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From the Managing Director's desk

Laveco Newsletter 2015/4 - Why will it still be worth operating offshore companies in the future? - Part one


Why will it still be worth operating offshore companies in the future?

Miért éri meg a jövőben is offshore céget működtetni?Anyone who has read the lines, and more significantly between the lines, of the last 3 Newsletters will already have realised what I would like to summarise in this article: “offshore” is definitely not dead, and certain structures formed earlier should by no means be thrown away, or rather there is no point or benefit in establishing new ones. However, there are situations where it is worth making a fresh start, and heading into the new year with a clean slate.

Although the business world is being frightened by the threat of 2017 and the automatic exchange of information, the effect this has will not be as great as the OECD is expecting.

In the past, it was those who operated in some way through offshore structures who were the winners. In the future, too, those businessmen who are able to arrange their affairs with greater financial freedom will be the successful ones.

The aim of this article is to show the trends, both past and future, of the benefits offered by offshore structures; to offer some suggestions as to how it is possible to think about the use of offshore solutions in the climate of information exchange, without attracting the attention of the taxman.

Conclusion: even if it is a little more expensive, it will be worth it. Whatever we do, we should not look for “DIY” solutions to the question, but instead should seek the advice of serious professionals.

Who were the winners in the past?

Miért éri meg a jövőben is offshore céget működtetni?If we consider the last 30-40 years, then the most successful businessmen and enterprises in the business world, irrespective of size and almost without exception, achieved their success when they maintained some kind of offshore structure as a type of satellite system in parallel with their own businesses. It is irrelevant whether this consisted of a single enterprise or several companies, or even various different vehicles. What is clear even to the naked eye is that just about everybody had some kind of offshore support behind them. Offshore was not the invention of the “small players”, but mainly by the multinationals, who even today are still very fond of such solutions. It is enough to consider the amount in excess of 100 billion dollars parked in Bermuda by Apple, or the case of Starbucks, or how about the offshore solutions employed by Google. There is no way that these can be called miniature enterprises. If Apple were to repatriate the 145 billion dollars held in Bermuda, then the amount would be subject to 35% federal tax in the USA. That’s almost 50 billion dollars, which, for example, is 25% of the annual GDP of Hungary. What do the multinationals have in common? Their approach. For multinationals, every dollar spent is a “cost”. Not in the sense of accounting, but from the point of view of the philosophy of financing. If something has been spent, then that has been lost forever, and is a loss for the company. In this way, for a multinational tax is considered in just the same way as, say, wages or raw materials. The multinational doesn’t differentiate when it comes to where the money goes; if we spend it, it’s gone and that’s that. You may wonder why I am spending so much time on this question. The answer is that this is the essence of it all, the approach which is present in the philosophy of all major enterprises, and which the managers carry with them like a virus when they switch between multinational companies, or even if they escape the shackles of the multinational world and set up their own companies. Very often they take the same approach with their own companies as they did with the multinationals.

Some time after the second World War, two significant processes began in parallel. These could both be witnessed primarily in the USA, but it has also been typical of the entire “white civilisation” for the last 50 years: we could call this period the era of the feel good state and the consumer society. One of the characteristics of the consumer society is a growth in income compared to earlier periods, which in turn also attracts taxation. The state was left with no option but to turn the taxation screw, as the tasks they had undertaken required financing. The easiest source of finance, given the lack of any significant state assets, was taxation. At the private individual level, it is relatively difficult for the average person to wriggle out of the clutches of the taxman. It was different, however, in the case of companies. As the increase in taxation also affected them, they began looking for solutions to the question of how to avoid the high levels of taxation for their cross-border business activities. Thus demand for advantageous tax opportunities began to grow. And, as is the general rule in regard to the market mechanism, demand generates supply, at least where the market is not hijacked by artificial tools or regulations.

