gold overseas.  And none of them understands the tax implications in your home country.

I’m currently working on a solution to this problem by pulling together several of my global contacts to provide comprehensive advisory services. This would be a single group that can give actionable advice across all areas of internationalization– property, banking, citizenship, etc. More to follow.

Next, Richard asks, “What do you think of Nevis versus Panama for incorporation?”

The most popular corporate entities of both jurisdictions offer similar benefits– neither jurisdiction taxes domestic corporations on foreign income, neither requires annual reporting, and both offer bearer share entities.

There are, however, substantial differences that you should be aware of– Nevis is a British common law jurisdiction. For most foreigners, this is much more comforting than Panama’s civil law system should you ever get dragged into court.

Also, US taxpayers should know that Panama is on the IRS ‘per se’ corporation list; Nevis is not. This means that a Panamanian SA will always be considered a corporation for US tax purposes.

Consequently, if you operate a Panamanian company that has US tax liability, the IRS will tax both the corporation and shareholders on profits. A Nevis company can elect to be taxed as a partnership, eliminating the double taxation.

If the company has no US tax liability, however, then this difference is of little significance.

Next, Barry writes, “Simon- regarding the social housing program you discussed in Panama, I’m concerned that the government will create artificial demand for housing and spur a bubble, similar to what happened in the US. Thoughts?”

You make an excellent point about governments’ ability to create bubbles. But the hard numbers in Panama make a very compelling case for supply and demand– quite simply, there are roughly 50,000 housing units needed for lower/middle class Panamanians.

Most banks and local developers are happy to ignore this market and focus on overpriced gringo projects. As such, the government is providing incentives to help close the gap.

Several years from now, there may be a bubble in this segment… but for now, I think Panama social housing is one of the strongest real estate opportunities in the western hemisphere.

To learn more, the best person to speak to about it is Ulrich Schwark, a German real estate professional in Panama who develops these properties. You can contact him here.

Lastly, I need to update you about the proposed tax changes in Uruguay. A few weeks ago, the Uruguayan government began discussing new legislation that would tax residents on their foreign assets and income– clearly a negative for anyone thinking about establishing Uruguayan residency.

The government has since clarified that it only intends to tax citizens, not residents. This still seems like a negative, in my opinion, since many expats want to move to Uruguay in order to obtain a second passport.

For now, the changes are just propositions and have not been ratified… so we can bring up the topic again once the new tax code is finalized.

April 8, 2010
Panama City, Panama

Do you remember that really awkward phase we all went through as adolescents?

Growth spurts, voice changes, menstruation, and yes, pimples– in the end, while we all came out of it more mature and grown up, there was a difficult and sometimes painful transition period in which we had to learn how to deal with new realities.

Developing countries go through the same sort of transition, and it can be just as awkward and painful.

Typically, they try to transition from fledgling banana republics with corrupt governments and byzantine regulatory systems to stable democracies with a growing middle class and reformed tax code.

Most countries have a very difficult time with this.

For example, I expect China to undergo significant pain as their economy continues to inflate. One day the Chinese will find that their rising currency and wages are no longer cheap, and they’ll have to seek competitive advantage in something other than manufacturing knick-knacks.

In other words, a country of a billion people cannot go from making socks to being the world’s investment bankers overnight, or without any fuss.

These sorts of transitions are very difficult because they affect the entire social landscape– employees are laid off and have to retrain to new skills, businesses go bust and reinvent themselves, etc.  Of course, politicians always get in the way by passing laws which only prolong the pain.

Overall, the transition cycle is not easy, and few countries pull it off well.  In my assessment, Panama is one of the countries succeeding.

20-years ago, with its puppet dictator, open drug trade, and banana exports, Panama was nothing but a bad punch line.  Over the last decade, though, the country has been able to successfully develop a service-oriented economy with robust tourism, banking, and transportation sectors.

Today, while the country is definitely no Shangri-La, Panama is thriving and on a very clear upward trend.

Remember, this is ultimately the most critical point to consider when planting a flag overseas– is the country or jurisdiction on an upward trend? Will it be a better place 10-years from now?

When you survey the political landscape in developed countries, the headlines generally tend to get worse and worse.  Certainly, not all news is bad, but the subversion of civil liberties, erosion of financial privacy, and rapid growth of big government seem to be at least weekly occurrences.

