Posts tagged as:

taxes

Why you don’t want to go at it alone

By Simon Black · 7 comments

Blair is in her early 40s from Southern California.  She’s intelligent, fairly aggressive, and an experienced financial executive at a mid-sized manufacturing company. In total, she has about $250,000 in savings, some of which she used to buy property in Panama.

She is single with no children and has been traveling to Panama to plant flags since 2006. She plans on (semi) retiring there in another 5-years and has unfortunately learned a lot of hard and costly lessons.

At the height of the global property boom, Blair bought a unit in an ocean-view condominium tower in the San Francisco barrio of Panama City. I like San Francisco– it is well located and presents a nice mix of local Panamanians and foreign expats.

At the time, however, San Francisco was put under a building moratorium because the neighborhood was severely overcapacity with its infrastructure.  Waste treatment facilities were overburdened to the point that raw sewage was washing away construction sites, water utilities couldn’t get pressure to higher floors.

Of course, Blair’s real estate agent didn’t mention any of this to her. He cheered her on to make the purchase, encouraging her wise decision-making and investment acumen at every step along the way.  He looked good, sounded good, and had even lived in Miami for a while… sounds like a trustworthy fellow worth his salt, right?

Wrong. Blair was terribly misinformed. Aside from the sewage and the lack of water pressure, even her beloved ocean view was gone before the building was even complete– another building was erected between her bedroom window and the sea, built by (you guessed it) the exact same developers.

Like many gringos, Blair found her real estate agent on Google and was initially impressed by his English skills and claims of knowing important people in the country. She admits to being taken as a fool and quite literally is paying the price for it.

(It is exactly for this reason that I put together my Panama Black Paper, released in September and December, which names names of people in Panama to do business with, and people to avoid like the plague.)

Because Blair has such a long-term view, though, she has taken everything in stride.  She feels that, by the time she semi-retires in five years, she will be able to recoup what she invested in the condo.  Meanwhile, as Panama City’s infrastructure improves, she has been able to generate positive rental cashflow on the unit.

She has since wised up to the city life, and these days she is actively searching for a new property outside of Panama City where it is cleaner, quieter, but still accessible.

By the time she is ready to move there, she expects several new multinationals to have relocated to the nearby Panama Pacifica commercial park located just outside of the city.  This commercial park, she believes, will present a lot of opportunity to entrepreneurial-minded people who can provide essential business services.

Because she expects to be generating business income in Panama, she plans on registering a Belize company to conduct the business, thus planting her business flag outside her country of (future) residence.

She told me that she already made this mistake once– two years ago she searched for “Panama companies” on the internet and purchased a corporation from one of the service providers who popped up.

As it turns out, a Panamanian corporation was the exact opposite of what she needed, and the Panamanian lawyer she spoke with had no earthly idea what her US tax implications would be as a result.

Blair has since straightened out her tax situation once she finally found a competent US tax attorney who had expert knowledge of international business structures and was willing to help her out without breaking the bank.

Aside from planting a residency and business flag, Blair has moved some money to a European bank; she feels comfortable in Austria because she does not live there or do business there, so the government has little cause to milk her.

Lastly, she is planning on eventually acquiring second citizenship, possibly through a South American program that I will be discussing next month.

Her ideal vision for the future will be living outside of Panama City as a citizen of a South American country, with her business based in Belize, generating revenue in Panama from multinational firms, and banking her capital in Austria.

Because her foreign business will neither be engaged in US trade nor generating US-source income, her company will not be subject to US corporate income tax. Additionally, as an expatriate, she will be able to pay herself a salary of roughly $90,000/year tax free.

I think one of the key lessons here is that planting multiple flags is not always a do-it-yourself process. As Blair’s story demonstrates, there are potential landmines along the way, though expert advice is available to ensure a smooth journey.

Knowing how critical this expert advice is, in the last few months we provided you with key contacts in the Panama Black Paper, and introduced you to a top international tax attorney.  Next month, we will be discussing South American residency and citizenship programs, so stay tuned for that.

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Your free gold report is available for download

By Simon Black · 4 comments

I’m heading out the door to Africa, so I’m keeping it short today… hopefully I won’t get lost in the mountains this time, wish me luck.

