FATCA, AEOI and Economic Reformation

Economic reformation to retreat from planetary boundaries
Bumping Against Planetary Boundaries. Derived from globe.svg by Ninjatacoshell

AEOI and FATCA are symptoms of the failed version of capitalism that underlies global political turmoil and the crisis stage our planetary home has already met. Politicians worldwide are desperate to provide enough for their voters to keep themselves in office, but they are failing. Their failure causes disappointment, anger, war, devastation and flight. Populists with worse ideas are attempting to cash in on the chaos. They will be even less successful.

The Failure of Conventional Capitalism

We think we know that capitalism is all about growth. If we could make enough stuff, everyone would be better off. Shallow thinking. Although we all know that the Earth is finite and that we’re not leaving, we act as though Earth’s resources are infinite. The capitalism that we embrace as our secular religion takes that as a given. But the collapse of Venezuela, Somalia, Syria, Western Sahara, the encroaching of sands onto Chinese agricultural lands and the disappearing summer sea ice of the Arctic tell another story.

AEOI and FATCA Measure Desperation

If things were proceeding normally, the OECD governments would not be desperate for revenue. After all, they suck in monumental amounts of revenue every year, that should be enough. Sad to say they then disgorge it wastefully. To top that off, they pilfer it from the pockets of those who need it most and pass it to those who need it least. So they get remarkably little bang for the buck and so do we. This topsy-turvy allocation may align with a fairy-tale version of capitalism but it dispenses with capitalism’s promise.

That’s not news to you, I’m sure. If governments spend revenue unwisely, their first response is to seek more revenue, not to spend wisely. Having emptied the pocketbooks of 95% of their citizens and not wanting to bother the rest, they look farther afield. AEOI and FATCA are the tools they use to suss out additional revenue sources. You look like a likely candidate.

Unforced Change Not in the Cards

Liberals, Socialists, Conservatives and NeoLiberals all suffer from the same illusion that the problem of current debt is solved through future growth. They have to believe it. If they don’t, their whole system collapses. The trouble is that even children can now see that the emperor has no clothes. Politicians cannot see the fallacy because they must not see the it. If they do, they will have no choice but to do what’s necessary to make things better. What could be more unwise than that?

Wealth Concentrates as the World Deteriorates

The structure of today’s capitalism all but guarantees that not only rent-seeking (seeking unearned income) is rife but also ensures through self-reinforcing rental mechanisms greater and greater wealth will accumulate faster and faster. It is accumulating so fast now that this may be the year that one person owns as much wealth as 99% of humanity. At the same time, human population continues to climb and global warming continues to increase with no halt in sight.

Unstopped, global warming will kill us all. Unstopped, population growth will kill us all. And unstopped, wealth concentration will kill us all.
One thing we know with absolute certainty, in a finite system, exponential growth will not continue indefinitely. That’s where we are today. Believe what you want, reality doesn’t care.

Measuring Inequality

I need to make a slight aside here so that you can understand where you are in the grand scale of things. If you have more than US$10,000 in wealth then you have more than 71% of the people on Earth. If you have US$100,000, you have more than 92% of the people on Earth and if you have US$1,000,000 you have more than 99.4% of the people on Earth. And if you are the richest person, you have as much as everyone else put together. Ahhhh the schadenfreude and envy that you must feeling and feeling guilty about, right now, for you are so far above the bottom but the top is out of reach.

There is no way to graph your wealth in relationship to Bill Gates or Warren Buffet. If you have only a few million in wealth, your dot on the computer screen will vanish into nothingness. You’ll cease to exist. Every time he swings his golf club a multi-billionaire accumulates more wealth by the mere fact of his existence than you will in a lifetime of work. Perhaps you think that’s okay. I don’t.

