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The
Offshore Game Note: This material is old, and a bit dated. All of the British Colonial offshore
centers have been under attack for several years now, and most are giving in
to one degree or another. Therefore,
generally, they are no longer suitable or trustworthy until the dust
settles. However, other jurisdictions
are moving in to fill in the gap. Have said that,
many of the principles discussed below are still valid and useful, and give
you a good idea of some offshore strategies that are used every day. Please email us at porongo@safe-mail.net with your
Offshore needs and we will advise you on the best way to implement it. If you do not yet have a strategy, we can
also consult with you to help you develop one. Enjoy the ideas below! A Top International Expert Talks Frankly about Offshore
Trusts and Companies. You're driving along the highway and you pass a sign that
says, "You are entering a smattering of homes, four or five gas stations, a short
business district, a junk yard, and within
ten miles you've seen it all. Then you pass another sign "You
are leaving international companies."
Whoops. Wait a minute. 180,000 companies? Unlikely? Guess again. Roam the world and you'll find a
dozen such tiny spots where the corporations outnumber the people by
10 or 20 to 1. It's internationally agreed that all types of plunder,
mayhem or murder are acceptable for a government, as long as it
limits its predations to its own citizens. Let me see if I can explain this bizarre game in plain
talk. People cordon off a piece of land and arbitrarily announce
that it is henceforth a "sovereign
nation." Ruffians and schemers soon grab the posts of government, and by the power they vest in
themselves set about plundering the
individuals who live there. This has been going on for thousands of years, until today the entire
earth (other than a portion of the oceans) is divided among different
gangs, who wear pinstripe suit, and run their plunder under the flag
of governments. Over time these bandits have learned that it's in their
own best interests to ignore what the other gangs are doing within
the other borders. It's internationally
agreed that all types of plunder, mayhem or murder are acceptable, as long as the other
governments limit their predations to their
own citizens. Each agrees not to try to enforce its own laws in the
territory of another gang. Over time, gangs with larger populations on which to feed
develop more sophisticated methods of
extorting money. With few exceptions, the highest taxes and most onerous regulation evolve in
the larger territories. Pinstripers
running the smaller countries usually find slim pickings among their own
inhabitants. But, a few of the creative ones have figured out a way to take advantage of
their "sovereign state"
status. As the internationally-accepted custom allows them to pass any laws they want within their
sovereign territory, they pass legislation that offers low to no
taxes, plus total financial privacy for
"international" companies and trusts. They become "offshore tax-havens." This legislative trick effectively provides islands of
legal refuge to the assets of the richer citizens of the bigger
nations and they flock to these offshore sanctuaries by the
hundreds of thousands, carrying with them the
titles to their assets. And the big nations are effectively
powerless to stop them. Thanks to the international code of thieves, even a tiny state can deny
a big foreign state the right to tax the small state's citizens,
and that includes the small nation's
corporations and trusts. My current country of residence, the becoming one of the most attractive offshore tax havens in
the world. Since moving here I've met a number of people who work in
the offshore banking and trust business, among whom is Andrew Keuls, the Marketing Manager of VP Bank of bank operating in the immensely by sitting in on a recent conversation he and I
had regarding the offshore industry. Mr. Keuls is a British citizen
and holds a Bachelor of Law degree. For eight years he was an international officer with the Hongkong and Shanghai Banking Corporation, operating out of their
offices in He then spent another 6 years as the manager of the Trust Administration Department of the Hongkong
Bank Trustee in Subsequently, he was Director of Jardine
Fleming Investment Services in has a remarkable international background in the banking
and trust business. ---------- JP: Andrew, thanks in advance for offering to share your
thoughts with my readers. First, how big
is the offshore industry? AK: The offshore, low-tax centers, which would include
those in the number of corporations registered
