Banking Abroad: Is It Still A Good Idea in 2016?
Banking and offshore banks. What do many people think of
when they hear these terms? Even better asked, how does
the mainstream media often portray these terms or themes to
the general public? Certainly the connotations are
usually not positive and these terms are almost always
synonymous with tax haven jurisdictions, tax dodging and let
us not forget the usual criminality thrown in for good
measure. But here is the thing. If you live or are
resident in one country and bank or invest in another, you are
banking or investing offshore regardless if the particular
financial institution is located in a so-called tax haven
jurisdiction or not. For this reason we would prefer to
use the term banking abroad
because that in reality portrays a more accurate verbal
description. And in terms of banking abroad, people have
been doing this for centuries. In fact, people have been
doing this historically for the past millennium to
specifically protect their assets, with taxation being an
issue much further down the list of concerns. In other
words, the tax advantage angle of it, truth be told, is really
something fairly new in terms of the overall historical time
So, why keep at least some of your wealth and some of your assets in another jurisdiction? The obvious and direct answer is protection and wealth preservation if political issues are among some of the main concerns. Europeans especially have had a long history of foreign army invasions, war, change of government and with that a new guy that wanted to financially punish those that supported the old guy, to say it very plainly. For a very long period of prior human history, the risk of losing one's home and one's wealth was a very real threat not to be idly dismissed if there was a change in government or if one fell out of favor for whatever reason. And even in more recent periods, meaning within the last 100 years, we have seen new forms of government such as communism replace the previous form of government, thereby threatening the loss of home, possessions, one's business and assets belonging to everybody in the general population, and not just the mega-wealthy alone.
And if you believe that the current forms of democratic social welfare state governments guarantee such things to never happen again, you are being naive. Let us not forget that the Weimar Republic of Germany was a democracy, and that various forms of worker compensation and social welfare programs we know today really were started in Germany and already existed at that time in that country as well long before the 1930's. Even more recently we have seen Yugoslavia and Czechoslovakia broken up into new nation sates, and we have seen public referendums on political separation by the Scots. So, even within our lifetime and or our parent's lifetime, these kinds of political changes have taken place and seem to be a never ending phenomenon.
And it may not even be a case of internal political changes but perhaps outside issues creating financial and social disruption as well. The still on-going refugee crisis in Europe is one very real and very current example. If I were to tell you even just 15 years ago that Western Europe would be facing a social crisis and financial burden brought about by a swarm of refugees coming from outside of Europe, you would have told me I was hallucinating. And if I said the same thing to a staunch government supporter that had unbridled confidence in the existing government, the reply from such a person would be: that could never happen, our police and border patrol would prevent such a thing. And yet here we are in 2016, and you know the rest. Things can and do change.
Threats can come at us from the most unexpected places. And while modern day governments have become very skilled and very good at extracting taxes from the overall populations thanks to computer systems and electronic reporting (and obtaining stolen date from computer hacking), they have continuously failed to master the art of protecting all the people, all of the time (but they still want you to pay for supposed promise of government protection, even though they cannot always deliver on it). And the argument surrounding the idea of you banking and investing elsewhere, out of their reach literally, is indeed the heart of the matter for them at least. You want to protect yourself, and they want to insist they have a monopoly on that issue (protection), and collect the respective protection racket fees also known as taxes. Yes I do know that governments can and do much more than that, but when you scrape away the veneer of everything else, that is really what political arrangements have always been about – protection from outside threats. In is only in the last century that government services have been expanded to include various forms of social welfare programs and other things previous governments did not do.
However, due to the growth of the social welfare state and this new expanded role, we would opine the current threat to the average citizen is not necessarily a foreign invader but your own domestic government. In other words, the various expanded roles have made local domestic governments unbridled spendthrifts (albeit with someone else's money, your money to be exact). And in conjunction with that, an unbridled thirst to extract more and more private wealth or income for supposed public purposes. With that comes the hubris of government officials and politicians who think it is their divine right to dictate, extract and even break their own laws when it comes to tax collection. The US tax collection arm of the US Treasury, known by it's acronym of the IRS routinely freezes bank accounts of those they wish to audit or question regarding the validity of tax declarations, even though no final judgment has been rendered on the matter. We know of a few clients that almost lost their own small business to such an action. One gentleman, along with his accountant, provided proof that his declaration was correct and even after having this confirmed by tax collection officials, it took one year of fighting to have the bank account funds previously sequestered to be released. If it were not for friends and relatives that loaned him cash, he would have lost his business. After that he opined never again, and quickly sought to establish accounts abroad not because he was a tax dodger or criminal, but because he witnessed first hand the abuses of government against the individual. So, while there are those that take an oath to defend their own country against all enemies both foreign and domestic, it is not such a bad idea to swear an oath to yourself to do the same when it comes to your own assets and private property.
