April 27, 2011
Paraguay isn’t exactly ‘on the radar,’ so to speak. Most people who research living overseas usually end up in the hyped up places like Panama, Costa Rica, or even Ecuador. Those places are fine and good, but Paraguay may truly be a hidden gem for many.
Like Ecuador, you can live well in Paraguay on a very modest budget, almost to the point that it’s obscene. Unlike Ecuador, however, which seems ‘frozen in time,’ Paraguay’s economy is at a turning point. I think it’s in the same position as Panama was about 10-years ago.
Quick background– in 1977, US President Jimmy Carter signed a series of treaties with Panama’s Omar Torrijos in which the United States agreed to hand over control of the Panama Canal to the Panamanians on December 31, 1999.
The US had a long-standing influence in Panama, stationing thousands of troops and injecting billions of dollars into the economy. With the subsequent withdrawal of the US military in the late 1990s, Panama lost a major economic workhorse.
Practically overnight, there were no more soldiers running around town blowing their paychecks, no more officers to rent expensive off-post quarters, no more sweetheart contracts to provide services to the Army. The immediate effect was a painful, albeit brief recession.
By 2001, Panama had hit the reset button for its economy, beginning a steady climb back to prosperity. Paraguay is essentially at this point now… somewhere slightly above ground zero. It’s a small market, but I think there are fortunes to be made here– in property, in agriculture, even in fixed income investments.
Taxes are a complete joke in Paraguay. The suspended income tax is negligible, and property taxes are so low it’s cute. I know a number of property owners here who pay anywhere from $50 to $300 per year for spacious, luxurious properties, or huge swaths of agricultural land.
It also helps that the country has a fairly clear process to welcome all foreigners as residents. Paraguay doesn’t care where you’re from– I’ve seen Russians, Arabs, Europeans, Japanese, Taiwanese, Africans… you name it. As I discussed last week, the biggest step in obtaining Paraguayan residency is a small bank deposit.
We have a global audience here at Sovereign Man– at last check, from well over 100 countries on 7-continents. For the vast majority of these, establishing a small bank account in Paraguay is an administratively inconsequential action. US citizens, however, do have additional regulatory burdens, and I want to remind you about this once again.
[editor’s note: this does not constitute tax advice, so make sure you always check with your own tax and financial advisor]
If you’re a US taxpayer with a foreign financial account, the first form you need to know about is the Department of the Treasury’s TDF 90-22.1, the Report of Foreign Bank and Financial Accounts (or FBAR).
This form is required for any US person (or disregarded entity) with a financial interest or signatory authority over any financial account in a foreign country if the total value of those accounts exceeds $10,000 at any time during the calendar year.
The IRS was kind enough to put out a pretty detailed FAQ about the FBAR. Among other things in the FAQ is interpretive guidance on the recent FinCEN ruling about offshore gold:
“An account with a financial institution that is located in a foreign country is a financial account for FBAR purposes whether the account holds cash or non-monetary assets [such as gold].”
This form must be filed by June 30th every year and reflects financial accounts held from the previous year. In other words, US taxpayers who had a foreign account exceeding $10,000 in 2010 will need to file the FBAR this year by June 30th.
The second form US taxpayers need to be aware of is the 1040 schedule B; those with foreign financial accounts must file the form and fill in boxes 7(a) and 7(b). It’s very simple, and instructions are on the back of the form.
One of the nice things about banking in Paraguay is that the interest rates are far superior to what most other countries are paying right now. US taxpayers must include this interest income on their tax returns, and if you generate interest income in a foreign currency, take into account the currency appreciation.
A lot of people forget to do this and land in hot water.
Needless to say, US citizens still have the burden of paying taxes on their worldwide income, so any offshore activities in Paraguay (or anywhere else for that matter) need to be reported. Failure to report is simply not an option, and I’m sure everyone has better things to do with their time than turn big rocks into little rocks.
The bottom line is, international diversification is a great idea; you get more control and protection over your assets, exposure to stronger currencies, superior returns, and often stronger financial institutions. But do it for the right reasons.
I’ve never understood the mentality of a handful of people who consume so much time and energy trying to hide and conceal their income from tax authorities… if they would just put a fraction of that effort into making more money, it would solve the problem and they’d sleep a lot better at night.
Stay tuned for tomorrow’s letter, we’ll talk a lot more about agricultural opportunities.