in these jurisdictions is immense. Here in the over 180,000 International Business Companies or IBCs have been formed. In addition, there are
countless thousands of trusts (since there is no official trust register, one has no idea of
the exact number of trusts that are being
administered here). The scale of assets that are being managed in these
offshore centers is very large indeed. At the
beginning of this decade, the World Bank calculated that at any time approximately one-half of
the free-world money supply was booked in the offshore centers
-- a truly incredible figure. JP: Half the world's money supply? That's absolutely
staggering. The two most common vehicles for holding assets or businesses
in these offshore centers are IBCs and trusts. Let's start by exploring trusts. Why are they so popular? AK: More and more individuals and corporations are moving
assets out of high-tax jurisdictions into
offshore trusts. Primarily, this is due to reasons of privacy and
asset protection. In the case of individuals use offshore trusts for the simple reason of
the sequestration risk coming in 1997 when the Chinese
government will take control. They fear
expropriation. Another use that comes to mind would be immigration trusts
where people are immigrating to a high
tax jurisdiction. For example, someone immigrating to investment income on any offshore
trust. The also enable perfectly legitimate tax planning to be done
through an offshore trust by someone before they immigrate and become
domiciled there. JP: How about International Business Companies? I'm aware
that the BVI one of the most attractive offshore havens in which to
establish an IBC. What is their most common
use? AK: Offshore corporations are used chiefly for trading,
for investment holding such as real estate or a stock
portfolio, and as part of corporate holding
structures. If an international company incorporates here it is exempt
from all defer or eliminate taxes in the
high-tax jurisdictions. All the $300 for a company with authorized capital of $50,000 or
less. JP: What typical business might look at this avenue? AK: For example, any firm involved in import-export where
it would not be necessary to be located in any particular location
to conduct the business. In other words, one
that just brings a buyer and seller together and acts as an
agent. Most often they find tax benefits in reinvoicing.
This is where the IBC buys a product with the intention of reselling it, so
it is not the end user. The IBC is invoiced
by the manufacturer and then in turn raises its own invoice to
the end purchaser. Normally there will be a margin of profit
retained by the IBC as agent. JP: So if I'm importing shoes from my company in a place like the profits here. AK: The transfer-pricing rules. But, even
a find tax advantages in doing business through a foreign
sales corporation. As a professional firm, we prefer that people work with
their own tax advisors and lawyers as it's
very easy to fall into a tax trap. The body of tax legislation in the OECD nations is fluid,
the rules are changing constantly, and if something becomes evident
to a tax authority as a big loophole,
they'll close it. JP: What other benefits could a company get that sells
into its own domestic market? AK: It might benefit from confidentiality, for example you
could put together a structure to conceal
beneficial ownership. As mentioned, it might gain tax advantages. The goods could be shipped directly from the manufacturer
to the end user, probably with documentation such as invoices and
contract letters, going through the
offshore company. You could probably achieve a certain amount of deferment and you can have a
certain amount of allowable expenses you could offset against your
ultimate tax assessment. Whether or not in
a tax-sophisticated jurisdiction such as the income would be a question to ask
a The are not. That's why reinvoicing is such a huge business globally. For instance, in trans-Asian trade, if someone is shipping
from tax deferment or the elimination
of certain taxes. JP: So, two incentives for businesses to use offshore
entities would be fear of expropriation and to achieve tax benefits
through reinvoicing.
What about private individuals? AK: There are three very big reasons for private
individuals to go offshore. The first incentive is asset protection. In protection is largely driven by either fear of government expropriation or by the bigger
fear of litigation. Anyone can be bankrupted because of your
contingency system in the seems to be unique in making
litigation profitable. In most other countries it doesn't pay to
litigate unless you have a won case. The fears are a little different in the rest of the world.
