FATCA, AEOI, Amazon, Überization and the Death of Taxes

FATCA shines the light on Amazon profits in Japan
Photo by Asadyan
“Nothing is certain”, Benjamin Franklin wrote in French to Jean-Baptiste Leroy in 1789, “except death and taxes.” Perhaps he was right at the time, but two hundred and thirty years later we are nearing the point where the death of taxes seems possible.

It can be argued that each person receiving a government service should pay the same portion of their wealth for the service. Basing all taxes on that fundamental principle, one that was once impossible. That will soon no longer be the case. While that is happening, the case for traditional taxes is being undermined by technology and lifestyles.

Governments are scurrying about, trying find sufficient revenue to cover the expense of keeping a greying population in good health and entertained. Unsurprisingly, that has led to the U.S. to find yet another way to punish its expats. It was the first, but not the last. Politicians who hang out in the Fourth Ring of Dante’s Inferno decided that their countrymen and businesses abroad should be punished. So the Fourth Ringers (aka politicians) got to work and developed FATCA (Foreign Accounts Tax compliance Act).

“Gotcha!” they said! American expats and businesses would no longer be able to get the same deal as nationals of every other country. Well, almost every other country. As it turned out, punishing one’s expats and multi-nationals is such great fun that everyone wanted to join in. Soon they published AEOI (Automatic Exchange of (Tax) Information), the globalised FATCA

FATCA Goes Global

FATCA was such a great deal for U.S. nationals abroad that the entire OECD said “Us, too. We’re not going to mollycoddle our expats either!”

Before long over one hundred countries had signed on to the newer, better version: AEOI. Since the other countries didn’t adopt the U.S. attitude of punishing their nationals abroad, the returns won’t be as substantial. Still, AEOI is going to bring money into a lot of treasuries that wasn’t there before. As we know, there are lots of politicians smiling and a lot of expats and offshore company owners crying.

The Rise of the Robots

When I use the term “robot” I’m referring to the entire robotosphere. That covers computers, the Internet, software, AI, things with arms, things with eyes, things with wheels. They are all part of the Internet of Things (IoT). At some point the IoT and the robotosphere will be one and the same. Already they overlap.

The robotosphere has no boundaries. Some countries put up political barriers on the Internet. Those may be restrictions in the peoplesphere but are not in the robotosphere. Robots work together in harmony in China, Pakistan, Russia and the U.S. at the same time. They cross political boundaries and through political barriers without a hitch. Already we have robots on Mars, others are touring the planets and one is headed out past the solar system and into the galaxy. We humans look rather petty. Just ask your favourite robot.

One of the characteristics in the robotosphere is distributed intelligence. Another is ephemerality. Processes in a dozen locations may come together to do something and moments later move on to a dozen other projects in as many other locations. A sort of being with a sort of consciousness existed for a few moments and then it was gone. Mr Tax Man, who ya gonna tax?

Toss a problem into a pool for solution and fifty robots in forty countries will contribute to the solution. There’s no revenue. There’s no locus of production. How can it be taxed? Use the latest 3D printer to make a dining room table from recycled materials using a free plan and code that is housed in the cloud. What can you tax?

Amazon in the Robotosphere

Those who buy from Amazon think of it as a company that sells things. From the day of its inception, though, Amazon has been a software company that sold things as a way to support itself. That wasn’t the plan Jeff Bezos and his fellows had, but that was how to solve problems. As Amazon pioneered the way to becoming a global powerhouse without ever making a profit it put robots at the center of its business. Amazon is a leader in creating the robotosphere. The robotosphere is creating Amazon.

Robots are driving down the cost of almost everything. If goods were properly priced, they’d be ninety percent cheaper than they are today… the rest is simply compounded profit margins and taxes. Eliminate compounded profit margins and rationalise tax collections and we’d come close to that. Amazon has no profit to tax. Increasingly fewer people have sufficient income to tax, a process that will accelerate.

The Überization of Transport

For most people, automobile ownership is going to be unnecessary. Über, Lyft and many others are paving the way to a future without automobile ownership for people in cities and suburbs. Robot cars and trucks will make them unnecessary in the exurbs and rural areas as well although it will take longer. The car will cease to be your certificate of identity, showing that you are wealthy, or adventuresome or a rugged hunter. Most importantly, they’ll cease to be effective generator of sales taxes.

Even worse for Mr. Tax Collector, Über’s robotic cars won’t even need drivers. Robotic trucks and robotic cars will destroy millions of jobs. Those are millions of people who will move from generating taxes to consuming government services without paying taxes. Are we going to raise road taxes to cover that cost? How will either FATCA or AEOI help fund a government dependent on income taxes from folks who have been replaced by robots?

