AEOI vs FATCA Don’t Let Preconceptions Mislead You

OECT Logo

By Nzeemin [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

AEOI, FATCA, CRS and BEPS,not to mention the OECD and the IMF are impacting you in ways they never have before. It is a fair bet that the almost daily changes that are occurring in the banking world today have most people who read this column behind the curve. When that happens to us we tend to fall back on old patterns of thinking. That’s not because of some innate character flaw but because that’s one of the ways the body conserves energy.
Thinking is hard work and your brain is predisposed to be lazy. This is one of those times that you need to give it a swift kick in the behind, so to speak. Old patterns of thinking can end up being very costly to you.
“My life is just fine,” your brain thinks, “I don’t need to be thinking about my bank accounts. It’s just too bothersome and things are going okay.”
A cow’s brain is thinking the same way the day before it heads to the slaughter-house. Life is pleasant until it suddenly isn’t.

Behind the Scenes of AEOI

Virtually every country is in some degree of financial trouble. Misspending, greying populations and crafty citizens are just three of the many causes. When politicians have a problem, their first reaction is to reach for the chequebook but often these days the bank account is overdrawn. Because they want to be re-elected, politicians will do almost anything before they raise taxes. So they cast around for ways to get money without raising tax rates.
A few years ago the search for taxes led the U.S. to implement FATCA to make it hard for its citizens to hide untaxed money abroad. OECD politicians said “Hey! What a great idea!” and so they came up with a similar plan for their own citizens called the Automatic Exchange of Information (AEOI).

FATCA is born

When the U.S. was trying to implement its early form of international tax reporting the project was an utter failure. Governments refused to co-operate as they all saw an advantage for their banks if they just stuck with the old ways. So the U.S. strong-armed individual banks. “Co-operate with us,” they said, “or you’ll never be able to transfer money or deal in dollars again!”
Unsurprisingly, the banks all stood up, saluted and cheerily waved their little American Flags. It didn’t really matter, they thought, it was only the American taxpayers who were in trouble. Sell them out and everything else will be just fine.

AEOI arrives

That fine state lasted only a couple of years when all the other industrialised countries realised that they could do it too. So they came up with AEOI which, because of the number of nations backing it, is a really big deal. Nearly every country that matters is moving quickly down the road to implementation. By the end of 2019, the world is going to be a very inhospitable place for those who want to minimise their taxes or keep their wealth out of the hands of distant relatives, Even those who simply want to do business efficiently and economically now find their jobs more difficult.

Surprise Winners

Not every country is one where you want to put your money… exchange rates are volatile, governments are fickle and bank staff are unhelpful. And as for the safety of the banks themselves, well that’s a whole story unto itself. There are plenty of offshore banks that take your money and charge you for the privilege. Then they take most of it and invest it, keeping the profits for themselves.
There is no bank authority worth the name to tell you how safe those banks are. Their countries have joined AEOI so they will report your balances and deposits to whatever country you are a tax resident of.
Surprisingly, though, the country that kicked this off, the United States, may now be the best place to put your money. It already has FATCA in place and has no need to participate in AEOI to collect its taxes. It has states that provide a fair level of privacy and its banking regulation is among the world’s best.
For the moment Singapore has advantages like the U.S. Its banks are among the worlds strongest and the MAS is one of the world’s most stringent regulators. For the present, Singapore is slow-walking its participation in AEOI and may ultimately have little more than token participation.
We have taken the time to do a financial and jurisdictional analysis of a number of banks around the world. Contact us for our recommendations and assistance.

SME Must Learn to Navigate the Shoals Between World Orders

APEC members

The Death of the Old Order

China opened to the world in 1978 and by 1991 entered a period of sustained, astounding GDP growth. This growth soon transformed not only China, but the world.
Then, in 1991 the Soviet Union collapsed and its satellites greeted the lifting of the heavy yoke of Communist dictatorship with joy and trepidation.
And finally two years later the nascent EU formed with a number of related organisations quickly falling into place.
Soon, the elements of a new world order had emerged and an era of peace and prosperity was at hand. Or so we thought.
Al Qaeda, the Asian Financial Crisis, the dot com bubble, 9/11, Afghanistan, Iraq, the Global Financial Collapse and the rise of ISIS followed in quick order.