It's not the threat of legal suit that gets people to plan for
asset protection, it's more a combination of succession planning
and fear of political expropriation. Consider that family wealth must be preserved for succeeding
generations and is not to be squandered. It is
one explanation why the entrepreneur class throughout Forbes richest list you see there are five listed
billionaires in the Forbes lists 12 billionaires and 7 in the there are probably quite a few
more there, but they're hiding it. A lot of the methodology to keep that wealth together is
the use of trusts and offshore company
structures. So, succession planning is one of the big reasons that private individuals use
offshore companies. JP: I recall the well-publicized case of Li Ka Shing, a billionaire, who set up a he gave for setting up his trust
was called succession planning. AK: I suggest that his real reasoning for setting up an
offshore trust is to protect a portion of his very considerable
wealth against political risk. In override the bill of rights. In a
totalitarian country basically everything can be taken away from you simply because you
may have displeased a government official. In of war is real. Consequently, a
lot of families there with significant wealth feel they need to keep a portion of it
in some offshore structure so that even if they lose everything
where they are, there will be enough to provide for the family and
successive generations somewhere else. Of course, the more celebrated cases of expropriation
occurred after the Russian Revolution of 1917.
For instance, the jewels of Princes Olga Paley, one of the Romanoff
family, were expropriated by the communists and then subsequently sold to private buyers in
the west, where they were put up for auction at one of the big houses. Relatives of Princess
Olga claimed that everything had been illegally expropriated. As
ruthless as the expropriation was, however, it was a domestic action, and as it occurred in
St. act in that jurisdiction. So, the
relatives of Princess Olga never recovered the family jewelry. On the issue of sequestration, one doesn't have to think
just about totalitarian countries. There
have been cases where democratic countries have wholly appropriated businesses, whether
publicly listed or private. An example of
that would be the which quite recently acquired the Ruis
Mateos family. JP: I missed that one. AK: The significant aspect of the case was that Rumasa owned various investments offshore, but its
holding company was in Spanish government decided to go after Rumasa,
all it had to do was expropriate the shares of the holding company and
everything thereunder, wherever it was, in The Rumasa Group case is an
illustration that holding assets in a democracy doesn't stop the
government from expropriating them. JP: So what was the Mateos'
family's mistake? AK It shouldn't have held ownership of the offshore assets
in a Spanish corporation. Had ownership of the Group been held
in the have been powerless to confiscate
them. JP: What's to keep the government in an offshore
jurisdiction from expropriating the assets of the resident
companies? AK: Hypothetically, nothing. This is one reason for using
countries with a long and stable legal
history. One would assume that there would be some warning that the
threat was imminent. If you have an offshore company in one of the more sophisticated low-tax jurisdictions such as the the company. For example, if you
were ever to feel insecure in the move your company to Migration of corporate domicile is now quite common. As a
result of value-added-tax pressures in the European Community, there
are a lot of companies that migrate out of order to get outside their own
tax nets. JP: If a company or individual has its operating records
in an offshore jurisdiction, how vulnerable is it to having
those records seized or compromised by its own
government? AK: Enforcement is a very real problem for a predatory
government when an entity is offshore. It's
a generally recognized principle of international law that no government will enforce a
foreign government's tax law. For
example, the assets that a taxes. This applies in most
low-tax countries. However, we practitioners in the offshore areas have no interest in
encouraging tax avoidance. But where there is
legitimate planning, there are opportunities that both private individuals and
corporations can take advantage of. JP: I assume that many citizens of high-tax jurisdictions
who set up offshore entities are attempting
to evade taxes. AK: Quite possibly. Some clients using offshore vehicles
are probably failing to disclose their full tax situation as a
matter of choice. That's their business.
Apart from warning a particular client that it's their responsibility to file their
domestic tax returns accurately, the offshore practitioner will not ask
the private client if he has filed
them. JP: In your experience, to what extent are individuals or corporations vulnerable to
discovery. How common is it for foreign governments to try to obtain a
taxpayer's financial records? AK: They try all the time, but they don't often succeed.