Last week I wrote about four jurisdictions that I am comfortable with to store gold overseas– Panama, Austria, Hong Kong, and Singapore.  Remember, one of the key benefits to trading paper currency for gold is that it anonimizes your money. Storing it overseas in a private facility keeps it outside of the financial system.

As last week’s letter was just a short overview, I promised that I would shortly send you my updated report on moving and storing gold overseas.

As promised, I finished the update and am making it available for you to download here:

http://www.SovereignMan.com/gold%20report%202010.pdf

I hope you find the information valuable– it discusses the four jurisdictions in more detail, plus a few more, and also provides some specific tips for actually moving precious metals overseas.

Let me know what you think and if you have any additional questions.

Additionally, I received a few emails from subscribers who had trouble listening to the interview with the international tax attorney from yesterday– if you want to download the audio file, you can do so here:

http://media.libsyn.com/media/withoutborders/OffshoreStructures.mp3

all you have to do is “Right Click” (or “control” + click if you have a Mac) then “Save As” to save the file to your computer.

If you own a business or are planning to start one, you absolutely will not want to miss that interview (unless you enjoy overpaying your taxes or don’t care if you get sued). We discuss how you can set up a business overseas, reduce your tax burden, and safeguard your assets.

Tomorrow I plan on sitting down and answering some overdue questions, so stay tuned for that.

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How to make an extra $12,422,575.54

By Simon Black · 8 comments

January 12, 2010
Estepona, Spain

There is really a great deal of information out there about offshore corporate structures… frankly it’s mind numbing. Do a search for “offshore corporation” and you will undoubtedly return over a million websites promising you fast incorporation in Panama or the BVI, as well as a host of ‘benefits’ for that particular jurisdiction.

Are these benefits real? Does it make sense to structure a business overseas?

Yes. Planting a flag overseas provides asset protection benefits, and in many cases, significant tax benefits… even if you are a US citizen. It is possible, for example, to generate corporate profits free of tax liability, and to defer personal income tax liability indefinitely.

Let me first back up for a moment and explain some of the lovely US regulations that govern foreign corporations for US taxpayers. (as an aside, you should realize that I am not a tax attorney, nor does this constitute tax advice)

The first is section 957 of the Internal Revenue Code pertaining to “Controlled Foreign Corporations (CFC)”. A CFC is any foreign registered company with more than 50% direct or indirect ownership by a US person.

If a company is deemed to be a CFC, the IRS essentially views it as a domestic US company and expects the foreign company to file a tax return every year.

That’s where places like Panama come in. Some people try to get slick and form a Panamanian company, hiding behind their lawyers as nominee directors. If their name is withheld from a public registry, the US government will never know about their ownership interest… right?

Guess again. Basing your tax strategy around another human being keeping your secrets in just plain absurd. Your lawyer may be a good guy, but when push comes to shove and the US government comes knocking, he’ll sing like a canary.

Let me underscore this point again even more clearly– do NOT expect to hide profits through an offshore company without the government finding out. They will find out. Privacy and secrecy are gone, at least for now.

Fortunately, there’s a big fat silver lining. Most people do not realize that there are perfectly legitimate ways to structure your business interests overseas and realize significant benefit.

Big businesses do this all the time; large multinationals have subsidiaries and affiliate offices all over the world. Consider Boston Scientific, which manufactures products in Ireland and then ’sells’ them around the world. The company only pays a 12.5% tax to Ireland on its profits from those sales, rather than 30% to the IRS.

You might be thinking to yourself right now– “Great… except I don’t plan on opening a multi-million dollar medical device manufacturing facility in Ireland.” Believe it or not, in many ways it’s even easier for some small businesses to capitalize on this concept, especially if you have an online presence. Here’s why:

A foreign corporation is subject to US income tax, depending on the situation, if any of the following are true–

First, if the foreign company has a permanent establishment in the United States; ‘permanent establishment’ is ordinarily defined by specific tax treaties, but usually includes things like an office, factory, or workshop.

Second, if the foreign company is engaged in a “US trade or business” or has US-source income; income source rules are defined by Internal Revenue Code section 862.

For example, if a business produces inventory, the source of income is where the inventory is produced; if a business performs personal service, the source is where the services were performed. For businesses that sell inventory, the source of income is where the products are sold.

As you can see, these rules clearly favor many types of enterprises, including e-commerce businesses, some service providers, overseas manufacturers, and businesses owned by expatriates.

