Lome, Togo, in the dying heat of the day, on the rugged National Highway. Leading inland from the jungles of this African port, the road struggles a thousand miles upwards over five mountain chains through Togo and into the landlocked nations of Mali and Niger. Truck after truck struggles along the path, rusting, dented hulks, worn and well past their prime, but still hauling, overloaded, pushed by wearied, blurry eyed drivers. This mainstream of transportation is pushed past its limits, the trucks caked in dirt, running on cheap gas and worn out tires. They groan and grind slowly out of the jungle, up 500 miles of mountain into Dapong, Togo, half way through their journey.
In this African scene lies an opportunity that also increases asset protection and privacy and in some cases can reduce tax, all at the same time. Details here include an idea from a couple who in the process of selling used tires and worn out shoes in Africa learned the ultimate form of financial privacy, wealth protection and tax efficiency.
Dangerous Attitude Change
Before submitting this report let me be frank about problems of confidentiality. The avenues for maintaining privacy have been enormously thinned. There has been a terrible onslaught against our privacy in the western world. Tax authorities and other government agencies, led by the USA, have steadily and inexorably chipped away at the very concept of keeping one’s assets in unobtrusive ways. There is a growing attitude that financial privacy itself is something wrong. The USA Patriot Act makes this problem even worse on a logarithmic scale as it creates an attitude shift that has a witch-hunt atmosphere. Today even the simple act of buying an airplane ticket can automatically cast the government’s eye upon you and create intense scrutiny.
This decrease in privacy plays into the hands of many government and other officials. Even worse new technology has improved the ability of these officials to make enormous invasions on our privacy increasingly sinister and effective. If this were not bad enough the trend for government agencies to keep and use money confiscated or fined from individual companies gives these agencies motive to misuse the information they receive.
Take the example of how many major banks agreed to pay billions of dollars in fines to the SEC and other government agencies for misleading investors during the last stock market boom. Part of the deal was that the fines were kept by the government agencies and that banks did not have to admit guilt, thus making it harder for investors who had been cheated to recoup their losses. In Round #1, the banks cheated. Investors lost unfairly. Our government watchdogs who are supposed to protect the public quite rightly went after the banks. Yet in Round #2 the government protected the banks and kept the compensation that should have been for investors. The investors lost again!
If Big Brother isn’t bad enough, the regular use of lawsuits is so bad that many businessmen and professionals (especially in the U.S.) live in continual dread. This fear has also steadily risen in other Anglo Saxon countries such as Canada, Australia and the UK. Continental Europeans (after the devastating intrusions of two Germanic invasions) have been a little less keen on exposing their wealth, but even there the tax authorities have slowly been tightening the privacy wrench.
Fortunately the same technology employed to strip our rights can also be used to gain enormous opportunity, privacy and asset protection as well. The same telephones, airplanes, computers and modern forms of communication that are being used by attorneys and government employees against you can also bring global opportunity to your doorstep.
Get Your Facts Straight.
To begin, let’s separate the concepts of privacy, asset protection and tax savings. In the past thirty-three years of working with thousands of investors, I have learned that many confuse the three. Understanding the differences is important. There are many powerful tools that can be used to reduce tax and add asset protection that are not private. For example offshore trusts can delay income tax, reduce estate tax and dramatically enhance the safety of wealth. However under current laws these trusts are not private at all. In the U.S. as an example it is entirely legal and effective to use overseas trusts for the above mentioned purposes, but the reporting requirements are extensive. The trusts give tax and asset protection but do not necessarily provide privacy.
So the first step in any structural planning should begin with the question, what is most important for me, privacy tax savings or asset protection?
Incredibly Urgent Warning
Once you make a decision about what you want it is imperative that you create your structure in a legal way.
It is urgent that you do not try to attain tax savings illegally by just relying on privacy in any bank, institution or country. This is certainly not a safe or reliable approach. Recent legal history suggests that even the most private financial centers are being uprooted and can be at any time. In fact recent events suggest that the more private a financial center is, the riskier for privacy the center becomes. The most private are likely to be the most attacked and using these centers or devices risks attracting the very attention you wish to avoid.
While working in the international banking, insurance, investing and economic business for over thirty-three years, I have observed an incredible erosion of privacy. I left the U.S. in 1968 to run an overseas investment company in Hong Kong. At that time there were numerous ways to legally attain privacy, asset protection and reduce tax. At that time there was not much interest by taxing authorities around in those who held assets outside their own country.
Two Facts Create Dramatic Change
The first sad fact is that tax authorities are now very interested in where and when citizens place their money abroad. In the past such authorities did not feel there was much they could do. Second, they did not feel that much of the population used overseas devices. Technology has made it easier and easier for investors to hold assets globally and consequently tax collectors worldwide have become much more concerned about keeping track of where investors hold their wealth.