And that is exactly what happened during the 60s, 70s and 80s: the supply side also started to grow. This was when the offshore company appeared initially as an elite product, then became a mass product in the second half of the 90s. The supply was provided by those independent countries and British Independent Territories who through their own constitutions and legislators developed their own tax laws. They did just that, providing such beneficial possibilities to foreigners as could not fail to attract the interest of those eager for tax-free or low-tax structures. On numerous occasions these small countries stole each other’s ideas, and sometimes even entire laws. The International Business Companies Act passed in the British Virgin Islands in 1984 appeared almost word for word in the legislation passed in Belize in 1990. The Seychelles, too, then merely changed the name of the country and the dates in their version. The geographical location of these jurisdictions is very interesting. The Cayman Islands and Bermuda typically served the demands of US enterprises, while the Channel Islands (particularly Jersey and Guernsey) or the Isle of Man provided tax relief to British businesses and their European neighbours. The law of supply and demand, the first law of the market economy, worked perfectly here too, with one or more offshore centres working closely with all of the major stock exchanges (New York, London, Tokyo, Frankfurt). The small Caribbean islands occasionally fought amongst themselves over clients considering company formation. As one of my favourite university students said of the process in his dissertation: it was just like when a poor girl sells her virtue for money. You know, maybe there was something in what he said...

Today, these tax haven jurisdictions, with a slightly modified ideology, are known as International Financial Centres. Which is quite appropriate, given that over the last 40 years or so, the more serious jurisdictions have developed significant, well established infrastructures, with banks, investment funds, management consultants, insurance companies, lawyers, accountants, etc. to serve international clients.

Those who wanted success used “performance enhancers”. They purchased, or set up offshore structures and temporarily sent money there, safe from taxation. If this was done for long enough, they could become quite successful, as significant amounts could be accumulated, and, where necessary, re-invested into circulation. Sooner or later, those who didn’t do this lagged behind those who did and became uncompetitive. The businessman who saved on taxes and re-invested these funds in his business was able to beat the prices offered by his competitors, or maybe finance campaigns which enabled him to gain further advantage. This is exactly why I refer to offshore as “doping”. The majority of experts say that in competitive sport today everybody takes performance enhancing drugs, just there are those who manage to get away with it. There might just be something in this as well...

Nobody is able to say exactly how much money has been parked in the bank accounts of the International Financial Centres. A few years ago, an organisation known as the Tax Justice Network published a report in which they claimed that more than 20 000 billion dollars had been secreted away to these centres, attracted to the small countries with low tax rates from the large, developed nations via harmful tax competition. Who knows whether or not this figure is accurate? What is important is that an amount definitely exists, and it is certainly not small. And this is the heart of the problem. The battle for this money has begun.

The battle for the redistribution of the world’s wealth

Miért éri meg a jövőben is offshore céget működtetni?This title may appear a little drastic, but believe me it is not. The end of the 19th century witnessed the close of the era of free-market capitalism, and the beginning of a new period, which the followers of Marx named the Imperialist era. It was at this time that the large empires were established, with all the major powers staking their claims around the world. When everything had been divided up they had no choice but to start occupying, or stealing each other’s territories. This is when Lenin says that the “new thieves” appear alongside the old “thieves”. This is exactly what is happening in the world offshore market: the world offshore system has been too successful over the last 50 years, and the huge sums which have accumulated have just become too tempting for some who want to get their hands on the money. Here too, the new thieves appear alongside the old thieves.

Around 15 years ago a process began which radically shook up the world’s financial system. The OECD began producing recommendations for the world banking system, and one of the core elements was to achieve the complete transparency of business and financial structures worldwide. Their goals were the recognition and identification of the beneficiaries behind companies and financial transactions, and the tracking and monitoring of the processes. In parallel with this, they also redefined the term money laundering (even though there is no agreement worldwide on a definition), and basically declared war on solutions which enabled income and capital to escape high rates of tax by enlisting the help of countries with low rates of tax. September 11th 2001 gave the process huge momentum. The attacks on the New York towers provided the OECD with an ideal excuse, and from that point on money laundering did not stand alone as the target of the very public fight, but was joined by “prevention of the financing of terrorism”. If you read the anti-money laundering laws of just about any country, they start with something like this: “the Parliament of ...., in the interest of the prevention of money laundering and the financing of terrorism, passes the following law...”