Foreign corporations that fit these circumstances are not subject to paying US taxes. The company may be subject to tax in its own jurisdiction, but many (BVI, Cayman Islands, Labuan, Singapore, etc.) do not tax corporations on income earned outside of their borders.

In this manner, the corporate entity is free of tax liability. However, when the corporation makes dividend distributions to its owners (US taxpayers), the US citizen will pay tax on those distributions.

Presently, the dividend tax rate is quite low, but you can be sure that the Obama administration will raise the dividend tax in the future. If the corporation does not distribute profits to the owners, however, the individual has no immediate tax payment due and effectively defers his tax liability indefinitely.

Here’s an example– you are a US citizen and own an e-commerce company based in BVI. You have no permanent establishment in the US and have no US-source income by the IRS rules. The company does not pay tax to the US, nor does it pay tax to BVI.

Assume your company nets $1 million annually. You do NOT distribute this income, and rather invest all of your profits with a 20% annual return. At the end of 10-years, your business has accumulated $25.958 million.

Now assume the same business is structured in the US paying 30% to the government. At the end of 10-years, the business will have accumulated $13.536 million.

The compounding power of tax-deferred profits is extraordinary– you make an extra $12,422,575.54 with a properly structured foreign company.

This week I’m going to be interviewing one of the country’s premier international tax attorneys who specializes in offshore business structures. As a personal favor to me, he has agreed to walk you through the regulations and explain how you might be able to realize these benefits.

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Multiple Flags Overview

By Simon Black · 5 comments

January 4, 2010

Reporting from: Malaga, Spain
Welcome back; I hope you had a relaxing holiday.

I spent 10-days with my family combing through the Italian countryside and drinking some unbelievable wine from a local grape called “Primitivo.” It’s a distant cousin of the California Zinfandel, and is only found in this region. A bottle from the best vineyard will set you back about 9 euro.

For New Year’s Eve, I saw a fireworks show that was simultaneously the most disorganized and explosive I have ever witnessed… so literally for me, the new year began with a bang.

I’m optimistic about 2010. I know a lot of people in the financial community who think that ‘this is it,’ that 2010 shall bear the worst economic cataclysm in history, causing widespread doom and agony.

Sure the conditions are ripe for stock/bond market crashes, a currency crisis, and multiple sovereign debt defaults.  But these are a far cry from a gloomy end of human civilization.

It’s not that I have tremendous faith in world ‘leaders’ (as ridiculous a moniker as that is to use); last month’s debacle in Copenhagen only further underscored how perverse and ineffective the existing political process is, and everyone is really starting to see it.

The Social Contract is deteriorating rapidly, and in the end, the one thing that you can count on is that people will ultimately do what they perceive to be in their self-interest.  This is what drives markets and trends.

As the protracted effects of government stupidity become more apparent, one such trend that I see emerging this year is the rise of the sovereign individual– the rebirth of the multiple flags approach.

I’ve talked about this before and I wanted to start off the year with a quick primer since it is a recurring theme of this letter. To be more specific, I absolutely implore you to plant multiple flags as part of your New Year resolutions.

The idea, originally conceived by international finance guru Harry Schultz, suggests diversifying different aspects of your identity across multiple ‘flags,’ or geographic jurisdictions.

As an example, Schultz coined the term ‘three-flags’ in the 1960s, suggesting that an individual should have citizenship in one country, residence in another, and businesses in another.

Later authors expanded on this idea by adding other ‘flags,’ including places to bank, places to ‘play,’ places to house electronic assets, etc.

Many writers today talk about ‘five flags’ or ’six flags,’ but frankly I don’t see a limit on the number of things we can diversify geographically: email, citizenship, residence, banking, brokerages, gold/silver deposits, business registration, e-commerce, customer base, phone/fax, financial instruments, postal mail, etc.

So what’s the point? Why should you do this?

Diversifying geographically increases your freedom, your privacy, your sovereignty, and potentially reduces your tax burden. It protects you against bank failures, market changes, litigation, divorce, overzealous governments, and “NGC’s” (non-government criminals).

Perhaps even more importantly, planting multiple flags expands your existing contact base and opens a lot of doors to new opportunities.

Think of it like a life insurance policy– even if the worst never happens, it gives you great peace of mind and in many cases can rank as a significant asset.