Today most aircraft pilots are almost superfluous insofar as routine travel from A to B is concerned. We can easily make them superfluous if we wish. Cockpit crews have gone from five to four to three to two over the years. There is nothing in history to make us believe that this trend can’t continue until it reaches zero.

Überization in Asia

It is claimed that Über will have a great deal of problem being viable in many Asian countries because of the plethora of taxis. My instinct is that that is not true for several reasons:

  1. The transportation selections that people make are based on habit and necessity. Necessity has a way of changing even the most ingrained habits quickly.
  2. Although many Asians have what seems to be a plethora of taxis during the period when they are most needed, they seem never to be available at the most important times such as during rainstorms, at lunch break and after work.
  3. In even the best-served cities it is frequently necessary to go to a fairly busy thoroughfare in the hopes of being able to hail a taxi.
  4. The uncertainty of if and when one will be able to hail a taxi, especially during times enumerated in #1 above is often the cause of late starts for meetings and a consequent drop in productivity.

There is an additional factor to be considered and that is the Überization of minibuses. Experiments with this sort of service is proving to be successful even in semi-rural environments. This approach would seem to be ideal for many locales.

Changing Housing Habits

Home ownership has been the sine qua non of middle class success since the middle class began to rise in the 19th century. If you didn’t own your home, you couldn’t really consider yourself to be part of the middle class. That is changing and will do so with increasing rapidity as time goes on.
Japan is probably the stand-out example for this trend.
The main drivers for home sales are:

  1. Scarcity
  2. Expected price appreciation.
  3. Declining relative payment size during ownership due to inflation
  4. Relative value compared to renting
  5. The need to impress others

In the case of Japan, they are faced with a declining population. Housing units are not scarce. Because of that, prices have not appreciated for two and a half decades. As of late there has been some speculative rise in Tokyo in the hope that Abenomics II will get the economy moving.
Twenty-five years of deflation means that the cost of the payments on fixed rate mortgages has increased as a percentage of take-home pay.
In a society with a declining population and declining home prices, rental units, with their inherent flexibility, offer more value than home ownership.

And finally, the upcoming generation of young folks put more emphasis on who you are and what you do than they do on what you have. Big homes and expensive cars don’t impress them nearly as much as they do their parents.
As a society becomes more and more willing to rent rather than buy, it makes property taxes less and less viable as a base for assessing taxes.

The Final Act

As incomes fall and the population greys, governments will scramble to find other sources. FATCA and AEOI are simply the leading edge of this phenomenon. Not only that, sales taxes will be insufficient to fund government and the old standby, tariffs, will lose their value as just-in-time on-site manufacturing strangles commerce. As governments reach across international borders to try to scoop up a bit more revenue they will find that it is a drop in the bucket compared to their needs. When salaries and costs are deflating, where do governments go for their funds?

Surprisingly, we already have part of the answer – they steal your savings, but not through FATCA or AEOI. Switzerland and Japan are already stealing from savers through negative interest rates, hoping that this will kill deflation. In Cyprus they were even more blatant – they took the money, they took the savers’ money, bailed out the banks and told the savers not to worry, they’d get their money back someday. That’s what you do when the government has no money; you go to the people who have it.

Where to from here? Possibly funding government exclusively through user fees based on individual net worth. Under this system, a government service that a person with a net worth of $1 million was charged $1.00 for, a person with a net worth of $1 billion would pay a thousand dollars for, reflecting the relative value to each of them. By linking databases and with the AEOI and FATCA rules and treaties in place, this would be quite practicable. Whether it is politically viable is another question altogether. The one thing that we can be certain of is that whatever actions are taken, they will be taken long after the crisis has already unfolded.

F.G. Bouman

AEOI, Taxes and Growing Your Market in a Static World

Birth Rate Map Presages AEOI policy.

Map by Ali Zitan Released into the public domain under Creative Commons CC0 1.0 Universal Public Domain Dedication

You can get a quick intimation of what your market is going to look like in the future with a simple look at the map above. You can also determine what each market’s tax policies, including AEOI and BEPS, are going to be by looking at the same map.

Demographics→Taxes→AEOI

If your market is not experiencing a growth in population then you will find business gets harder over time. For two hundred years, demographics have worked in favour of the business person. Growing populations meant more business. Now, the Middle East and Africa account for almost all of the world’s population growth. Business can no longer depend on mere population growth to carry it forward. As the next graph indicates, world population is reaching a point where it should become static in the future after which it will slowly decline.
Declining fertility rates force AEOI policies

If you are in a country such as Singapore or Dubai you must be thinking “does this guy have any idea of what he’s saying?” Well, yes, I do. Don’t be deceived by your local situation. There are a few places where populations have been growing substantially and quickly. Not only small, hot-house economies like Singapore and Dubai have experienced rapid growth in a short period of time. Many cities around the world are growing much more rapidly than their countries. The U.S. and Canada continue to grow their populations as a result of their liberal immigration policies. Each of these trends marks something different in terms of long-term sustainability.