Over the last decade and a half we have been witnesses to how the OECD recommendations have “killed” the world banking system. So-called compliance departments started appearing in the banks, and as some kind of all-powerful governors they dictate, to this day, who and under what conditions the banks open accounts for, and what constitutes a suspicious transaction. They copy and adopt the OECD recommendations, without giving a moment’s thought to the damaging effects which will be imposed on the business sector. All this while the banks’ managers stand by and watch with unblinking eyes as these ridiculous rules whittle away the banks’ profits.

If somebody tries, in today’s globalised world, to open a bank account in a country other than their own, then they very often find themselves facing a very difficult task. It is currently more difficult to set up a company in a country with an advantageous tax climate than it is in England, the USA or Germany. While for the formation of a company in the Seychelles we are forced to ask clients for numerous documents, in the USA or Germany the lawyer or notary making the arrangements will, at most, ask for the individual’s personal identification documents, if at all. If, heaven forbid, we then want to open a bank account for this company from the Seychelles, then 999 banks out of 1000 will reject the application on the basis of the high level of risk.

If we use our common sense, then clearly something here is not right. Let’s go back to where we started: OECD transparency. Is it possible? Has the business world ever been transparent? No, never. If a person other than the true beneficial owner appears or appeared behind a company, then company registers around the world will already show a distorted picture. Has this happened, does this happen, will this happen? Naturally. This is not an offshore characteristic, but a business solution which has been applied for many years and for many reasons: for competition reasons, individuals in high ranking positions in the state, and conflicts of interest. This is never going to change, a fact which the bureaucrats at the OECD are only too aware of.

Financing of terrorism. Are there fewer terrorists in the world today, or rather has the financing of these bodies really been cut off? The OECD, with their recommendations, are fighting tooth and nail against cash solutions, really trying to suppress them. The attacks on the London Underground in 2005 were organised for about 5 000 pounds. Just about every terrorist cell around could raise this amount from its followers in less than a day; you don’t need banks for that. In the case of the so-called “Islamic State”, for example, it is income from the oilfields which finances them. And if this is the case, then any bank has to work with them, if they don’t want to miss out on the millions and millions of dollars of oil money.

We immediately have to stop here, as we have reached an extremely significant point: the dollar. What is the US dollar currently? The only truly global currency, which is accepted everywhere and can be exchanged for local or foreign currency. According to the published figures, almost 900 billion US dollars of paper money were printed in 2012. Close on 75% of this was circulated outside the USA. The US dollar is a currency which is accepted as legal tender in the USA irrespective of the date of issue. If a banknote is 100 years old, it’s 100 years old and that’s that. What follows from all this? The US currency offers the best opportunity for the arrangement of so-called “black transactions”. If this is the case, then why don’t they deal with this question, or why doesn’t the OECD recommend that the USA stop printing dollars for the rest of the world?

Or how about if the US was to realise the Israeli plan to completely remove cash from the economy? If they wanted to, they could do it. In the country where even the ice cream seller on the street corner accepts card payments, they could bypass cash without too much trouble. But they don’t. Moreover, they tend to get into some rather interesting scandals, such as the Wachovia Corporation money laundering case a few years ago (Wachovia Corporation is a large bank in the USA). In less than a year, over 370 billion dollars went through the bank from the USA to Mexican money changers. This was, without exception, drug money, and the amount constituted 25% of the Mexican national income that year. Didn’t this get noticed by any supervisory body in the USA? Good question. Retrospectively Wachovia paid a fine of something less than 200 million dollars and the matter was taken care of, and everything continued as before. Drug money still finds its way into the system. The global turnover from the drug industry is estimated at some 500 billion dollars per year. 60% of this can be linked to the USA. These days, not even the American dream can get by without drugs, and the financing of this on such a scale is impossible without the banks. Has the OECD, or any other influential body for that matter, ever passed judgement on the USA because of this? And even if they did, were there any consequences? A friend of mine, who used to be a policeman, spent some time on training courses in the USA a while ago. His American colleagues, took him all round Texas, showing the routes used by the drug runners, before finally taking him to a drug warehouse where the seized drugs were stored. Our man, a very thorough police officer, asked how all the illegal drugs were destroyed. There followed a deathly silence, with nobody able to answer the question. A doubt crept into his mind: do they destroy the drugs at all?

