As you heard in the European Union conference last weekend, there is a demand from these governments that there be a sharing of banking information. The U.S. is following a similar line as we saw with Google and Apple answering questions on Capitol Hill. While there is a great deal of ‘huffing and puffing’ on the subject of Tax Avoidance in the developed world, the pressure is mainly being turned up on Tax Evaders. This is reasonable because they are breaking the laws of their country.
But the pressure is now spreading to Tax Avoiders, those people and companies that organise their affairs so that they are not liable for tax. This is not reasonable because people who are obeying tax laws and paying taxes due are not breaking the law. If governments want to change that then all they have to do is to change their tax laws to ensure they get taxes paid. In this age of globalism, it is everybody’s right and from a corporate viewpoint, his duty, to ensure his global income resides where it suffers the least tax. But governments are not happy with this, implying somehow that a person or company whose origin is in a particular tax jurisdiction pays the tax in that country no matter where his income accrues. The U.S. does tax its citizens’ income no matter where they live. The only way they can remove their tax liability is by changing their Passports. But other nations, reasonably, expect their citizens and foreigners earning within their jurisdiction to pay tax on only that income or income remitted into that jurisdiction.
First Step: Get the Information!
Having said that, how would a country enforce that tax liability? In the case of the U.S., the first step is to ensure that they knew what their citizens were earning.
Alongside the Foreign Account Tax Compliance Act (FATCA) there is the information disclosing FBAT. At the moment reporting requirements do not cover gold held overseas, but assets held in financial institutions or financial securities do. Gold’s currently off the radar of the IRS, but let’s not be naïve; FBAT and FATCA can be extended to cover all foreign owned assets, including gold, overnight!
In Europe, information sharing agreements between nations are on the rise and right now it is pressing nations like Switzerland to reveal their bank account holders to the world. Luxembourg has bowed to this pressure as expected, but we do not believe that Switzerland will budge.
Enforcing Tax Liability and More!
The objecting nations, which include the U.K., will have to close the loopholes they provide their citizens, so tax havens like Bermuda, the Channel Islands, the Isle of Man and all such as these will have to be deemed unacceptable to the tax authorities. But again, let’s not be naive and think that the U.S., U.K. and the E.U. will take on foreign tax havens on their own territory.
Switzerland Is Different
We don’t think Switzerland will bow to such pressure, because the nation depends too heavily on its banking industry to destroy it this way. It is against the nation’s interests to do so. Yes, they have allowed proven tax evaders names to be handed over, but a revelation of account holder’s names will not happen. In Switzerland they have “Banking Secrecy Laws” that make it a crime to make such revelations. They would need to repeal these laws first –that’s if they chose this route. We think this would take a national referendum first, an act that would take years to complete, as well as then being thrown out by the Swiss.
We saw the Swiss defend their banking position two years ago, despite the pressure placed on Swiss institutions (UBS) inside the U.S. UBS revealed the names of 4,500 tax evaders and withheld the names of 40,500 names which were not tax evaders and yet retained their Swiss bank accounts, which they continue to do today. It’s vital for us to understand where the immovable line is on this matter. It’s one thing to accept Tax evasion as a crime; it’s an entirely different matter to open the bank’s books to allow any foreign tax body to comb through them and for it to decide what is permissible in the foreign nation.
In the last World War, Switzerland would have gone to war if any nation decided to walk onto its territory to impose its laws there. Nothing has changed on that front!
Jurisdiction
The issue is Jurisdiction. We cannot stress how important this is. Even an Embassy of the smallest nation inside the U.S. is a piece of foreign soil, just as an Embassy of the U.S. is U.S. soil in all nations of the world. They are deemed sacrosanct. A far simpler solution will be to ignore income accrued there and deem it accrued at home and force the tax liability at home. The penalty for not doing this will then be imposed on the company –even if it is a branch only—in the Jurisdiction of the Taxpayer not where the assets reside.
But Swiss institutions and companies are vulnerable where they have branches inside the U.S. As we saw with UBS, the IRS penalized UBS inside the U.S. with fines. That’s why some Swiss companies with branches inside the U.S. are rejecting U.S. Taxpayer clients.
If a U.S. taxpayer fails to declare reportable assets, then he can only be penalized when he steps inside the U.S. and is at home. He must be on home soil for the penalty to be enforced. The U.S. cannot take a U.S. citizen to court in London or Paris for taxes due. The law of Jurisdiction applies. The Swiss cannot take a Swiss taxpayer to court in the U.S. to enforce the payment of Swiss taxes. To do that would be outside the laws of the country where the taxpayer resides.