The Rise and Fall of Cities

Cities such as the coastal cities and provincial capitals of China have experienced phenomenal growth.  That was to be expected as workers from the hinterlands flocked to the cities to provide the cheap labor for new factories. Dubai and Singapore have had high population growth as a result of temporary labor that has come to fill vacant jobs. But the jobs are artificial and result from temporary laws and regulations.

Population growth, in other words, has not been organic. It has been brought about by external forces that have been of immediate benefit but there’s no internal foundation for them. Such economies are far more fragile than they may seem. As they seek an even playing field, protectionist pressures of Europe and North America will make jobs disappear almost as quickly as they came. The cities of tomorrow that dot the Asian landscape would quickly hollow out.

China. It’s Always China

China’s situation is a case in point. Anyone whose business is in any way related to China is sitting on a time bomb.
China is so successful with its exports for three unsustainable reasons:

  • First, it subsidises its manufacturers by providing virtually no enforcement of either environmental policy or labor rights.
  • Second, it pegs the Yuan to a price significantly (up to 20%) lower than the price the market would naturally support, and
  • finally, it directly subsidises its manufacturers, making it possible for them to manufacture at or below cost and still make a profit.

China’s unbalanced approach to trade drives populist movements in Europe and America. You can bet that Donald Trump will act to create a balanced trade system starting on 20 January, 2017. The consequences for much of Asia are going to be dire over the short and medium term. Given China’s positive economic presence in every Asian economy, every country will be affected.

Demographics are not the Whole Story

There are three trends that will modify the consequences of the decline of population growth:

  • The Rise of the Robots
  • Distribution of the fruits of success
  • Economic rise of the many

Each of these is worthy of a separate discussion. For the moment I’d like to discuss the interplay of the final two.

Wealth Inequality Drives Economic Collapse

Under our current distribution systems, there is a link between the work you do and your ability to consume. Your work may entirely beneficial, as with a health worker. Or your work may be pernicious, as with a cocaine dealer. Both have in common is that they must work to generate income and survive.

Unskilled or semi-skilled labourer, too, needs to work to generate an income under today’s system and this is especially true in Asia. As jobs disappear, so does income. No income means no consumption. Under today’s policies, that means that your business is likely falter or die as net jobs move out of Asia.

Those at the top of the income distribution won’t be bothered; quality time is their issue, not food and shelter. If your business depends on the bottom 99% of society, you are probably in for a rough ride.

Government Response

Governments really have no choice but to locate revenue sources that are eluding them or to raise taxes. Or both. Between twenty and forty trillion dollars in wealth are being hidden from governments today. As much as half of it provides no economic benefit… it is simply hidden away and gathering dust. Even the money that is supposedly in the economy shows up as overpriced stocks and overpriced real estate. That doesn’t create jobs. All those overpriced assets are simply waiting for the next, greater fool to purchase them. When the implosion comes, there won’t be any greater fools. The Ponzi game will be over.

Governments know this. They want those assets in circulation. They want to create jobs. And so they must scare the money back into productive use in the economy or take the money and do the job themselves. It really isn’t very complicated. Given that, AEOI, the Automatic Exchange of (tax) Information is nearly ideal.

Can Anyone Resist AEOI?

AEOI will be nearly universal. Only countries with adequate demographics, economic and political/military power can resist. Take another look at the map. Each purple country has demographics working against it. As you can imagine, each has an urgent need for AEOI to expand its revenue. If we check here we can find out which ones have low unemployment. Because we are looking for strong economies, we look for low unemployment. It seems just a bit of a surprise that not only the U.S. shows up favourably, so does Mexico. And Chile is another good performer. Finally we want to add in the test of political/military power. Among the three finalists, the dominance of the U.S. is unquestionable. Consequently, we rate the U.S. as the least susceptible to AEOI.

You probably aren’t very happy with that conclusion. The mass media, popular wisdom and your personal feelings may put you in denial. While you may wish it were some other country, the country most likely to be able to resist AEOI is the United States.

We have arrived at this conclusion through various chains of reasoning. It seems like no matter where we start, we end up at the same point: the U.S. is the county most able to resist AEOI.