The World Today

Twenty-six years after the collapse of the Soviet Union the world is in disarray. Nations once had a fairly easy choice to make. They could side with the Communist bloc represented by the Soviet Union or with the Liberal Democratic bloc represented by the United States. That clarity is gone.
An undercurrent of anger, frustration and disappointment runs through the former Soviet bloc. Stagnant incomes are the lot of middle and lower classes in the northern liberal democracies. The South of the EU is on the brink of economic collapse and destabilisation.
In China and Russia the disparities between the rich and everyone else are massive. Discontent roils the liberal democracies while it is forcibly put down in China and Russia. None of this bodes well for the near future. Right now, the only certainty for the international SME is uncertainty.

The Near Future is Problematic

While the long-term prognosis is good, for SMEs, the short-term can put them in dire straits. For individuals, the short-term can be catastrophic. Troubles will hinder the road to a bright future.
Here are a few phenomena that will precipitate problems:

  • Income inequality fosters unrest in China and the United States. That unrest will spread.
  • There are too few jobs to go around. Countries will try protectionism. That will hamper export-dependent economies.
  • Malinvestment in a number of countries will trigger Global Financial Collapse II.
  • Governments will increase tax collections because of longer lifespans and slow or negative population growth.
  • Robots and Artificial Intelligence already eliminate some cheap labor routes into the global economy. More will come.

A Hopeful SME Day-After Tomorrow

A mixed world order is rising from the ashes of the old. This is not the unipolar world of American triumphalism. This order will be multilateral and tolerant. Economics will trump ideology.
Options and opportunities are plentiful for the owners of international small or medium-sized businesses. This is unlike their counterparts who are tied to a single city or country.
Take a look at the map at the top of this page. It is notable for a number of things:

  • APEC is where wars are not being fought and terrorism is the lightest
  • More than half the people in the world live in the APEC region
  • Many of the fastest-growing economies in the world are in APEC
  • The world’s two biggest economies are in this region
  • Most of the world’s fossil fuels are in this region
  • Most of the world’s mineral resources are in APEC
  • The world’s strongest military powers are in this region

Here is a map that shows GDP growth rates:
World's fastest growing economies, 2016

Europe and the Middle East Present Problems

APEC should be hopeful while Europe and the Middle East should be less so. Old-world conflicts of a thousand years ago continue to play themselves out. Just as the Romans fought the Germans and the Gauls to enhance their economy, now it is the EU South vs. the EU North. But this time the North is winning. Meanwhile, the age-old conflict between Shii and Sunni Islam is playing out, not only in the Middle East, but on the streets of Europe as ancient hatreds boil over once again.

Short-term Strategy for the SME entrepreneur

Irrespective of where your business is, the next several years will be problematic. Hilda Loe Associates can help you. Protect your assets and diversify your exposure. Uncertainty breeds prosperity for the wise. Contact us.

Switzerland Pursuing Anti-Tax Avoidance AEOI

post-AEOI empty bank vaultThe Automatic Exchange of (Tax) Information (AEOI) protocols are in place. Switzerland is aggressively pursuing agreements with many countries. The list of countries that Switzerland is engaged with includes a who’s who of former tax havens including the newly added islands of Barbados, Bermuda, the British Virgin Islands, Cayman Islands and the Seychelles.

It’s not just Tax Havens

Non-tax havens developing agreements with Switzerland include the entire EU. Outside the EU the following countries are under current discussions with formal agreements slated for signing in 2017: Andorra, Argentina, Brazil, Chile, Faroe Islands, Greenland, India, Israel, Mauritius, Mexico, Monaco, New Zealand, San Marino, South Africa, Turks and Caicos Islands and Uruguay. Switzerland is even further down the road toward implementation of AEOI with Australia, Canada, Gibraltar, Iceland, Japan, Norway, South Korea and the British crown dependencies of Jersey, Guernsey and the Isle of Man.

AEOI Holdouts exist

Expect Switzerland to strike agreements with most of the AEOI signatories in the next few months. However, there are standout exceptions to this: Singapore and the United States. Although they are signatories, these nations are choosing to interpret the agreement in ways particularly favourable to themselves.