Plus the global community has grown, banks all over the world have become more dependant on their ability to operate via, New York, London, Frankfurt and Tokyo. This has made all banks (even if they have no branch in any of these countries) vulnerable to authorities in each center. Swiss bankers, for example, have had their privacy laws totally whittled away by the simple fact that they must keep deposits in the U.S. if they want to deal in U.S. dollars (which they must). Every time U.S. authorities have wanted information from Swiss bankers they have pressed on Swiss assets that are held in the U.S.
Many readers will not want to read this fact, but it is a fool’s paradise to rely on privacy to avoid tax.
In previous years three easy ways to hold assets aboard without any reporting requirements whatsoever were by holding overseas shares, mutual funds or insurance policies. But these avenues have been reduced. For example, in 1995, the U.S. closed the window on foreign tax deferred annuities. Offshore mutual funds are also under greater scrutiny. Without gaining the important QEF election (Qualified Electing Fund) from offshore funds for tax purposes, American investors are stuck with an asset that will be taxed on income, not capital gains. This tax regime is under the controlled foreign corporation legislation, and in particular, PFIC, or Passive Foreign Investment Company rules. Since virtually most offshore fund companies will not provide QEF tax statements to U.S. investors, all efforts to diversify offshore on a tax-free basis have been futile. U.S. investors can still hold overseas funds or annuities but there is no tax benefit (and in some cases there is a tax penalty) in doing so.
Plus the attack on privacy continues. The IRS has initiated the strategy of using a subpoena to gain records of overseas banks relating to their customers that are U.S. residents who hold overseas credit cards, so that spending records can be matched with tax returns. And the U.S. Treasury Department has state that it is now trying to change rules relating to the tax benefits gained from holding life insurance policies abroad. This means that some of the tax deferral advantages of using overseas life insurance may be lost.
The problem is in today’s current atmosphere, seeking privacy seems almost criminal. In other words, trying to attain privacy may put you into a position where you not only lose privacy but actually gain great attention.
These facts mean that any investor today must obtain his or her privacy in ways that does not increase government attention and in ways that are likely to change. The trick is to find the perfect legal structure that hold assets in a private, tax reduced, asset protected way that governments are likely to encourage.
For an example of this perfect structure we return to Lome in Africa. The National Highway through Togo is the only link to the landlocked countries of Niger and Mali. The road is rough and trucks have worn out their tires by the time they reach the city of Dapong, half way up the road. A couple developed this perfect structure because he learned that used tires would sell briskly in Dapong.
However, when they checked out shipping used tires from the U.S., they found freight costs too high. Then they realized there was also a good market in Togo for used shoes as well. They knew that Americans hardly ever wear out their shoes. They then had a brilliant idea to stuff the used tires full of used shoes! Thus, they were able to ship the used shoes inside the used tires and establish a thriving, successful business.
There is more to this story than meets the eye. First this true tale shows how many ways there are to make money abroad. Who would have thought of selling used tires and shoes from America in Africa? But second and more important this story shows that everyone can have his own international business. The story shows that anyone from any walk of life can get into a real international business. This man and his wife were not business people. They were missionaries. They started the business to raise money for their mission.
Circle of 100
This brings us to the Circle of 100. In short If you have a non U.S. business that does not do business in the U.S. that is not controlled (50% shareholders are not U.S. citizens or residents) by U.S. shareholders, that company not only has no U.S. tax liability, but does not even have a U.S. tax filing requirement. (Non U.S. citizens and residents should check their tax laws.)
So the key is to have an overseas business that is 50% owned by non U.S. residents. Yet some people don’t want a business partner. (Keep in mind if you don’t have a partner you get the IRS as your partner by default.) In this case, I recommend donating half the company to non U.S. charities. The more the better. Donate half a percent to 100 charities around the world spread around the world!
This is the simple explanation but the structure is somewhat more complex. If this is of interest to you you may want attend my course International Business Made EZ. See below.
Age or circumstances don’t matter either. In fact if you are active in a business you love you will probably live longer. For example this delegate in Africa who started the business is in his 80’s and they have now set up a twenty-year business plan!
The time for having your own business has become easier and easier. Rapid improvements in technology have made right now perfect for small businesses. Low cost telephone communication, travel and transportation make global business easy. For example Merri and I now have over 22,000 readers in 82 countries, but still operate from our home in one of the most remote parts of North Carolina and Ecuador.
So if you are looking for the perfect tax shelter, one that will last and is not likely to be clobbered by Congress the minute it works well, look at doing a real international business. You can enhance your tax savings, gain enormous privacy and asset protection and improve the wealth and fulfillment in your life.
Until next message good business and good investing,
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