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From the Managing Director's desk

Old thieves, new thieves…


30/09/2014

LAVECO Newsletter 2014/3 - Old thieves, new thieves…I must admit that I don’t like reading articles that you can’t make head or tail of. The whole thing seems chaotic and it is impossible to see the logical train of thought of the author. Having said that, this particular article is going to start way back with Adam and Eve and will then be full of hazy theoretical tracts, but believe me, dear reader, it won’t be for this reason that your brow will be furrowed by the time you reach the end of the article.

I mentioned in one of my earlier articles (Organised chaos, or have you ever eaten an iPhone? LAVECO Newsletter 2011.IV.) that following the onset of the recession in 2008, in 2009 the Germans reprinted Marx’s “Das Kapital” several times. The economic analysts noticed that there were numerous similarities between the work describing the era of free competition capitalism and certain characteristics of the recession: what could be experienced 150-200 years earlier was raising its head again today – in other words, there is nothing new under the sun. Like the anatomy text book in medical school: what was written 200 years ago is more or less still correct today, as we still have the same number of internal organs and they are still in the same places.

Looking at the situation today, I can see that capitalism has developed to different levels in certain countries or regions, and in some places very peculiar formations have been shaped. Ostensibly, for example, it is difficult to analyse Chinese state capitalism, or the particular system which has developed in Vietnam. Similarly, Russia, where Communist ideology has not played an active part in economic life for 25 years, and China, where the Chinese Communist Party still plays a leading role, show very differing syndromes. That Communist Party and ideology which has defined the country’s everyday lives, attitudes and thought patterns for 70 years.

At the same time, it is interesting to consider what Lenin wrote after Marx regarding the end of the 19th and beginning of the 20th centuries, the so-called developed capitalist era. Lenin considered the transformation of capital to be one of the most important characteristics of the Imperial age, in particular through a specific transfusion whereby bank capital and industrial capital combine and finance capital is developed. In reality, the two start to strengthen each other, larger and larger monopolies develop, and the big fish is more and more likely to swallow the little fish. Tycoons start to compete with each other, both domestically and internationally, and the battle for the redistribution of international market share begins. The old thieves, who acquired the original assets, are no longer safe, as new thieves, using both legal and illegal methods, take from the original asset hoarders everything which they managed to gather, possibly over several generations. The battle between the owners of capital and those wanting redistribution/assets continues simultaneously at home and abroad.

So just how does Lenin fit into an article in a newsletter which basically deals with topics concerning the offshore world? Quite simply, dear reader, in that the offshore world exists as a replica of the greater world economic processes, and provides solutions in certain economic situations which have developed. Take a look around at what is going on in your country, region or continent. Who is the richest person in your country? Maybe a banker, who happens to have interests in other industries? Does your country have the old thieves? Have new thieves also appeared? If not, you can be sure that you won’t have to wait much longer. Sooner or later, someone, or maybe more than one person, will start paying very close attention to anyone who is visibly successful financially. And the result of that success will attract those who would also like a part of that result. If it can not be reproduced, then they will get hold of it by whatever means. Using any legal or illegal methods necessary. The question you are asking now is “What are the legal methods?” It is difficult to give a straight answer, as everything is relative. I remember from my history lessons that when the coffers in England were empty, the monarch sent the pirates out over the seven seas to gather what treasures they could to replenish them. If a ship was travelling slower than the others, then the pirates knew that ship’s bowels were concealing something. And this would be either produce or treasure – gold, silver, precious stones. At the time, this was how easy prey was singled out. All you needed was a good eye and it was easy to work out which victims would provide rich pickings. The pirate ship set off after its prey and seized the cargo in the name of the queen. After a good day’s work the pirates returned home and maybe even received knighthoods for their troubles. It is difficult to say that the method was illegal, as in the absence of a parliament the monarch made the laws, and also dished out favours, titles and fortunes…

In those days, the pirate ship needed someone on board with a good eye to spot which ships were travelling slowly. Is this, I wonder still necessary today? The answer is yes, just in a slightly different way. If we want to keep track of people’s wealth, or growth in wealth, then this should be entrusted to some sort of highly efficient “virtual” eye. In other words, software specifically developed to filter the information from the tax system, to look into public real estate registers and vehicle ownership records. And if we want to be really thorough, let’s throw in the ownership of yachts and private jets. Domestically, the tax authorities have unlimited possibilities in this respect, even if the defenders of our rights shake their fists from time to time because of the unauthorised use of data. So what? What sanctions will be imposed on an unlawful state?

At the beginning we just laughed at the first “Big Brother” TV shows, because we didn’t really realise just what tiny specks we all are in an Orwellian world in this story, whether we’re living in the Big Brother house, or just spectators on the outside. Let’s be honest, there isn’t a great difference. Over the years the veil has been removed from the large internet sites. Facebook monitors and stores data, Microsoft is not shy when it comes to delving into our computers, and Apple and Android are hardly saints. At the same time, there are also huge holes in the Gmail system, which hackers can break into in no time at all and make off with our information. At the end of the day, we stand completely naked in the virtual field; if they want, they can find out loads of information about us.

Right, the dress rehearsal was a success: people today hardly bat an eyelid at these issues. Yes, everybody has just calmly accepted that they are watching us, listening to us, and they read, gather and store the information they obtain about us. We don’t even get angry about any of this. The reaction threshold has been set so high, that even if we stand on tiptoes we wouldn’t reach it, assuming, that is, that we wanted to in the first place. So I wonder what else they can throw at us. One thing is very important: none of this has happened by chance, and the system has been fine tuned so precisely as to allow them to search through it with great efficiency.