U.S. AEOI Slow-walk plus Trump make a Potent Combination

Australian columnist Grace Collier reminds us that Donald Trump’s plans for U.S. taxes and investments will be a powerful magnet. Add in the strong U.S. dollars, internal stability, external strength and a growing economy that is likely to grow faster and the attraction for Australians is powerful. Collier expects to see Australians opening up U.S. companies (probably in Delaware or Nevada) to own their current businesses in Australia and engage in transfer pricing to move the profits into the U.S. for lower taxes and more stability.
Smart investors have been moving their money to the U.S. for some time now. We don’t expect to see this flow slow down any time soon.

When the Eurozone Collapses

Eurozone banknotes

In the increasingly likely though as yet uncertain collapse of the Eurozone, change will come alarmingly fast. The entire world will feel the impact of the change, not just Europe.

Smart investors already moving

Conservative citizens who bank in the south of the Eurozone are moving their money to banks in the Northern countries. When the crisis comes, it is certain that one of the very first actions will be to freeze accounts to prevent deposits from fleeing north. Long-term planners have been preparing for this since 2014 and perhaps earlier. If the zone does disntegrate they’d rather end up with Deutschmarks or Kroner than with Lira or Pesetas. Who can blame them?

The likelihood is that the next Italian government will fall after a year or two in office, but not before taking its populist stand against many of the Eurozone restrictions that have made Italy a vassel state of the Northern European industrial machine.  There will be a lot of dithering but simple economics is going to drive Italy out of the Eurozone and EU that it shouldn’t have been in in the first place.  With Italy will go Greece and possibly Portugal and Spain as well. We could well see a further splintering of the Eurozone and EU after the southern tier drops out.

Eurozone structurally weak

The EU was a sincere attempt to duplicate the massive internal market of the U.S. But it didn’t provide the political and financial structures needed to finish the job.  The Eurozone simply compounded the weakness. That created a hodgepodge of rules, over-bureaucratised on the things that don’t matter and ineffective or missing where they do.

The U.S. has long had in place a system that funnels taxes from financially strong states into programs to assist financially weak states. While the Federal government can run a deficit forever as the issuer of money, most of the states are constrained to by hook or by crook balance their budgets.  The remaining states don’t have the leeway to get their budgets very far out of balance. The EU lacks any such mechanisms to a meaningful degree.   Mississippi and Alabama are economic colonies of New York and California. However, New York and California contribute to their well-being via the Federal government. On the other hand, Germany’s colonies in the EU  receive nothing from Germany without strings attached.  And even then, all they get are grudging loans at stiff terms when things are about to go to hell in a hand basket.

No deus ex machina in sight

I cannot imagine that the Germans, in a sudden fit of enlightenment, will decide that it is time to put the EU South and East on a semi-permanent dole from their hard-earned tax money.  If it doesn’t, its  EU colonies will have no choice but to abandon the Euro at a minimum. Even the continued existence of the EU will be in question.  That bodes poorly for Germany.  Asia, the Americas and Russia are going to find themselves far more competitive with Germany in Europe.

To paraphrase Hemingway, the Euro will weaken slowly until it weakens fast. And then it will be gone. It is time for Euro holders  to set about opening U.S. Dollar bank accounts in world-class banks. Those banks must be in jurisdictions safely shielded from the likely collapse of the Euro.  Hilda Loe Associates has close relations with some of the strongest banks in the world and stands ready to help you move some of your assets into a safe bank in a safe jurisdiction.

Free Trade is Dying – Is Your Business Inside the Wall?

London's Financial Trade Centre, The City

© David Illif, User:Colin and Kim Hansen / Wikimedia Commons / CC BY-SA 4.0

Asian prosperity depends on free trade.  The West is rapidly coming to realize that the economic theory behind free trade, that is to say, comparative advantage, is wrong. Comparative advantage theory misses a whole host of causes and effects that often renders fair trade for the workers in wealthier nations a losing proposition. Free trade is disadvantaging many of the workers in consumption economies. The political blowback is fierce. Far Right parties are seizing upon the discontent to advance their message of racial purity and military strength.

There are regional trends that sometimes mask the situation, such as
Germany’s apparent success at dealing with the problems of fair trade. But the workers in the rest of the EU subsidize Germany, although you’ll seldom see that in writing. But the workers in most EU countries are well aware of it.

The News is Bad for Free Trade

Brexit, Trumpism and a variety of other populist movements are likely to reshape the world over the next decade, and it is reasonable to assume that the transition is going to lead to hardship all around, but most of all for the “Next 11” countries (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, Turkey, South Korea and Vietnam).