While everyone recognizes these benefits of life insurance, no one actually expects to die anytime soon… so they put shopping for a policy on the back burner, sometimes until it’s too late.

In this case, the time to start diversifying internationally and planting multiple flags is now… before it’s too late– before currency controls are imposed, before tax codes change, before the last remaining foreign banks close their doors to foreigners.

I could cite you examples all day long, but I will list just a few hypothetical cases–

Imagine getting sued, losing the case, and having your financial assets commandeered by the court. Now imagine if your assets were safely offshore in another country.

Imagine being investigated by the government and having your email archives turned over to the authorities. Now imagine if your email server were in another country.

Imagine being robbed (taxed) by the government because your business is structured within its jurisdiction. Now imagine if your business were registered in another country.

Imagine having everything in your home country taken from theft, coercion, and litigation. Now imagine having cash and gold locked away in a secure, private vault overseas.

Imagine the social decay in your city getting so bad that riots and violent crime are a common occurrence. Now imagine having property overseas.

I’m sure you get the idea. Putting your assets, your business, your citizenship, your residency, your family’s livelihood under one flag, one government, is putting all of your eggs in one very frail, weak basket.

Technology makes it incredibly easy to diversify, and I see more and more people waking up to that reality each day. It takes only moments to set up an offshore email account, a few minutes to lease a private vault, and just a couple of hours to set up a company in Singapore.

The possibilities are truly endless, you just need to find the right tools and the right flags that work for you. Yes, even if you are a US citizen who is taxed on worldwide income, there are still several options available to live a multiple flags lifestyle.

I will be discussing the options in future letters, as well as individual case studies.

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Subscriber Questions

By Simon Black · 0 comments

I receive a lot of subscriber questions, and while I cannot answer them all, I wanted to specifically address three of them that key in on recurring themes in this community– second citizenship, investing, international opportunities, corporate structures, banking, and gold/silver storage.

1) Paul asks– “I was wondering what your 1st choice would be in setting up an online business offshore.  Which country would be best for business structure, hosting, and merchant accounts?”

There are a lot of great reasons to have an online business– portability, scalability, maneuverability. You can go from zero to profit very quickly, and the Internet allows people to live and work anywhere on the globe.

Most importantly, though, online enterprises provide a great opportunity to easily plant multiple flags in a cost efficient way; you can live in one country, have citizenship in another, have your business structured in another, process credit cards in another, and have your servers based in another.

This prevents significant influence from any single government over your business. As to the right jurisdiction? This is a tough call because it really depends on your country of citizenship and your country of residence.

The United States, for example, is one of a handful of countries that tax its residents on their worldwide income. Some people with online businesses think they are smart because they structure their business in some Panamanian IBC and/or process credit card transactions offshore.

Then they don’t report the income and hold everything offshore.

Not only is this a completely bonehead move, it’s largely illegal. The IRS has clear rules for what it calls ‘check the box’ entities, as well as how to determine the source of income.

I’m going to be talking about this much more in the future, but for now, the bottom line is simple: with a well-structured plan, it is possible to set up an online business to maximize your personal tax advantage while minimizing sovereign risk.

There is great danger, however, in establishing an overseas structure without performing substantial research into the tax implications of your home country.

I’m going to help you solve this problem in a few weeks– early next year, I will bring you some really valuable information from some top North American tax advisers who specialize in offshore structures; they’ll teach you what you need to watch out for.

For instance, you may want to consider structuring your business in a country that has a comprehensive tax treaty with your home country. Switzerland is a great example that has treaties with both the US and Canada. Zero-tax jurisdictions like Panama or BVI do not have tax treaties.

More to follow on this in a few weeks, it’s an incredibly important topic that merits more than a short-answer.

2) Peter asks: “What do you think about Israel? In spite of all the political unrest in the news, Israel has a growing GDP and has a decreasing trade deficit.”

This is a great question.  My take on Israel is that it’s a great place for second (fairly valuable) citizenship.  If you’re willing to convert to Judaism and live in Israel for a bit, you can obtain an Israeli passport fairly easily.

Other than that, I’m not keen on investing in the country; it’s too closely tied with the United States, and there is no ‘blood in the streets’ discount that you would expect of a nation perpetually at war.

If you compare Israel to a place like Sri Lanka, there is no contest when it comes to value.