Ironically enough, while many of these governments want to wage a media and public opinion campaign full of rhetoric regarding foreign bank accounts and other arrangements, many of these very same governments provide the legal and protective environment to behave as a tax haven for non citizens. The United States especially is now in 2016 one of the largest tax havens in the world providing you are not a US citizen or legal US resident. Some US states such as Delaware and Nevada offer the very same non disclosure as other so-called tax haven jurisdictions when it comes to beneficial ownership of juridical entities. And also ironically, while the US has pressured foreign governments around the world to comply with FATCA reporting for US citizens that have a financial account abroad, the US does NOT report such accounts for foreign citizens that may have financial or bank accounts domiciled in the US. So, when it comes to fairness, transparency and disclosure, the critics of so-called tax dodging and financial havens do not follow the same rules themselves.
In terms of how things have changed in terms of the technology, political arrangements, taxation issues and what individuals and even companies used to do, we can highlight a common practice regarding banking and investing prior to the establishment of the European Union. Italians might have set up bank accounts in France or Denmark or Switzerland, the French might have set up bank accounts in Spain or Germany or Luxembourg, and the infinite list of other possibilities and cross border arrangements. In the past, one government did not report investment or bank accounts to another government and in fact may even have offered tax incentives to attract that non local capital as well. Sweden is one example whereby the local population paid some of the highest tax rates in Europe and yet bank accounts owned by foreigners in Sweden were not even reported to the local Swedish government, never mind any other government. So, once again, we find that even in nations that might have some of the highest taxation rates in the world regarding their own citizens are indeed tax havens for foreigners. And this leads us to the point that the entire world really is a tax haven, all depending upon where you are from and or what citizenship you hold (which certainly is another argument in favor of dual citizenship as well).
As much as international committees and nation state entities (IMF, G-20, UN, OECD) all pay lip service to cracking down on tax beneficial arrangements for corporations and individuals, the truth is that ALL countries are in competition with each other for foreign investment and foreign capital (and that spurs various incentives to attract such capital or investment, including lower tax rates). And as we write this the little rascals are busy preparing a new naughty list (of tax haven nations). Funny thing though, you will not find the various British Overseas Territories or the US States of Delaware and Nevada on it. Mr. Pierre Moscovici, a Frenchman (his country has a corporate tax rate of almost 35 percent, on par with the Americans) and the European commissioner in charge of tax policy is pushing for this so-called non-cooperative tax jurisdictions list. The British Government has called the creation of such a list deeply unhelpful (yes it would be very unhelpful to have a few British Overseas Territories blacklisted). And apart from a district attorney in New York City that now wants to probe possible legal actions against individuals mentioned in the so named Panama Papers (and make a name for himself), the US Federal Government is noticeably very quiet on the matter (maybe that is because Delaware and Nevada would also qualify the US to be blacklisted as well). Interestingly enough Portugal (28 percent corporate income tax rate) supposedly has designated 85 countries as tax havens. Mr. Pierre Moscovici, the French gentleman we already mentioned, opines on this subject that: The reality may not be 85, but it is certainly not zero. I insisted on having this list in order to create a shock and a debate. You want shocks Pierre? I can suggest some very good car batteries and jumper cables for your free time leisure enjoyment (if one is into that kind of thing).
A friend of mine told me many years ago that offshore companies and trusts were yesterday's news. He opined that such juridical entities would soon fall to the wayside because they would fall under attack and the only true protection would come from dual citizenship and or a change in citizenship. And regardless of whether we are talking about individual citizens or juridical entities such as corporations, indeed this prediction seems to have come true. The number of US citizens that have renounced US citizenship has been exponentially on the rise in recent years and corporate inversions have been on the rise as well, which basically is a change of citizenship so to speak for the company. While 50 US companies have re-domiciled themselves outside of the US since 1982, despite recent attacks on the practice, US corporate inversions continue and have actually produced some unexpected tax benefit windfalls both for the company and the executives as well in terms of stock options.
Ireland especially has been a major beneficiary of gaining new corporate citizens emigrating from the US to escape the 35 percent US corporate income tax rate and benefit from the 12 percent Irish tax rate. Interestingly enough, the OECD (you remember those guys, they were the ones complaining about so-called unfair tax competition, read low or no tax, coming from the tax havens) data from 2015 shows that Germany has a corporate tax rate of 15 percent, Canada also 15 percent, Switzerland 8.5 percent and Slovenia 17 percent. All the rest have corporate tax rates ranging from 20 percent up to 35 (once again, the US is the winner with the highest tax rate of them all, tied with France). Ironically those nations with the highest unemployment rates and worse off economies also have some of the higher tax rates in place (Italy, Spain and Portugal with 28 percent corporate income tax rates, Greece hovering right below at 26 percent). So, the main point is, while there is much ado by political leaders in Western Europe and North America regarding criticism of cross border tax arrangements, profit arbitrage, offshore banking and tax havens – these very same nations are all in tax competition with each other. What is that old saying about people who live in glass houses should not throw rocks?