By and large the Next 11 are still dependent on exports of physical goods to fund their growing economies.  At the same time, they lack the level of income for the middle and lower classes that could allow them to shift quickly to internally-generated growth. Protectionist measures and policies designed to protect the workers of trading-deficit countries will leave them struggling to find a way forward.

The News is Bad, But Not A Disaster, Yet

We need to ask what the liklihood is that free trade is in jeopardy and how long do we have before we can expect to feel the effects.

The good news if you aren’t an affected worker is that it can take a long time for major policy shifts to occur in liberal democracies. And the nations most likely to erect barriers are liberal democracies. (Warning – don’t relax and quit reading now!)

Even after the policies are in place, the practical impediments are still significant.  For example, the factories necessary to create the components and build flat screen TVs cost billions of dollars and take years to build and outfit.  It is clear that they are going to move slowly in throwing up barriers to trade. JUST look at their demand for imported consumer goodsHowever, for easy-to-make products, the barriers may go up quickly. And, unfortunately, the Next 11 are the source of many of those easy-to-make products. (e.g. crockery, pots & pans, furniture) so it is probable that those sectors will decline quickly.

Less Danger for Some Countries

I’ve been ignoring the BRIC countries in this discussion so I’ll take a moment to explain why.  Each of the BRIC countries is characterised by a strong industrial base. Each also has a vast hinterland and a large or huge population clamouring for consumer products. They can lever this into dynamic growth for decades to come if they implement the correct policies. In a protectionist world, they still have the ability to prosper.

I have also skipped Singapore. The decline in trade will affect Singapore in significant ways. However, for decades it has been diligently moving its focus away from physical things into providing services and the creating intellectual property.  It is unlikely that trade barriers are going to affect either of these areas. But the bill to be paid is that those with the least useful skills will be unemployable.

Singapore could, however, be out-competed by China, India, Indonesia or any other country that has a larger population and decides to replicate Singapore’s approach.  That will happen at some point, but given the difficulties of managing large countries, it is unlikely to happen in the lifetime of anyone reading these words.

G7 Workers Not Likely to Benefit From Trade Barriers

We will see the huge trade disparities that exist today disappear over the next two decades. There is no reason to expect that this is going to improve the lot of workers in the EU or the U.S.  The reason: robotics.

As humans, we are faced with the distasteful fact that we are not all born with the same capabilities. No matter how strong a person’s will, they are not going to become an astrophysicist with an IQ of 90.  Even a person with IQ of 130 is likely to find it exceedingly difficult to become an astrophysicist.  If she succeeds, she is unlikely ever to make major contributions to the field.  The same holds true in software development, medicine, finance and on and on.

We have to face facts, and so do our politicians. Folks with lesser intelligence are not suited for the most-in demand jobs of the near future… or even now. It is inevitable. The answer to the inequity that arises is political in nature. I don’t do politics here.

Robots Are Here. More Are Coming.

The sad reality is that those with even an average IQ are becoming more and more at risk for replacement by robots.  The factories that return to the EU, Britain and the U.S.,aren’t going to look like the ones that went abroad decades ago.  They will be robotised with just a few highly-skilled human technicians to keep them running. The remaining jobs will either be very high-end with significant intellectual challenges or they will be at the low end. They will be jobs for which robots have not yet been developed or for which it is simply cheaper to use a low-wage human.

In the U.S. between one and two million truck-driving jobs will be eliminated by automation starting as soon as five years from now. Soon after ten million cashier jobs will start disappearing. Europe faces the same problem. Robots are already putting Chinese factory worker out of work. Automated factories, cars and stores have huge implications for the workers in the advanced countries. Telerobotics will certainly make it even worse.

Businesses, Factories & Trade Will Migrate

Many multinational businesses presently headquartered in Britain are planning their own version of Brexit.  They will be leaving Britain and taking up residence in Europe if the terms of Brexit are not to their liking.  Even worse for Britain, those companies will also be uprooting their factories and moving them into Europe. Quite possibly, the City will find itself denuded of banks, hedge funds, brokerages, etc. as they move to Europe in order to stay within the EU.

We will see LG, Samsung, Apple and numerous other companies moving their factories into the U.S. and the EU, leaving a big hole in their domestic GDP. For example Samsung Galaxy phones are manufactured in Gumi, South Korea.