With the offshore jurisdictions ability to hide your assets and the BEPS program killing transfer pricing schemes, the U.S. is shaping up as the place where you will be able to avoid AEOI, but may also be able to more favourable tax treatment than you can at home. Sometimes truth is stranger than fiction. If you want to dig into this more deeply contact us here or read some of our earlier postings on AEOI, CRS and BEPS in this blog.
F. G. Bouman

Trump Brings Mid-Shore to the U.S.

capitol building of low-tax, mid-shore Delaware

Delaware State Capitol Photo by Joshua Daniel Franklin

Mid-shore jurisdictions are now coming into their own as they offer low tax rates (not zero) a strong, legitimate government and access to world-class banks. For legitimate businesses seeking to minimise their tax burdens while maximising their safety, mid-shore is undoubtedly the place to go.

Offshore jurisdictions offer low taxes but banking sectors that are often dicey with little or no effective oversight.  They are jurisdictions that have no inherent economic strength.

Onshore jurisdictions generally have strong governments and at least some of their banks are strong. Added to this, they are members of various national-level organisations and have relatively stable economies. But their taxes are generally high as they struggle to provide the services their voters demand.

Today’s Top Mid-shore Jurisdiction

Singapore is, hands-down, the world’s best mid-shore jurisdiction. When it comes to the things that individuals and businesses want, Singapore has it better than any other of todays mid-shore destinations:

  • Ease of doing business. The World Bank ranks Singapore as the second best place to do business in the world (just behind New Zealand). That makes it the top mid-shore jurisdiction in the worldl.
  • The Reputation Institute ranks Singapore as the only mid-shore country to make its top twenty list of reputable countries.
  • Top mid-shore jurisdiction Singapore ranks seventh in World Bank’s political stability indicators (Greenland is first & Hong Kong is seventeenth), far ahead of any other mid-shore jurisdiction
  • Located in the heart of the Asia/Pacific region, the world’s most rapidly growing economic area and the go-to safe-haven jurisdiction for emerging Asian Economy businesspeople.

Trump’s Great Deal Will Create the World’s Biggest Mid-shore.

Singapore has a great deal to recommend it today. However, when Donald Trump and the U.S. Congress finish with their plans to restructure the tax situation in the U.S., things will change. The U.S. will be the most competitive of all major economies in every area that matters to companies. But, because of tax law changes, it will also be a mid-shore jurisdiction which is a global game-changer. On top of that it will offer access to the world’s largest domestic market and one of the world’s best legal systems. This is big.

Keeping track of Donald Trump’s promises is a challenging task.  However, in the realm of taxation, he has been consistent – he doesn’t like them and wants to reduce taxes for both individuals and business. His plan isn’t complex but there’s always some room for confusion.

The Plan

  • Trump says he will tax the rich more by reducing their taxes Trump will reduce the top income tax bracket from 39.6% to 25%. This will have the effect of reducing tax on the wealthy by 27% when all the knock-on effects are considered. The zero income tax bracket for the least well-off is increased.
  • Lower corporate taxes Trump wants this and the Republicans want it as well. So we should expect to see the business tax rate decrease from thirty-five percent to fifteen percent. The offsetting measures will probably raise the cost of living for the middle and lower classes, but that is outside the ambit of this article.
  • Trump will selectively implement tariffs for countries gaming the international trade system. Companies based in the U.S. will have advantages over those based overseas. Any company wishing to export to the U.S. will want to seriously consider opening a quasi-independent company in the U.S. to enable it to take advantage of the tariff laws that are finally implemented.
    (It is interesting to note that the flow into the U.S. of TVs and components manufactured abroad increased after the implementation of tariffs designed to bring the TV manufacturing industry back to the U.S.  This was a direct result of TV manufacturers intelligently using the import regulations from both sides of the barrier.)

Other Considerations

In a federation like the U.S. there are often multiple levels of taxation. In the U.S there are local,state and federall taxes. That means that even after electing to form a company in the U.S., one still needs to choose a state. As it turns out, Delaware and Nevada both have no income tax on businesses. That alone is a significant attraction in comparison to other states.
Because U.S. banks require in-person account opening, as do banks in all mid-shore jurisdictions, Delaware and Nevada are advantageously located with Delaware being a short drive from New York City and Nevada an easy drive from San Francisco or Los Angeles.

Now is the Time

BEPS, CRS, AEOI and a very fragile world economy have changed the nature of tax avoidance permanently. Your concerns today are first to preserve your assets in case of governmental or bank failure and second to minimise your tax burden. Once those are settled, you need to think about what is probably the biggest irritant – the ease of doing business.

Surprisingly, considering the massive size of the U.S. economy, it is the eighth easiest place in the world to do business as ranked by the  World Bank. No other large nation comes close. Germany is 17th, Japan is 34th and China is 78th. Furthermore none of them can remotely qualify as a mid-shore. And, of course the U.S. ranks near the top in political stability and the quality of its legal system.
As you look at 2017 and beyond, it is clear that the traditional offshore locations are becoming increasingly inappropriate and dangerous for your business structure. Now is the time to investigate mid-shore locations. We can help. Contact us.