3) Stefan asks: “I have an account at DBS (Singapore) but they do not give any information about bankruptcy protection. Do you know anything about this? Do you prefer other Singapore banks? Any idea for a safe deposit box in Singapore?”

I can’t comment specifically on DBS, but you should always, ALWAYS, feel comfortable with the balance sheet of your financial institution. Banks in the US are backed by the FDIC, and this gives some people confidence in their account value.

I am not one of them. I bank overseas because I trust in the financial solvency of overseas institutions, but it means I have to do my homework.

Even the most cursory analysis can say a lot about a bank– what is their ratio of liquid assets to deposits? Does the loan portfolio consist of ticking time bombs? How well are they provisioned against loss?

This is why I wrote about Islamic banking a few weeks ago; based on requirements of their religious law, Islamic banks tend to have higher capital adequacy ratios, providing a greater cushion against insolvency in the event of a financial cataclysm.

There are several Islamic banking institutions in Singapore, though overall I’m quite confident in the country’s financial infrastructure. I rely on it myself.

As for gold storage in Singapore, look at Cisco-Certis. Their facilities have fantastic security, and the boxes are reasonably priced.

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A silver lining for taxpayers

By Simon Black · 37 comments

The US Internal Revenue Service was feeling rather proud of itself yesterday; IRS Commissioner Doug Shulman held a press conference to release the final results of 2009 amnesty program.

Over 7500 taxpayers came forward this year to confess hiding income in overseas bank accounts; this number is substantially greater than the several hundred which usually step forward.

Obviously, the unity of insolvent western governments against overseas ‘tax havens’ coupled with the UBS/Swiss banking debacle has lit a fire under noncompliant taxpayers… and of the 7500 individuals who came forward under the amnesty program, their bank account sizes range from $10,000 to over $100 million.

To be clear, having an overseas bank account is not illegal… it’s actually a smart thing to do. Generating offshore income, hiding it in an overseas bank account, and not telling the government about it, though, is illegal.

The Obama administration continues to beef up the IRS with financial and manpower resources– 800 new agents are currently being trained specifically to go after international tax evaders. They have even announced opening up new offices in places like Beijing and Panama… though I’ll believe it when I see it.

With their new mountain of resources, I expect the IRS to go after a few noteworthy tax dodgers (Wesley Snipes, Bradley Birkenfeld) in highly publicized trials. My prediction, however, is that most people the IRS finds will more than likely be subject to financial penalties, probation, and suspended sentences.

Why? Because incarceration costs money, and the government needs tax revenue. Someone who can make $100 million and stash it away in a Swiss bank account is more useful to the government creating jobs in society rather than playing the harmonica behind bars.

Regardless of the penalties, though, trying to ‘hide’ money in offshore accounts is just a dumb thing to do. There are a lot of people out there who think that their trustees and banking secrecy will protect them from tax authorities.

They won’t. Depending on the discretion and secrecy of another human being is a sure-fire way of getting caught. No banker or trustee in the world can withstand the pressure of the federal government and its limitless resources.

There is a bit of good news in all of this, though.

The Obama administration has recently abandoned its plans to go after overseas corporate income. Current tax code allows US corporations to defer paying taxes on income earned overseas until that money is repatriated to the United States. Obama wanted to change this law, but has recently abandoned his plans.

I’m sure that US companies threatened the administration with another round of deep job cuts if the tax hike were passed… and considering that Obama needs their support for changes to climate, healthcare, and financial regulations, he walked away from the idea altogether.

Entrepreneurs with overseas income can greatly benefit from this tax rule; with a properly planned business structure, businesses can defer paying taxes on overseas income, indefinitely, until the funds are brought back to the US.

Let me know if you’re interested and I can refer you to some knowledgeable and by the book tax attorneys who will give you expert advice.

THE BEST GAME IN TOWN:

Legitimate tax deferral strategies are often the cornerstone of good tax planning.  Find out what options are available for your particular situation and take action right away.

For individuals, an easy way to do this is with the self-directed IRA structure that I have mentioned a few times. I don’t want to beat a dead horse, but it’s a no-brainer strategy.

We negotiated a subscriber discount with Checkbook IRA, whom I have worked with in the past to set up a self-directed IRA. Due to extremely heavy call volume, the good guys over at Checkbook have agreed to extend the discount for one more week to make sure that they have a chance to answer everyone’s questions.