Traditional Capitalism Encourages Shoddyness

Somewhere along the way progressing out of my lower middle-class life I learned that a little extra money spent on clothing bought clothing that was an order of magnitude better in terms of durability and wearability. One could easily spend twice as much on a piece of clothing and get ten times the wear out of it. As it turned out that was true of many things. (Not cars, unfortunately. or smartphones.) Those who patronise Walmart ensure that they’ll need to keep patronising Walmart because the quality is so poor that they have to keep shopping there for replacements. Savings in the world of shoddy are hard to come by.  A few more dollars spent at Land’s End, Duluth or L.L. Bean can mean a decade’s difference in the life of a skirt or shirt. Longer-lived clothes are one more way to add to your bank account.

This isn’t meant as an anti-Walmart tirade, it is to point out that mere numbers do not tell the story of economic progress. Take Las Vegas as an example.

Las Vegas – Home of the Ephemeral

Las Vegas Boulevard is a strip of disposable multi-billion dollar dream castles and fantasies.  The Neon Museum in Las Vegas is the final resting place for the signs of once world-famous casinos that are no more. It houses the last echo of casinos that were wondrous, shoddy creations in their day; creations that deteriorated and outlived their use-by dates and were imploded to make way for equally shoddy successors.

How much more money would have had to have been built into the design and construction of each of these buildings to extend their lives for one or two hundred years?  Ten to fifteen percent. That’s all. But of course the pay back would have started a little later and taken a little longer, and that was all that mattered. It should be obvious that this sort of thinking is a direct contradiction to universal principles and patterns of systemic health and development.

What Can be Done

Regenerative Capitalism offers a way out. But it calls for a radical shift in perspective. Growth is out. Improvement is in.

Here I adapt page 8 and 9 of Regenerative Capitalism

These are the eight characteristics of a healthy human system:

  1. A Healthy System is Innovative, Adaptive, Responsive.  The most innovative, adaptive and responsive systems are the ones most likely to prosper in a world of change.  In Darwinian terms, they are the most “fit”.
  2. It Empowers Participation.  In an interdependent system, fitness comes all parts contributing and taking from the system so that the whole benefits as well as the parts.
  3. A Healthy Human System Honors Community and Place.  Each human occupies a unique place in the system and came to that place through a unique history. A healthy system will honour each person’s place and history.
  4. It Fosters Edge Effect Abundance.  We are a collection of small systems and maximum creativity occurs where different systems touch, not at the center where things are uniform. Working collaboratively across the edges enhances each system.
  5. It has Robust Circulatory Flow.  Economic health is dependent on the robust circulation of money, information and resources.  Sequestering these in the hands of a few leads to economic death.
  6. A Healthy System Seeks Balance.  The Regenerative Economy seeks to balance efficiency and resilience; collaboration and competition; diversity and coherence; and small, medium, and large organizations and needs.
  7. It is In a Proper Relationship.  Humanity is an integral part of an interconnected web of life in which there is no real separation between “us” and “it.” The scale of the human economy matters in relation to the biosphere in which it is embedded.
  8. It Views Wealth Holistically.  True wealth is not merely money in the bank. It must be defined and managed in terms of the well-being of the whole, achieved through the harmonization of multiple kinds of wealth or capital. These  include social, cultural, living, and experiential capital. The human system must also be defined by a broadly shared prosperity across all of these varied forms of capital.

Where to Start?

AEOI and FATCA are, as I mentioned, tools that demonstrate the desperation of governments to increase their revenue streams. Resistance is futile. They will have their way sooner or later and you must become comfortable with that fact. There are two things you can do, and both are important:
First, you can avail of legal options that will reduce or eliminate the taxes that you now pay through careful tax planning. I personally detest the idea that we have a system that enables this form of legal cheating, but that’s the system we live in.Contact us for some ideas.
Second, Read Regenerative Capitalism.
Third, Get locally involved, no matter where you are. If you are reading this, you are the kind of person that can make things happen in your community or communities adhering to the principles above. Do it.

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.


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.

AEOI vs FATCA Don’t Let Preconceptions Mislead You


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