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…

CRS/AEOI Strikes: Singapore & Australia Will Exchange Banking Info.

National Australia Bank, Queen St. implements CRS/AEOI

Effective 1 July, 2017 Australians in Singapore and Singaporeans in Australia will find their tax information is now being shared with their home governments [via CRS/AEOI], or rather, the countries in which they are “tax residents”.  Australia has taken what is referred to as the “wide approach” [to CRS/AEOI] which means that up front the financial institutions will be asking their customers to list all of the countries in which they are tax residents and will report this information to the Australian Tax Office (ATO) along with the tax information.  The ATO will make a determination as to whether this information will be shared with any particular country, but it will not be up to the financial institution to make this determination.

Under CRS/AEOI in Australia, there is no minimum account balance required for reporting… i.e. if the account exists, it will be reported. This affects not only Australians and Singaporeans, it also affects Americans with accounts in Australia as, for ease of implementation, the ATO has decided the apply the same rules to FATCA (the one-way reporting of American accounts to the US IRS) as it applies to CRS in terms of financial institution reporting.  Financial institutions aren’t required to apply the CRS guidelines but it is anticipated that they will do so voluntarily in order to ease their own regulatory burden. If misery loves company then Aussies and Singaporeans will probably cheer the joining them in their pain.

To be clear, the ATO has classified the following types of organisations as financial institutions:

  • a Custodial Institution
  • a Depository Institution
  • an Investment Entity
  • a Specified Insurance Company
  • certain Trusts

The ATO has issued these guidelines which, although intended for financial institutions, can be useful for individuals trying to control their tax exposure resulting from CRS/AEOI. If you think that you may have any tax exposure in Australia, you should read through the guidelines; you may find that you are less (or more) exposed than you think.

A Feast for Cynics – BEPS, Indonesia & Planetary Destruction

Singapore before, during and after 2013 haze
© By RectorRocks (Own work)
Governments make a great deal of hue and cry about punishing miscreants for their evil misdeeds. Then then one sees how mild the punishments are for gross misdeeds. Of course cynicism has a way of popping out all over. We see this in the mix of BEPS, Google’s tax avoidance, the destruction of Indonesia’s forests and peatlands and the Singapore government’s ineffectual response to the consequences.

Does anyone actually believe that the Indonesian government cares one whit about the planet-destroying pollution that pours out of its country each year like clockwork?  Jusuf Kalla figuratively told everyone to simply shut up and hold their breath. As Vice President, he presumably has some standing but his only real sin was saying what “leaders” all over the region actually think. “Just hold your breath.”

Singapore Deals with World-Destroying Haze

Take for example Singapore’s much-publicised Transboundary Haze Pollution Act.  With a possible fine of SGD 100,000 per day of transgression, it seems like it might have some impact… but then, built right into the law is a cap of two million dollars!  This is getting serious?

It has taken five companies to task but not to court: Asia Pulp and Paper, Rimba Hutani Mas, Sebangun Bumi Andalas Wood Industries, Bumi Sriwijaya Sentosa and Wachyuni Jandira.

One would think that the revised expectation of a two meter rise in sea-level by 2100 would have the legislature in low-lying Singapore up in arms about this. After all, Indonesia is one of the world’s major CO2 emitters, thanks to its endless fires.

In the case of Asia Pulp and Paper, their 2015 consolidated net income in 2015 was SGD 222.7 million.  Had they actually been fined in Singapore, the worst they could have expected to be fined was less than one percent of their net income… and no jail time.

On the other hand, if one of their executives was caught for the second time using a mobile phone while driving he would pay SGD 5,000 and could be imprisoned for up to two years. That’s a real disincentive  And he would pay.  So far as I can determine, none of the five companies above nor any of their officers have received any punishment yet.

For the record, the published net income that Asia Pulp and Paper reported may be the tip of the iceberg;  they have a network of distributors and finance companies domiciled in the Netherlands, Mauritius, the Cayman Islands and the British Virgin Islands.

If they are punished at all by the Singapore government, it will amount to a one-finger slap on the wrist.  Vivian Balakrishnan’s quiver seems quite empty of arrows. The wise man speaks softly but carries a big stick. Singaporean legislators might consider giving the NEA a decent-sized stick with which to do its job. The problem is a knotty one, but one can’t even say that the first step towards solving it has been taken in Singapore.

BEPS Targets Google as Google Targets Indonesia

But the real subject of this piece is Google.  Although fewer people are affected by Google’s creative basing of its profits than are by Indonesian haze, Google provides us with a good example of why so many governments are up in arms over Base Erosion and Profit Shifting (BEPS).

Google operates in Indonesia as it does in the rest of the world – it sells advertising and books profits from the advertising.  It maintains a small office in Indonesia which, it says, is there for managing its conferences in Indonesia. It pays the office for the costs associated with the conferences plus an eight percent markup to cover the cost of operating the office.  That, it says, is in accordance with the law.

“Foul” cries taxman Muhammad Haniv.  This is unethical. It’s immoral, he says.  Ah, but this is business and we all know that there’s no place in business for morality and ethics.  The question is, is it legal?  And Google contends that it is.  So all those beautiful Indonesian advertising revenues show up in Singapore where, surprise of surprises, the tax is much lower than in Indonesia.

Indonesia Destroys the Earth While Google Walks Away with its Taxes

Mr Haniv quotes estimates that Google Asia Pacific’s total revenue from Indonesia last year may have been as much as USD455 million, generating some USD152 million in profit. He estimates that Indonesia has lost out on some USD 76 million in taxes. Those $76 million could certainly have been steered to the companies that are burning the country down in order to persuade them to stop their planet-destroying pollution. Could have, but most likely would have found its way into someone’s “charity” and nothing would have changed.