Find out if this ‘no-brainer’ strategy will work for you and take action by October 23rd to save $500.

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The window is closing

By Simon Black · 3 comments

I need to start off today’s missive with an important update. Last month I wrote a few articles about something that I believe is an absolute no-brainer if you have retirement savings– setting up a self-directed IRA.

Most retirement savings plans are locked in to a handful of investment options– employees are forced to make a selection among four or five choices, most of which are poorly managed funds run by the same institutions that clearly demonstrated their incompetence last autumn.

A self-directed IRA provides a mechanism for an individual to allocate his retirement savings in whatever way he chooses– whether his own portfolio of equities, physical gold, foreign real estate, overseas bank accounts, private placements, etc.

With a self-directed IRA you can take control of your retirement savings to ensure that some bumbling moron at a bankrupt financial institution doesn’t lose it all investing in Fannie Mae. More importantly, you can ship your savings offshore in a perfectly transparent, legitimate way.

I believe in this approach so much that I went through the trouble of negotiating a subscriber discount with Checkbook IRA, the same service providers that set me up with my self-directed IRA structure a few years ago. These guys are an honest, efficient, highly competent family operation, and I was grateful that they extended a $500 discount to subscribers.

I am writing about this again today for two reasons. First, I’ve exchanged a few emails with Jordan Sheppard at Checkbook IRA, and due to the amount of volume they are receiving and limited capacity within the shop, the discount will be discontinued effective next Friday, October 16th.

Second, and perhaps more importantly, I’m concerned about the direction that the market is going to take. There are a lot of people whose retirement savings are literally trapped in some blue chip index fund.

These are the same people who probably had a bad feeling last August that things were about to get really bad. They watched with horror as their positions took a 70% nosedive.

Fortunately, the last six months has been a period of irrational exuberance, and markets have recovered 50% from their lows. As markets tend to be forward-looking, though, can we realistically say that near-term prospects for the US economy are rosy?

Not by a long-shot. The Dow hovering near 10,000 makes about as much sense as lipstick on a pig.

Top line corporate revenue growth is weak at best, and there are numerous long-term factors which hamper earnings growth, namely: baby boomer retirees pulling their capital out of the market; costly health care regulation; increased corporate taxes; capital flows to emerging markets; etc.

Each of these factors has a negative bearing on long-term equity valuations. It is difficult to predict what will happen over the next few months, but given the carnage that we all experienced last year, it is probably more sensible to make low risk investments that mirror our economic outlooks.

To me, this means companies that are trading a steep discount to net asset value, precious metals and certain commodities, Asian currencies, foreign real estate, and carefully selected private placements.

This is why it is so important to unlock your retirement savings– with a self-directed IRA, your money will be protected from idiotic fund managers if the market takes another leg down.

If you currently have a retirement account that boxes you in to limited investment options, or keeps all of your savings within the United States, I’d highly encourage you to find someone that can set you up with a self-directed structure.

I’m comfortable recommending Checkbook IRA since I have worked with them in the past, and they understand unique needs like using a retirement account to buy physical gold and store it overseas.

If you give them a call, make sure you mention the Sovereign Man discount, which is good until October 16th.

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Panama and the OECD

By Simon Black · 10 comments

“We are very concerned with what’s happening in Panama, or to put it another way, what’s not happening.”

– Jeffrey Owens, director of the OECD Centre for Tax Policy and Administration

Earlier this month, a group of tax commissioners, finance ministers, and NGO representatives descended upon Los Cabos, Mexico for the 5th annual “Global Forum on Transparency and Exchange of Information” sponsored by our friends at the OECD.

You will likely recall that the OECD published its ‘black list’ and ‘gray list’ of non-compliant financial centers, coinciding with the G20 summit in London this past April.  Offending nations ranging from Uruguay to Switzerland immediately scrambled to have their names stricken from the list.

The OECD called this month’s forum in Mexico to make sure that remaining tax havens have either already stepped into line, or are breaking their necks to get there.

The primary regulation in question is the OECD’s controversial standard for information exchange, known as “Article 26.”  This is the standard which requires countries to exchange information with other nations for the purposes of tax reporting, regardless of domestic bank secrecy laws.

Read More…

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