The point is that all nations can only act within their jurisdiction, not outside it. In Europe and the U.K. the same applies. Any institution inside their jurisdiction falls under their laws. So if an Apple or a Google were to be attacked by the U.K., then those authorities would attack the U.K. branch for an offense the U.K. authorities deem has taken place in a foreign jurisdiction and penalize them in the U.K. and not in the foreign jurisdiction.
Argentina
We look at what a nation does that has a poor level of power over its citizens such as Argentina and how it imposes this.
There are many cases in history of nations who have imposed exchange controls/repatriation orders and the like on their citizens in the past, but the most recent one is Argentina. Bear in mind the principal is not they are too weak to chase citizens overseas, but to find out what they have and to penalize them at home. The same would apply to the most powerful nations on earth such as the U.S.
This is the situation in Argentina. Argentines have at least $160 billion of undeclared funds, equal to about 36% of the nation’s gross domestic product, and $40 billion are hidden inside the country.
Many Argentines hide assets to avoid a 35% income tax and a levy of as much as 1.25% on their personal wealth. Undeclared assets are also beyond the reach of the government, which in 1989 seized bank certificates of deposit in exchange for bonds and in 2002 converted dollar deposits into pesos.
But now a national need has arisen. A year after seizing the foreign-owned energy company YPF, President Fernandez de Kirchener is funneling more money into the nation’s energy industry as the government struggles to boost production from the world’s third-biggest shale oil reserves. With Argentina already committed to pumping $2 billion of central bank reserves into a fund for energy investments and the highest borrowing costs in emerging markets keeping it from issuing debt abroad, the government is eyeing the billions of undeclared dollars that Argentines hold to help shore up reserves that have dwindled to a six-year low. In line with J.F. Kennedy’s, “Ask not what your government can do for you, but rather what can you do for your government”, this is the path she is following:
- The tax authority announced the plan May 7, highlighting its information-sharing agreements with 40 nations and warning Argentines who don’t use the three-month amnesty window that they risk fines or arrest.
- President Cristina Fernandez de Kirchner wants tax evaders hiding about $160 billion in dollars to help finance Argentina’s oil-producing ambitions. Her offer: Buy a 4% bond or face the prospect of jail time.
- The Evaders have two options for their cash and the only one paying interest will be a dollar bond due in 2016 to finance YPF SA, the (now) state oil company. The 4% rate is a third the average 13.85% yield on Argentine debt and less than the 4.6% in emerging markets.
FATCA and FBAT are step 1 as above, for the U.S.A.
In Argentina, those joining the plan would be immune from prosecution and won’t be forced to pay past-due taxes, said Ricardo Echegaray, head of the tax agency. The search for evaders, which includes cross-checking information on income and personal wealth reports with purchases of real estate and cars, foreign travel and credit card purchases, will continue.
“You better bring your dollars back because we will find you,” Echegaray said at a May 7 press conference. Last year, tax collection in South America’s second-largest economy rose to 37% of gross domestic product from 16.5% in 2002, according to Economy Ministry data.
Former Vice-Economy Minister, Roberto Feletti, said the government expects to attract at least $5 billion under the program.
How to Protect Oneself?
There you are with assets overseas and yet live in a country where you may fall foul of your own authorities because of this. You may have said to yourself, “my assets are out of reach of my authorities; I’m safe.” But as we can see, you should be asking basic questions, such as “What do I have here that can be attacked by my local authorities?”
Your home and local assets are the first point the authorities would attack, but as in the past, you are in the most direct firing line. Imprisonment is a likely step if you disobey new national directives.
You may say, “Oh, that was the case in 1933 but it is different now.” Oh, really? It is a basic fact of any financial control that it is exercised where it can be applied directly and easily with devastating effect. Argentina is not a wild banana Republic that imposes rules that developed nations won’t. They are following the Exchange and Capital Controls rules that the developed nations invented.
From Zimbabwe to Argentina, through Cyprus and through many other nations to come, we see governments demanding more from you including what they feel justified in taking from you. It will be the way forward as financial crisis don’t evaporate but take a heavier toll in one nation after another. Developed nations are not immune!
The principles are to place yourself in a position where, like Tax Avoidance, you are not liable to comply with the new Exchange Capital Controls or it is out of your power to comply so that at home you are out of harm’s way. Don’t fight the Battle; avoid the War!
There are ways to do this that will appease your Authorities and leave you free from culpability. But before you walk that road you must decide that you do have the resolve to go all the way. If not, bring the assets home and pay the Piper when he wants you to.
Hold your gold in such a way that governments and banks can’t seize it!
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