Meanwhile, in developing Latin economies like Panama, Chile, and Peru, things are consistently improving– they are going through the awkward growth phase as smoothly as possible.

As an example, the Martinelli administration in Panama recently passed comprehensive tax code reform.  While increasing the sales (consumption) tax by 2%, it cuts corporate and some personal tax rates, reduces some property tax rates by half, and completely eliminates over 30 types of tax.

This new, simplified tax code is a major step in the right direction, and it will be excellent for business.

The government here clearly understands that successful businesses hire employees and generate wealth in the economy.  This model has done wonders for Singapore and Hong Kong, and Panama is following suit.

Yes, there are still elements of poverty, corruption, drug trafficking, etc. in Panama.  The trend, however, is undeniably one of consistent improvement and greater economic freedom.  Ultimately, this is exactly what helps countries successfully transition through those difficult growth phases.

As I’ve said before, until these economies become large or popular enough, local capital markets tend to be off-limits for armchair investors.  I don’t see TD Ameritrade offering access to the Peruvian stock market anytime soon.

It is possible, however, for intrepid active investors to open local brokerage accounts and capitalize on the rising tide… though the most passive investment opportunities generally tend to be foreign bank accounts (which provide liquidity and exposure to the currency) or property (which is non-reportable and an excellent inflation hedge).

More on these topics in future letters.

March 31, 2010
Panama City, Panama

It appears that not all is amiss with sovereign debt: Panama may be one of the only bright spots, at least in the western hemisphere… the country recently had its debt rating upgraded by Fitch to ‘investment grade’ with a positive outlook.

Now, I have been quite vocal about my disdain for the ratings agencies… these organizations completely missed the boat before the financial crisis, slapping AAA ratings on shaky subprime bonds. And yet, for whatever reason, the financial community as a whole listens to them.

An investment-grade debt rating is still a major badge of honor for developing countries– something they all strive for but few achieve. In Panama’s case, even though I take umbrage with the rating agencies, the upgrade accurately reflects the country’s very sound economic fundamentals.

Last year, Panama was past of a very small, exclusive club of countries that experienced positive GDP growth.  The combination of capital inflows to the banking sector, multiple public works projects, and of course, the expansion of the Canal, kept Panama afloat.

Over the last several years, Panama’s economic trend has been quite positive. In 2004, the country ran a deficit of 4.9% of GDP and had a debt level of 70% of GDP.

By 2008, the country had reduced its debt level to less than 50% of GDP and had run 3 straight years of budget surpluses. Even last year, Panama ran only a slight deficit of 1% of GDP– a completely negligible number in the world of sovereign finance.

Thanks to sustained growth, substantial tax reforms, and increased toll revenue from the Panama Canal, the government expects that it will cut its debt level to 35% of GDP by 2014.

By that time, Panama’s sovereign debt rating will likely surpass that of Greece or Spain.

Other strong economies in the region to watch in the short-term are Peru and Chile.

Peru has reduced its debt to 26% of GDP and also posted positive GDP growth in 2009.  Lima has transformed itself from a run-down punch line just a few years ago to a thriving capital city, full of commerce and culture.

With major exports of copper and gold, Peru is well positioned to capitalize on a resource boom, particularly having diversified away from the United States– it has established strong trade ties with Brazil and China, and also decreased its ‘dollarization’ from 82% to 46% over the last decade.

Chile, despite the recent seismic disaster, is also well positioned to capitalize on a resource boom. The country has strong incentives for foreign investment, and it continues to be the continent’s beacon of political stability.

I could go on at length about these two economies, and I likely will in future letters… but for now, suffice it to say that we will likely see the strongest regional growth in the near term from Panama, Chile, and Peru.

Due to their limited size, and the fact that markets are more transfixed by Brazil (and other shiny objects), there is no easy way invest in these countries, at least through a major North American or European exchange.

Many foreign brokers will be able to set you up with a local trading account, though my assessment is that the property markets pose more value for small investors.

Why?

As I wrote in yesterday’s letter, capital controls are coming… when Joe Biden suggests that redistribution of wealth is really just being ‘fair,’ capital controls are truly a foregone conclusion… and it’s the same conclusion in most developed western nations.

Unless you want your money trapped in an economy that is guaranteed to inflate and tax your savings away, you should think about moving at least some money overseas… and for now, buying foreign property is one of the best ways to do that.

