What you will find in this edition
- Feature: Tax Havens and Their Path to Antiquity (Part 2)
- Fraud Alert: The Classic Scam of All Time
- Privacy: The Largest Tax Haven in the World
Tax Havens & Their Path to Antiquity
(Part Two – Continued form June 8, 2018)
by Jeffrey H. Corbett
“A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform.”
— Russell B. Long, U.S. Senator
Political Flight Capital
Tax havens have provided much more than a harbor for those wishing to avoid excessive tax. Political flight capital may even be a greater reason for their existence. History is full of examples of countries providing the wealthy with relief from tyranny, real or perceived, in their homeland. A synopsis of the two most well-known havens provides an important perspective for your consideration.
Hong Kong offers the most-recent example where this activity has been chronicled. After more than 150 years of British rule, Hong Kong reverted back to the Chinese on July 1, 1997, causing grave concern about its future. Hundreds of millions of dollars became flight capital and left this location. Canada became a huge benefactor of this exodus since many investors not only moved their money there but established second citizenships in this North American location.
Hong Kong is also interesting because it is an example of how the offshore world can change. Prior to 1841, it was an island with a tiny population of approximately 3,000. Hong Kong became a textbook case of a nation short on natural resources; where poverty and crime could have easily over run this nation. Instead, low taxes and a business philosophy of nonintervention became a source of enormous prosperity. By embracing this “laissez-faire” philosophy, Hong Kong positioned itself for the long-term success it has enjoyed.
Today, Hong Kong is again seen as a business-friendly city-state. Its strategic location in the Asian Pacific region has resulted in it becoming one of the busiest harbors in the world and the third largest financial center, behind only New York and London. The Sino-British Joint Declaration, signed by both Great Britain and China in 1984 provides for a policy of “one country, two systems” until 2047.
No discussion of tax haven history would be complete without referring to Switzerland. This charming European tax haven is frequently the jurisdiction of choice for those looking for a secure and private location to keep their nest egg. Switzerland has positioned itself as one of the world’s major financial centers by virtue of political stability and economic strength. It is often regarded as the world’s premier tax haven. For many, the mention of offshore investment will immediately create images of the famous Swiss numbered accounts. The mythology of this private Swiss account truly precedes any discussion of tax havens. In this regard, as is often the case, fact and fiction are blurred together.
In reality, numbered accounts are rarely used and often discouraged by high fees since a depositor’s financial affairs are private by law; these accounts are seen as being excessive. This country’s central European geographic location, combined with the trustworthiness of Swiss banks, has sustained its tradition for more than one hundred years. Swiss banks currently manage about one-third of all privately invested assets worldwide – approximately US$1 trillion. Bank privacy is a centuries-old tradition but certainly has been redefined in recent years. For the most part, evidence that a crime has been committed is needed to obtain bank information. Information sharing agreements, nevertheless, are in place with foreign tax evasion being the focus. Switzerland remains a wonderful place to conduct business and can certainly provide an individual or corporation asset protection from frivolous lawsuits. But if you are looking to hide here from the taxman – all bets are off – beneficial account owners are known by their corresponding banks for both tax reasons and anti-money laundering requirements.
The United States Perspective
As with any generalization, there are exceptions, but for the most part, US perspectives pertaining to tax havens tend to differ from the rest of the world. Most Americans have adopted an ultra-conservative stance. Cross-border strategies are often viewed with much skepticism resulting in condemnation. Because of ignorance, this fear of the unknown can result in missed opportunity, lack of proper asset protection planning or poor estate preparation. All of these problems could be easily avoided with an open mind and basic education. Over the years, we have discovered that the foundation for this rationale is basically established within a group of six primary issues. Fallacy and fact are inseparable within this reasoning.
- “Geography” – The United States has a very distinctive and powerful geographic presence. From its early history forward, the economic advantage of “Manifest Destiny” was not lost on entrepreneurs and politicians alike. This “coast to coast” presence was unmatched in Europe and provided a gateway for trade. Large natural resource reserves, complimented by political stability and freedom, provided the needed edge over the Far East. Thus, a superpower evolved with a mindset of self-sufficiency. Isolationism, defined as purposely avoiding political or economic interaction with other nations, developed into a popular stance. Until recent history, most citizens perceived no urgent need to look overseas. Consequently, the geography of the United States lent a hand early on with the majority of the US population becoming unfamiliar with foreign lands.
- “Buy American” – In the mid to late 1970’s, the cry to “buy American” became very common among the United States middle class. Most credit the automobile industry to be first to coin this phrase. It was a failed attempt to rally Americans against the flood of Japanese cars into the marketplace. Buying American became a method to prove one’s patriotism. Over time, the logic failed as the public became more aware that most “American” manufacturers had diversified to such an extent as to only be correctly termed a multinational. Consumer self-interest and product quality surpassed attempts to align patriotic feelings with economic reality. There still remains; however, a percentage of the population that steadfastly holds this belief.