Of course, in all this there is one very important element: the ban. If drugs were legally available from the local chemist, then it is highly unlikely that the cartels would be able to make such huge fortunes year after year. Today this is exactly what is happening in the world offshore market. By forcing their recommendations on the world, the OECD are restricting, banning and killing off opportunities. The OECD confront anyone who doesn’t accept their recommendations. Except the USA. The USA, thank you very much, which is exempt from just about everything which the OECD dictates to the rest of the world. In the USA it is still possible today to form a company without being asked for even a faxed copy of the client’s identification documents (passport, ID card etc.) by the formation agent. In offshore jurisdictions, by contrast, each person involved in the formation of a company is required to present 20 different papers. Offshore jurisdictions are subject to record keeping obligations, and the latest idea is the introduction of a register of beneficial owners. In the USA, on the other hand, if an annual return is required at all, it consists merely of a few details.

Miért éri meg a jövőben is offshore céget működtetni?The OECD is forcing the automatic exchange of information on the world’s banking system. The USA, however, is not a part of this, because they, thank you very much, set up their own FATCA regulation earlier, and exchange information through this. It’s true that they are focusing primarily on their own taxpayers, making sure they’re not hiding anything from the American taxman. Foreigners are not so interesting, especially if they have to report on any funds they are holding in the USA. So, the USA is elegantly removing itself from the international information exchange process, happy to receive information, but less so when it comes to giving. Moreover, they are not always able to give. Despite the international tax agreements, in certain cases they can not satisfy the requirements as their system is not capable of doing so. The State of Nevada, for example, does not have an information exchange agreement with the Internal Revenue Service (IRS), the American federal tax authority. If a foreign tax authority asks about these companies, all they can do is show their bare hands. Nevada slips through the information supplying net. If we think we can maybe see some possible link between the Casino business and Nevada, then it’s obviously not by chance. But isn’t it all the same if the slot machines are directly linked to the local tax authority, when nobody outside the state receives the information. So maybe the machines aren’t even linked to the tax authority after all. Not there either...

For decades we were advised by the professional press to avoid the United States for the formation of companies wherever possible. The tax laws are complicated, the tax authority strict, and breaking the laws can even lead to imprisonment. Only American residents and entities with Employer Identification Numbers (EIN), can have American bank accounts. All this managed to put off the majority of clients interested in setting up companies and bank accounts in the USA. Prior to the introduction of the FBAR regulations in 2011, however, the number of LLCs and LTDs registered in the USA reached the hundreds of thousands, although these typically opened bank accounts outside the USA. Starting from 2011, however, these foreign bank accounts became subject to a voluntary report which had to be filed each year with the IRS. Now, though, the situation is visibly changing.

At the beginning of October I attended a prestigious tax conference in Monaco. The subject of one of the presentations was the following: the establishment of tax-free Trusts in the United States. The English common law Trust dates back some 800 years, and in the past, as in the present, remains one of the most significant and sophisticated instruments in the field of asset protection. There are a number of versions of this throughout the common law world, from Australia to the Channel Islands via New Zealand. The format is also extensively used in the USA, though the placing of the emphasis on the tax-free aspect is very new. So, just what is this all about? Everything that is tax-free has been banned for everyone, and then, when numerous small tax havens are visibly losing the fight for life, the USA leaves the door slightly open and lets anyone passing that way take a peep inside. And if the door is left slightly open, then what more does it take to open it completely for guests? That’s just one tiny step. If, in time, the US legislation changes, and those foreigners who wish to have bank accounts in the USA no longer require an EIN, then capital will be free to flow into bank accounts in America. All this requires is the insertion of the word “not” in the right place in the regulations: “individuals with American company bank accounts are NOT required to obtain an EIN”. Even the most remote island nations in the Pacific Ocean have an American Embassy, or at least a Consulate. Certifying the signatures for the opening of an American bank account would not be a problem for them, in fact, they would welcome the extra revenue from certification fees. In this way, it is not even necessary to travel to the States to open the account, as everything can be done remotely.

The article continues here