Naturally, it’s better to consider countries with thriving economies and solid fundamentals that are indicative of continued growth and stability. In the Americas, that certainly includes Panama, Peru, and Chile.

March 25, 2010
Tokyo, Japan

About 20-years ago, many of the world’s sovereign nations started down an interesting path.  Region by region, governments formed supranational free trade blocs in order to facilitate economic growth.

Supranational organizations were nothing new… from the failed League of Nations after the Great War to the UN and NATO, large multi-country blocs had been formed in the past, but usually for political purposes or military alliances.

Conceived in 1989, the Asia-Pacific Economic Cooperation (APEC) was among the first international forums specifically designed to boost trade and enhance economic growth in the region, politics be damned.  After APEC came MERCOSUR in South America, NAFTA in North America, the EU, and finally the African Union.

A few years into the new millenium, most of the world was covered in trade blocs that were supposed to throw politics out the window… today, though, only APEC remains as a pure financial body, and the rest of the world could learn some valuable lessons from that region.

Aside from reduced trade restrictions that are standard for these organizations, APEC has come up with a few really brilliant ideas. Their goal is to make it easy for businesses to engage in commerce with each other– and by facilitating business at the individual level, more deals get done, and more wealth is created.

One of the ways that they’ve done this is by creating a program called the APEC Business Traveler Card (ABTC).  It’s literally a small plastic card that entitles cardholders to visa free travel for at least 59 days throughout the APEC sphere, as well as expedited immigration clearance at airports and other ports of entry.

At major airports in the region, for example, you’ll see signs all over the place for “ABTC FAST TRACK” which gives priority clearance at customs, immigration, check-in, and security to ABTC card holders.

Actually, in many cases, the ABTC is as powerful and useful as a diplomatic passport, but without the cost… and since APEC includes several countries like China and Vietnam that normally have a stringent visa process, the additional travel freedom is substantial.

This is a great tool for PTs and anyone who does a lot of business in Asia.

So how do you obtain one?  You need to be a passport holder from one of the participating countries– so if you’re from Australia or New Zealand, for example, I highly recommend going through the application process; check your respective country’s immigration website.

If you’re not already from the APEC sphere, you need to obtain another passport… which you should be thinking about already.  Of the participating APEC countries, the most straightforward ones to obtain are Chile, New Zealand, and Singapore, as well as Hong Kong permanent residence.

With each of these countries, the residence and naturalization process takes anywhere from 2-7 years, and in each case, the process is unmistakenly clear and leaves very little to subjective interpretation.

For example, obtaining a Hong Kong permanent residence card (which qualifies for the ABTC program) requires 7-years under one of the various residency schemes, such as the investor visa or professional worker visa.

In Singapore, citizenship can be obtained in as little as 2-years; it’s 5-years in New Zealand, and 5-years in Chile.

Frankly,I will need to write entire letters specifically on the subject of second passports from these countries; for now, though, you should definitely be thinking in that direction– and if you’re interesting in eventually planting a residency flag in Asia, those are the countries you should consider for second passports.

Stay tuned.

March 24, 2010
Hong Kong, SAR

One of the worst things that can happen to a country is to experience a brain-drain.  The loss of productive people who create new technologies and companies means the loss of the jobs and wealth that they create.

The long-term aggregate effects of this can be truly devastating, and history provides no shortage of examples.

By nature, though, people are generally creatures of habit– inert beings. They must be acted upon by a tremendous force to uproot them and get them moving… but everyone has a breaking point.

In aging superpowers, governments seem to be doing all they can to exert enough force to push people beyond their breaking points.

I have seen, from my own vantage point, a flood of new, fed up expats arriving to places like Hong Kong where the jobs and opportunities are plentiful, and they have strong incentives to be productive.

In fact, though it doesn’t have the same songs and bombastic statement as other countries who think they have the lock on ‘freedom,’ Hong Kong is one of the most economically free places in the entire world.  The level playing field ensures that everyone has a chance to succeed.

Do you remember how the world thought that Hong Kong was going to turn into yet another communist graveyard when it reverted to Chinese authority in 1997?

The exact opposite happened. Rather than force Hong Kong under its totalitarian authority, mainland China learned from the island’s success and adopted increasingly free market policies.