In India they make some Samsung televisions, mobile phones, refrigerators, washing machines and split air conditioners. A second Indian factory opened in 2007.

More recently, in 2014, Samsung began manufacturing computer memory modules in China. There are two semiconductor facilities: one in Austin, Texas and one in Giheung, Korea.

A manufacturing facility and a research and development center are located in Warsaw, Poland.

Most Samsung microwave ovens are manufactured in Malaysia. Its refrigerators are constructed in South Korea, China and Poland. Televisions are made in Portugal, England and the U.S. A third manufacturing facility is planned to be built in Vietnam in 2014.

That is surely the tip of the iceberg as this doesn’t include their supply chains. Somehow, Samsung is going to have to figure out how to prosper in a protectionist world. It won’t be easy.

Warning for Next 11 Businessmen

Trade barriers are not going to rescue workers in the G7 but they are likely to have disastrous consequences for the Next 11.

If you are a businessperson that depends on the Next 11 or on countries that haven’t made it into the Next 11, now is probably the time to start making plans to deal with the transition away from free trade.

Where you incorporate, where you domicile your business and where your bank accounts are located will have far reaching consequences in the future. Stay tuned, we’ll have a lot more to say on this subject.

Taxes, Titanosaurs and Shell Games


It is my considered opinion that taxing businesses is an exercise that is  somewhere between  stupid and futile. Simply put, businesses are the generators of new wealth in any country and taxing them simply impedes the ability to create new wealth.  Furthermore, a properly designed global tax system can achieve efficiency, justice and fairness through taxing incomes and wealth of individuals as, in a properly designed system, all money will at some point pass through their hands.

I’m not so naive as to believe that we’re likely to see a rational tax code so long as homo sapiens are the dominant species.  Perhaps things will shape up in fifty or a hundred years when our robot overlords take over.  In the meantime, we have to deal with the tax system as it is, not as we would like.

As so often it does, excesses in the U.S. give a good sign of the excesses that are better hidden globally.  So it is with this in mind I present to you, the U.S. Public Interest Research Group’s (U.S. PIRG) report, “Offshore Shell Games, 2016“.

Each year major corporations salt away many tens of billions of dollars in offshore jurisdictions that are less punitive than their home governments. This in turns deprives governments of money that could be used for much-needed programs or to pay off debt. (Or so the story goes, we’ll leave the discussion of how wrong-headed governments and their publics are when it comes to understanding some basic economic concepts for another time.)

Titanosaurs are the Problem for Tax Authorities

One of U.S. PIRG’s findings is that seventy-three percent of Fortune 500 companies have at least 10,366 tax-haven subsidiaries and the top thirty collectively use 2,509 such subsidiaries!  The most popular ones for those companies are the Netherlands, Bermuda and the Cayman Islands.

It is important to note that what works for the top Fortune 500 companies is often not available to the average millionaire or medium-sized business.  The big guys pay to have legislation and tax rules favouring them written.  Often these laws and rules are so narrowly cast that only one company can meet the requirements.  Other companies then adjust the way that they do business to take advantage of them.

Opportunities for smaller players and individuals are fewer than for the big guys, but on the other hand, in a field full of lumbering titanosaurs, there is plenty of room for tiny mammals to safely scurry about. That’s a good thing; it’s the little guys that change the world.

“American multinationals reported earning just 14 percent of their profits in major U.S. trading partners with higher taxes — Australia, Canada, the UK, Germany, and Mexico”. But, in spite of that, “… American multinational companies collectively reported 43 percent of their foreign earnings in five small tax haven countries: Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland.”  Hmmmm… is it any surprise the OECD has finally decided to act on tax avoidance?

At Hilda Loe Associates we leave the Titanosaurs to their own devices. On the other hand, if you are one of the little guys changing the world, we may be able to help you optimise your situation.

Frans Bouman

 

BEPS & Taxes: Keep Your Dutch Sandwich on the Menu…For Now.

Townhouses in the top BEPS target
OECD may be waving the BEPS cudgel at offshore companies and tax havens, but for the next year or so it has all the power of a Nerf bat.
“Ireland’s 12. 5 per cent corporate tax rate is not under threat from moves to reform the global tax system, the OECD’s tax policy chief has said. On a visit to Dublin, Pascal Saint-Amans said there was no longer any questioning of the rates set by some countries” (Irish Times). more…