And… what’s Haniv doing about it?  Have the tax laws been changed? Does he have a cudgel to bring Google into line?  Nope.  Haniv has his headlines and apparently that is all he can do. The folks who really run things, the ones who keep the haze billowing, are quite happy with the status quo.  Their personal “charities” are probably full of Google stock.

It’s enough to make me a cynic.

Frans Bouman

 

China’s Property Market WILL Crash… and Soon!

Shanghai Buildings
© jiang-wen-jie

Since April 2015, the property price in China has grown fast, and the trading volume per month and price YoY growth rate have broken all previous records by significant margins. This market rally is the strongest in the 18-years long bull market of China’s housing market. Housing market speculation has become the talk of the town so much so that people would give up their own business or jobs for it.
However, the real picture of China’s economy couldn’t be more depressing apart from the red-hot housing market: the GDP growth rate has fallen steadily towards the historical lows since “Reform & Opening up”; the export values (rolling 12 months) year-over-year growth rate has declined for the past 6 years and arrive at the level last seen in the aftermath of the 2009 global financial tsunami. If we ignore the above facts, the period since April 2015 would be seen as the most prosperous in China’s history and the housing market at its on record. China’s housing market is truly reminiscent of Pompeii right before A.D. 79.

Automatic Exchange of Tax Information to Deal With Tax Avoiders

Ernie Kovacks and Edie Adams

The OECD information exchange ‘dating game’
Tax Justice Network October 25, 2016 Automatic Information Exchange allows tax authorities to share information about bank accounts across borders. The idea is that if dating someone from Germany has a bank account in Switzerland, the German tax authorities will be automatically informed, vastly reducing the potential for people to hide their money. The system of Automatic Information Exchange is being developed by the OECD, a group of more developed economies, but any country can participate. more…

Freshly minted yen

Tokyo seeks wider scope to target tax avoidance
Nikkei Asian Review Sept. 29 2016 Japan is moving to clamp down harder on companies that shelter their income from domestic taxes offshore, even in China, South Korea and other jurisdictions with tax rates of 20% or higher. Under its existing tax haven countermeasures, income at shell companies registered in jurisdictions with a tax rate below 20% is added to the income of their Japanese owners and taxed in Japan. This goes for both corporate and individual taxpayers. more…

Synthetic tax havens attacked by BEPS.

A private beach in a tax haven

Private Beach in Belize

“To a wise man, the whole earth is open, because the true country of a virtuous soul is the entire universe.” – Democritus

Unsurprisingly, colloquial use of the term “tax haven” has little to do with the facts.  Political use of the term is even more divorced from reality.  Fortunately the OECD has defined what a tax haven is so let’s start there.

To be a tax haven, a country must meet these criteria:

• no taxes at all, or nominal taxes – such as a fixed annual corporation tax charge of €100. Income tax and inheritance tax usually exempt;

• secrecy, especially bank secrecy;

• no exchange of any information;

• absence of any activity to take advantage of lower rates of tax.

Keep that in mind and you’ll understand that there are many fewer tax havens than politicians and the press would have you believe.

Synthetic Tax Havens

Take, for example, the structure known as a “Double Irish with a Dutch Sandwich”.  Many governments and the media would have you believe that both Ireland and the Netherlands are tax havens because many companies, including Google and Apple, have famously avoided so much taxation using this structure.

However, neither Ireland nor the Netherlands intentionally devised the laws to be used to turn the countries into tax havens. Indeed, any investigation at all can only lead to the conclusion that neither country is a tax haven under the OECD’s definition.  What is happening is merely that sharp international tax accountants and tax lawyers have figured out how to take advantage of peculiarities in the Irish and Dutch tax laws to create a zero or near-zero tax regime by combining them.

Synthetic Tax Havens Under Attack

This sort of tax avoidance may be coming to an end, though, because the OECD has launched its (Tax) Base Erosion and Profit Shifting initiative which, although it is a multi-year international effort, aims to ultimately have the laws of all the participating countries harmonised so that there will be no gaps that allow the Apples and Googles of the world to cut their taxes by tens of billions of dollars.

For today that is less problematic than the simple reporting of information that has the potential to disrupt the lives of everyone reading this blog if they maintain an account other than in the country where they reside for tax purposes. Odds are, if you are reading this blog, that description fits you and the time to get your tax residence and banking in order is probably now.  Please contact us now.

A Topsy-Turvy Offshore World

Offshore:the faster you go, the behinder you get.

“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else—if you run very fast for a long time, as we’ve been doing.”

“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

Lets get right to it… most everything you thought you knew about how to protect your assets and perhaps your privacy by using offshore companies and bank accounts is being overthrown. You’ve passed through the looking-glass without even noticing it and now the world is different.

For a few years, non-U.S. citizens were laughing at the poor Americans who, because of the long arm of their tax authority, the IRS, and the grasping nature of their government found that they weren’t even welcome to walk through the doors of most banks around the world, and most especially, the highly reputable ones.  Throughout the world financial institutions discovered that because of FATCA, the U.S. Foreign Account Tax Compliance Act, dealing with Americans was just too troublesome and the penalties for non-compliance with the U.S. regulations were too high. So most Americans found themselves with real problems when trying to open an offshore bank account (i.e. non-U.S.). more…