Hong Kong shows how far free market policies can go in transforming an entire society; 100-years ago, it was just a rock, devoid of any natural resources, and populated by largely illiterate fishermen.  Only decades later, the island had risen to prominence as a global financial center.

How did this happen? By allowing businesses to freely compete with each other for consumer dollars, and by attracting the best and brightest minds across the entire world to come and become wealthy from their hard work and ingenuity.

Essentially, this is the concept of “America” that has worked so many times in the past.

Today, Hong Kong has matured, along with the rest of Asia.   It is no longer the only free-wheeling boomtown of the “wild, wild east,” and the island now finds itself competing for financial primacy with the likes of Singapore, Tokyo, Shanghai, and even Labuan.

This competition is good, though, and I think it’s a sign of things to come.

Smaller jurisdictions, particularly those which lack cash cow natural resources, will continue to compete with each other to attract the most productive people through ultra-low taxes, residency/citizenship incentives, and top quality standard of living.

The theme is simple– “If you are bright and motivated, we want you to live here; and, because your ideas and hard work will make this a better place for everyone, we’ll let you keep most of what you earn and enjoy the fruits of your success.”

In aging superpowers, it goes something like this– “If you are bright and motivated, we expect you to provide for everyone else. You should be happy to do this because it is your patriotic duty, in our sole opinion. There will be consequences if you fail to comply.”

Large, debt-ridden nations will likely continue down their path of self-destruction.  I fully expect smaller countries, however, to choose a different direction and join the competition to attract the intellectual and financial capital of productive people.

This is good news for the productive who will find that they have increasing options for residence, better lifestyle, and the accumulation of wealth.

I’m seeing the signs of this already– for example, there is a very interesting new business and employment incentive program in Chile that I’ll be discussing soon, and a variety of new measures to boost entrepreneurship in countries as diverse as Guatemala, Cambodia, and Lithuania.

In the meantime, if you find yourself in the ‘fed up’ category, I’d strongly encourage you to look in places like Hong Kong for new beginnings… obtaining residency is a straightforward process, and within the island’s strong economy is a multitude of jobs and business opportunities

March 18, 2010
Pattaya, Thailand

Something interest happened this week in Thailand that I think says a lot about the country and its people.

For the last several months… well, years, actually… a large group of organized protesters has stepped up its calls for the current government of Thailand to step down. The group is known as the “Red Shirts” for the uniform they wear, and their top priority is to have open and fair elections to select a new government.

Over the last few months, the Red Shirts have grown more vocal, staging massive protests and rallies across the country. Their latest move was devilishly clever, in my opinion.

In the last few days, group organizers mobilized about 40,000 Red Shirt volunteers to stand in the blazing Bangkok heat, roll up their sleeves, and give blood… not for some natural disaster relief effort, though. Just to make a point, and a bloody one at that.

In this case, the Red Shirts collected about 300 Liters of blood and dumped it in front of the Prime Minister’s residence in Bangkok… as my local friends have told me, now the PM must wade through a river filled with the blood of Thai people on his way to work.

I really admire the creativity. I could only imagine the media effect this would have in the United States if an antiwar group did the same thing at the White House.

Even moreso, though, I was struck by the peaceful nature of the protest, especially with such a strongly symbolic gesture.

You see, Thais are an extremely peaceful people. They have been fighting against one corrupt government or another as long as anyone can remember… but despite their passion for freedom, their rallies remain peaceful.

When the Red Shirts descended on the Prime Minister’s residence, it was tightly guarded with police and military forces. The guards let them through, they dumped the blood, said a few words for the press, and dispersed.

I think in a lot of other places, the energy of the situation would have turned violent quickly. In Thailand, it was peaceful and respectful, and I think this says a lot about the country and culture.

Fundamentally, Thailand is an incredibly safe place to live exactly for this reason… its people are peaceful, and not just for catchy slogans or tourism campaigns. In fact, if you want to get the best idea about the true nature of a culture, look for situations like this when the country is going through a tough time.

In Thailand, the river of blood episode comes on the back of two years worth of extreme economic uncertainty and political instability. This is far from Thailand’s finest hour… yet the situation is still completely nonviolent, a clear indication of the Thai people’s temperament.

Another example is what’s happening in Chile. Rocked by a series of historically powerful earthquakes and aftershocks, the country has been dealt a seriously bad hand lately. And yet, in their darkest hour, despite the difficult conditions without food or power, Chileans still conduct themselves in a non-violent, civilized way.