On May 6th 2014 in Paris the finance ministers of the OECD members signed a declaration of intent, in which they set down that subscribing countries would mutually exchange information; that is, that the banks of each country would provide to the national tax authority of each other country details of its citizens who are the beneficial owners of bank accounts there. As such, they would provide the balance, turnover and income of the accounts. To date, 65 countries have signed up to the system. They will publish the detailed directives in the first half of 2015, and by the end of 2015 the banks are expected to start collecting information on account holders in accordance with the new principles. They should collect, and then when the system becomes active, send the information to individual tax authorities, who will then find themselves faced with a set of tasks never seen before. First of all, the data must be processed, then it must be compared with the domestic tax return; any discrepancies must then be examined, and proceedings instigated in the case of any negligence. In short, a whole list of tasks is waiting for the tax authorities. Naturally, that is, if the system gets off the ground in the first place. Because there is another side to this which so far the large nations – and I mean primarily the USA – have not considered, and that is what dangers the whole thing has in store for them. The USA still loves collecting information on its own citizens and then pestering them with tax matters, but giving out information is a different kettle of fish. Especially bearing in mind the fact that as a result many clients may remove funds from American banks and investment companies. The US stock market is a significant factor of the American economy. Take it away, and you don’t just lose the American dream, but you cause a whole lot of sleepless nights! And each party and every politician is only too aware of this, and nobody wants to make themselves unpopular.

Just how efficient will these tools be? If we look at the current situation where sanctions were imposed on the Russians, I would say that they are only strict for about a week, because after that time the producers/manufacturers realise that they are losing their markets and the politicians their popularity. At the end of the day all we can say is that we will see what the future brings…

Let’s imagine that the whole international exchange of information does materialise. What will it entail? It will mean a new chapter in the Big Brother story. The domestic tax authorities will have access to assets held abroad. And this will start the avalanche. Who can it be taken from? The ones who have it. And who can take it? The ones with the power. Could that be the state? Yes, it could. Could it be someone else? Yes, if somebody by fair means or foul gets hold of the information. Could the new thieves be coming? Yes, they could. And yes they are coming. In the form of this tax, or that duty or contribution, one-off or recurring deductions. The list of questions which arise here is endless. What happens, for example, if someone has had money sitting in an account in Switzerland for 20 or 30 years, and in the last 10 years not one penny has been deposited? Even if all that time ago the funds came from the proceeds of crime, that would have lapsed with the passage of time, so what right would they have to tax it? Come to think of it, what will count as capital and what as income? What counted as legal income, and what illegal? Please give me straight answers to these questions. I’m waiting patiently. Maybe I’ll have to wait forever… It simply is not possible to give precise answers.

I don’t even dare think what might happen if this data falls into the wrong hands in some country’s tax authority. Se there will certainly be those who have an unhealthy interest in the foreign assets of the super rich or even just wealthy. Not by chance does the sin of coveting appear in the ten commandments. I am sure it was based on practical experience. Might somebody covet somebody else’s assets? Have there ever been such cases in history? This is another rather easy question to answer…

Yes, that is what I wrote about at the beginning of the article: your brow will be furrowed by the time you reach the end of the article. The people who think up these new regulations and try to turn the established world financial system on its head are not clear about the dangers involved in the process. But I don’t want to go into that now, as that is another story. The question here is: “What can be done in this situation, or rather what is it advisable to do at the current time?”

Firstly, it is not worth panicking: they never slaughter all the lambs at once, as there would be no-one left in the flock to drive forward. To put it in more concrete terms: in the past they never took everything from everyone in one go. There are certainly numerous reasons for this, but I deliberately do not want to write about those here, just in case the legislators have some kind of “offshore interests.” I would rather leave that to the experience and imagination of the reader and to the city legends we have all heard about….

Having said all this, it is very important to follow and get to know the regulations and legislation. In this way you can only win, even if reading the umpteenth article or attending yet another conference seems like a waste of time and energy. It is not a coincidence that information means power, and in this sense, the strictest sense, it can be turned into money.

The changes in the laws contain a large number of uncertainties, inaccuracies and not clearly defined elements. I mentioned earlier that there will be a lot of significance to definitions, such as what constitutes capital and what constitutes income. Similarly, the question of when the new regulations will be adopted is not insignificant. Not to mention the periods, and acquisitions from those periods, to which they will be applied. This is one of the major weak points of the system, which not even the legislators themselves seem to be able to put in order.

Summarising the above, I see a lot of uncertain elements in both what the OECD imagined and what they would like to impose on the financial world. There are also question marks over the agreement and collaboration between the large nations, not to mention the practical implementation. The system will also have winners and “big” losers, who might want to reconsider joining the information exchange system once they have weighed up the potential losses. If, for example, Google, Apple and Microsoft repatriate to the US all the funds parked in Bermuda and other offshore financial centres, and pay all the taxes that would be due under the US system, what effect, I wonder, would that have on their share prices? If the effect would be positive, then why haven’t they done it up until now? Apple alone has at least 100 billion dollars in offshore bank accounts and investments.

In the current situation, I wouldn’t recommend that anybody give up easily the position they have reached. Today, technically speaking it is not too complicated to wind up a company and its bank accounts, to sell off any subsidiaries and transfer the rights to any real estate. If, however, we would like to rebuild everything tomorrow, then that is likely to cost 2-3 times as much as it did originally thanks to the changes in the requirements. Then there is also the small matter that what “is brought home” is only a stone’s throw from certain prying eyes…

LAVECO Ltd. and its staff have been only too happy to help up until now when clients have approached us with questions on this topic, and we will be just as cooperative, or possibly even more so in the future. We follow events closely, and when new developments or information see the light of day, we share them with you.

What you can do is continue to read our newsletters in the future, make use of the information and share your knowledge with others.

 

With warmest regards

László Váradi
Managing Director
LAVECO Ltd.

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