Over the years there has been quite a bit of chatter about a movement, a desire, a group of interested persons that want to see some kind of one world government come about. Is this all conspiracy quackery is is there some basis of truth to it? Whether you are to one to subscribe to such theories or not, there certainly are a number of things going on both politically and economically (and the economic as a result of the political) that simply boggles the mind. Indeed, looking at these so-called Free Trade agreements (TPP - Trans Pacific Partnership Agreement, NAFTA – North American Free Trade Agreement, CAFTA – Central America Free Trade Agreement, plus others) and various organizations created (such as the WTO or World Trade Organization, GATT - General Agreement on Tariffs and Trade, plus others) certainly it would appear the goal is to wrestle political power away from individual sovereign nations and instead place such power with supranational entities). So, in that regard, one can definitively point to an impetus to shift such political power to a multinational body, or in the least, one that theoretically and in practice is supranational (acting above and dictating to individual sovereign nations). Such global or supranational bodies certainly can benefit multinational business on a number of issues, but the the problem is that many of us as individuals are not all multinational. Rather, we are all too often tied and tethered to only one place, be it regarding our investments, our bank accounts and our citizenship – and therein lies the danger. And that is why you need to think and act globally with your own finances, banking and investments.
The problem today is that many modern democratic social welfare governments are broke and are looking for loot. What better way to do that than to go after what probably is a minority of the populace that has the education, knowledge and resources to make cross border or international investments. If governments can successfully discredit this group of people in the eyes of the general public, then they have the ethical and moral high ground to attack these individuals. And the most common ploy or argument is: we (the government) do not have enough money to pay for roads, schools, social welfare benefits and so on because these offshore or international investors are not paying their so-called fair share of taxes. However, such an argument deflects criticism away from the real problem, which is proliferate government spending and not tax dodging. Let us finally tell the truth about this.
As we have already commented upon in other recent articles, the US Government took in more tax revenue in 2015 than than they ever did before in 250 years. 2015 was a banner tax collection year for the US, with US$3 Trillion Dollars collected in taxes to be exact, and they still ran a US$400 Billion Dollar deficit anyway (the record tax collection was not enough). OXFAM recently reported that 50 of the largest US corporations have US$1.3 Trillion Dollars stashed away in offshore tax havens and such practices are costing the US Government more than US$100 Billion in lost tax revenue. Ms. Kimberly A. Clausing from the Department of Economics at Reed College produced a white paper in January 2016 claiming that profit shifting (corporations booking profits in another jurisdiction different from the one where the profits were generated) is costing the US government between US$77 Billion and US$111 Billion. Let us round off both to US$100 and let us add on another US$100 just to assume these numbers are low, to come with a grand total of US$300 Billion in lost tax revenue. And you know what? It still does not matter because applying this supposed US$300 Billion in lost revenue to the 2015 US government deficit of US$400 Billion still leaves a remaining US$100 Billion deficit regardless. In addition, those of you that are mathematically inclined can calculate out what percentage US$200 Billion or US$300 Billion is in relation to the US$3 Trillion Dollars of tax booty the US Government took in and OVER SPENT for 2015. Don't get me wrong, and additional 5 percent or 10 percent increase in tax collection could not hurt and US$100 Billion Dollars is not pocket change either. BUT, the existence of bank accounts abroad and or corporate holding companies abroad plus corporate inversions is NOT the reason these various welfare state governments are going broke. Rather they are the results and symptoms of the disease, and not the disease itself (and the disease is irresponsible and proliferate spending by governments).
Getting back to the title of this article and the question at hand. Is banking abroad or so-called offshore banking still viable in 2016? You had better believe it is. There are more threats today than ever, both foreign and domestic. Lunatic and spendthrift politicians, insane central bankers that want to implement negative interest and bail-ins (whereby banks are permitted to raid your bank account to cover financial loses from their own foolishness), plus sanguine economies where growth is limited if not non existent are all reasons why you should have something stashed elsewhere. And you do not need to go to a tax haven mentioned on some naughty nation list, or necessarily bank in a dark corner of the world. All these very same governments criticizing and complaining about lack of transparency, tax dodging and whatever else are guilty of having some of these very same attributes themselves when it comes to foreign money in their own respective countries. Plus, we have a tendency to favor some of the developing or emerging markets when it comes to banking ideas. Such countries can offer growth opportunities, higher interest rates, sane banking practices (Derivative? What's a derivative? No, we only do local housing and car loans here) and sensibility when it comes to what should be private and what should not be. Remember, some of these emerging or developing markets that are now democracies had dictatorial governments not too long ago. The locals do remember, and are not keen on the idea of government having access to ALL financial information about everyone. What for? Providing that the taxes are paid, why is it so important for any politician to have unbridled information about one's personal financial affairs (providing of course you are not breaking the law, which is the case for the overwhelming majority). So, the point is that there still are some sane jurisdictions to consider. Having some money elsewhere is not risky business, but rather a form of insurance. And there is no insurance like the one you create for yourself under your own terms. So, happy insurance policy making.