Mainstream media sources, always on the lookout for guns and violence, paint a different picture of both countries. Even if they have to make up facts, they want people to believe that Thailand is about to descend into chaos, and that Chile is already there.

It’s not true. Chile and Thailand are both going through some challenges at the moment, but the civilized and non-violent actions of the people are demonstrative of how truly safe both countries are, even during difficult times.

If conditions in the world happen to turn truly sour, I would have no problem calling Chile or Thailand home because both cultures have already been tested by adversity.

See the video of what I’m talking about here:

I’m sitting in a comfortable, overstuffed leather chair this morning typing away at this letter while a team of local women give me a traditional Thai foot massage.  30 minutes in the chair will set me back about $4, and I can’t think of a better way to part with my money.

It is with great hesitation that I’m even sitting in this chair– not because I don’t like massage, but because this particular chair happens to be at the airport.  You see, I’m waiting for my departure to Europe, and if it weren’t for an important meeting in Spain that I’m looking forward to, I would be staying right here in Asia.

It’s not that I don’t like Europe– I love it, actually… the scenery, the people, the history, the architecture. It’s hard to not feel alive on a summer day in Krakow, racing down a ski slope in the Italian Alps, or driving a Porsche down the Croatian coastline.

In terms of value for the money, however, Asia has Europe beat hands down.

Take this simple, $4 massage; it would be difficult, and entirely cost prohibitive, to find a team of European professionals who would be willing to provide this level of attention; Europeans feel that ’serving’ another human being is elitist, which is part of their egalitarian socialist dogma. The session would be courteous, at best.

Many cultures in Southeast Asia, on the other hand, are happy to go the extra mile, especially when there is a gratuity attached.  The ladies who staff this airport location, for example, wouldn’t even let me remove my own shoes and socks– they did it for me.

Having another person do that honestly makes me feel a bit uncomfortable… but providing this level of service is what they are accustomed to, if nothing else than for the gratuity at the end.

The motivation to earn more by providing excellent service is clearly more prevalent in the Orient than in Europe.  Neither mentality is right or wrong, just different. Naturally, though, as a consumer, I prefer a greater level of service.

Price is also a major factor. In Asia, with few exceptions like Singapore, Japan, and South Korea, you have to put up with some level of squalor– trash in the streets, gratuitous displays of poverty, etc. While these indications are not completely lost on Europe, it’s safe to say that cityscapes in the west, in general, are cleaner.

That being said, however, the price difference is enormous. The cost of living very well in Europe is easily five times the cost of living very well in Asia.  Is Europe five times as nice? Depending on what you are looking for, most likely not.

As I look around the world and price compare, I wholeheartedly believe that Asia and Latin America still provide the most value for the money.  My top picks for those regions are:

- Latin America -

1) Chile: Strong economy, beautiful landscape, modern and developed infrastructure. Living costs are low, and the cleanliness makes it feel like you are in Europe. The biggest concern with Chile is that it is growing too quickly; the Chilean peso is one of the best performing currencies in the world, so costs for foreigners are going up.

2) Panama: Also a strong economy with developing infrastructure and increasing local standard of living; costs in Panama City are going up, but if you get out of the city, you’ll find that you can still live incredibly well for very little.

3) Colombia: Clean, modern, and home to some of the best weather on the planet (especially in Medellin). You have to be willing to look past the “Colombia stigma,” but I guarantee it’s well worth the exercise in intellectual independence.

- Asia -

1) Malaysia: Home to a growing influx of Islamic funding, the country is on solid economic footing while maintaining very low living costs. Medical care is strong, and the “My Second Home” program provides an easy route to permanent residency.

2) Philippines: Stable economy, cheap real estate, and excellent English proficiency. Manila and Quezon can be tough, but just outside of the cities you can find inexpensive, pristine coastal property. I know many expats who are happily living out their years being fed grapes on a hammock with just a meager retirement pension.

3) China: Lack of English proficiency can be very frustrating… but China is becoming nicer and more livable by the day. In terms of its modernity, it will be the first developing nation in Asia to match the west, and it will happen in the next 5 to 10 years.

Naturally, I will provide more about these locations in future letters, but I wanted to give you a quick overview today; if you have any specific questions or your own additions, please let me know.