- “The War on Drugs” – Billions of dollars are spent each year to address drug abuse and the dreaded outcome this aspect of modern life brings. One result of this governmental campaign is to establish a public mindset that any activity offshore is unlawful in nature. There can be little doubt that illicit activity is present; the exact level, however, is very much in question and will perhaps never be known. It does seem a matter of common sense that financial markets are naturally going to be a depository for all sorts of funds, and reasonable due diligence can be the only expectation. Further, all industries have an element that is unsavory. For example, the United States savings and loan industry had numerous well-documented problems extending over many years. In addition, the US brokerage industry has had scandal after scandal that includes some of the largest names on Wall Street. Nevertheless, our perception of these industries is not clouded by overreaction. Painting all the Caribbean, Pacific Rim and Europe with the same broad brush is simply unreasonable; billions of dollars move each day from these countries in the way of legitimate commerce.
- “Media” – Each evening, tabloid television reinforces the readily accepted fact that sensational stories sell. Exceptions become the norm within this journalistic framework. How information is presented to the public becomes more important than the particulars. Thus, the “spin” of a particular story becomes everything. Offshore business reports are rarely interesting unless someone is financially hurt. In addition, Hollywood has lent a hand cultivating a profile of illegitimacy with movies such as “The Firm,” where cash was flown via private jet to the Cayman Islands for deposit, or “Wall Street,” as offshore accounts were used to hide profits from insider trading. These images have cultivated a profile that holds little in the way of truth.
- “Government Agencies” – Bureaucratic agencies such as the IRS, have vested interests in restricting the access and desirability of overseas markets. Their power base could be potentially eroded if the offshore market was perceived in a more positive light and if an open-door policy was maintained for currency movement. This is reflected in the increased filings now required by the US Government for moving currency offshore. These restrictions would likely be even stronger except for potentially devastating effects on the US economy. Every government action taken within the financial markets has an equal reaction that is not always desirable. The US economy is very much dependent upon foreign investment that would not react well to stricter controls on the movement of money. This highlights the inherent struggle between the State Department, with its international interests wishing to maintain policies that avoid economic retaliatory measures by foreign governments, and the IRS, with its strict domestic view.
- “Giving Away Personal Privacy” – Governments keep secrets. They often do so under the premise of national security. It should follow that individuals would have issues, perhaps of the financial nature, that would be detrimental to their well-being if known by the general public or business competitors. Personal privacy, however, has been consistently undermined over the last few decades. The primary reason has been the lack of active participation by US citizens to protect their right to privacy. Additionally, the public has become willing to sacrifice its private life because of fear. Fear of crime, drugs, gangs, terror, etc. has created an environment where the idea of privacy is a low priority. Any former resident of the Soviet Union can describe in detail how intrusive a government can become and the danger of a complacent stance. Left unchecked, it is the nature of government to push the envelope and pry into the private affairs of its citizens. “Government for the people and by the people” can easily become a lost concept. Privacy remains important, because privacy is power.
Tax and tax shelters (havens) have existed as long as civilization. They survive in an inverse but directly proportional relationship. Higher taxes will always result in a broader appeal for shelters and havens. Conversely, if a country lowers its tax, it will negate the appeal of such alternatives and may, in fact, become a haven itself. These are dynamic concepts, which change with the time, national origin and surrounding economic climate. We would submit that since tax, and the inevitable tax shelter do not remain stagnate neither should our understanding of them.
The Classic Scam of All Time!
Nigerian Advanced Fee Scam
Recently, I was traveling on the East Coast of the United States. During a break, I turned on the national news and was shocked to find out that the Nigerian Advanced Fee scam is still going strong and several criminals had been arrested. Thus, I thought you might find it interesting to review this epic swindle. Many find it humorous, but we find it really sad that it still exists, and many have been harmed.
For more than twenty years, the Nigerian “advanced fee” scam -has been running uninterrupted. The scam operates as follows: The target receives an unsolicited email or fax from a Nigerian contact. Often they approach you, claiming that your standing in the community has given them a reason to believe that you could be of assistance. The letter is frequently from a non-existent entity called the Nigerian Oil Corporation. The pitch is to help them get money out of Nigeria for which a huge fee would be paid to you, usually in the millions. They will request that you pay an “advanced fee” to help smooth the way for the transaction. If an advanced fee is paid, they are never shy and will invariably claim to have problems with the transaction. More money of course would cure everything.
There are many variations to this Rip-off.
We highly suggest consulting the US State Department and the Nigerian Embassy for additional information. Below is an excellent video which reviews all of this scam and its many variations. Interesting fact – it is estimated that con artists need to send out over 12 million emails to get one response but they continue with their efforts because it is successful.
The World’s Largest Privacy Haven
The United States as a Haven for Privacy:
Since 2014, 97 jurisdictions have agreed to impose new disclosure requirements for bank accounts, trusts, and other investments held by international investors. Of the nations the OECD asked to sign on, only a few have declined. Those nations are Bahrain, Nauru, Vanuatu and the United States. Thus, with a stable economy as the backdrop, the United States has seen a huge influx of foreign investment and become one of the few remaining jurisdictions where advisers are actively promoting accounts that will remain secret from overseas authorities. As a result, at least for Non-US citizens, the United States has become the largest haven for privacy in the world.
While offering secrecy to Non-US citizens is not against the law, U.S. firms are not permitted to knowingly help overseas customers evade foreign taxes. Still, for clients with a legitimate need for secrecy, especially from countries where political instability can threaten a family’s fortune, the United States offers a potentially attractive solution.