In my experience, the only cases where they've succeeded
occurred as a result of family disputes. I recall a dispute between two sons over control of their
father's global business. The son who lost
control went to Revenue knowing full well that from his father's records part of
the family business had not been disclosed. In another case, at the beginning of a divorce the wife
secured all of the private papers of her
husband. When the couple couldn't reach a settlement, she handed those
papers to the IRS. Unless revenue authorities discover papers which point to
hidden offshore assets, they have
nothing to go on. As I said, the only situations to my knowledge where compromise has occurred
has been in cases where one party used
records as a weapon. Thus, the chances of being caught are largely
dependent on an individual's own actions. Has he left a paper trail? JP: If Revenue the BVI and demands records from a trustee or bank here,
what do they need to do in order to get
them? AK: They must provide evidence to the that the individual is guilty of some violation of the law
other than tax evasion. They would have
to establish some violation such as money laundering or drug
dealing. JP: Can they just say, "We believe this individual is
laundering money or dealing drugs?" How
much evidence do they need to present? AK: They would have to prove the evidence to invoke one of
the mutual legal system treaties. It does happen. At this point the untouched by all of the drug and money laundering problems
going on in the all of them have tight checks on new client business and
cash transactions. This is not a
suitable location for money laundering. However, the companies and as a result it is always possible that a
company may be legitimate when formed, but down the line a client may
use that vehicle for illegal activities.
In those cases, Interpol or the FBI may invoke mutual legal
assistance. Provided they establish criminality as recognized by BVI authorities, the offshore
industry will cooperate to stop those
acts. It is a misconception to believe that international criminals can
hide behind offshore services. JP: How about domestic civil cases, as when a of creditors or litigants demands
records? AK: The may not be so easy. Basically, it
would be incumbent on a creditor to first of all discover offshore
holdings. It could be that a person is declared bankrupt and the offshore is simply not
known about. Secondly, the creditor
would have to have a judgment applied in an offshore territory.
Sometimes the very fact that an offshore entity is involved dissuades a domestic law firm from
pursuing assets. That said, no professional practitioner, domestic or
offshore, will get involved in any conspiracy to
defeat creditors. If one did, that practitioner could be named in a suit for conspiracy to
defraud creditors. With asset protection
planning, it is de rigueur that the client must produce a certified balance sheet of solvency
and on that basis alone will the offshore practitioner be
prepared to put in place a structure that might
defeat future creditors. JP: I've been preaching that to my readers for the past 20
years. Every prudent person should put part of their wealth
outside the reach of their domestic courts
before there is any threat of suit. AK: This brings to mind another prudent use of offshore
planning. Traditionally, people leave their assets by will. They are
not aware just how much of a problem that
could create for their dependents. To give an example, a Dutch national who was domiciled in had a business in Swiss bank account. He left his assets by a will written
under English law. It took ten years before his widow was able
to get one cent out of the estate. Also, when you employ professional executors under a will,
whether a bank or a law firm, the fees are traditionally very much
higher than you'd normally have to pay a trustee, and the executor is
under obligation to discharge liabilities of the estate, which
is not necessarily the same as acting in the best interests of
the beneficiaries. Finally, when assets are left under public probate, any
creditor who has any interest in you has a document as well as a
schedule of assets to attack. The fundamental
point is that the very people that the deceased wants to benefit are blocked from access to
funds, while they could have had immediate benefit had a trust
been established. JP: Does your firm offer legal or accounting advice to
foreign clients? AK: We could never hold ourselves as qualified to give tax
or legal advice for a service if the client didn't have
one. We have hundreds of law firms in the normally most offshore matters are handled by those firms
because of client-attorney privilege.
Normally, although we would comment on structures devised by foreign law firms, we would do so
with a reservation that the client must seek local advice and
none of our comments were qualified for the client's domestic legal or
tax position. We can only give definitive opinions on what would be the
tax or legal treatment, for instance, of a company in the British
Virgin Islands and we do have qualified attorneys and accountants
on our staff to be in a position to do
that. JP: When you're dealing with client communications, do you
use mail, wire, modem or phone? AK: We deal on whatever basis the client wants. To give
you an example, we have a Swiss entrepreneur who does not want
any communication to be sent to basis that he will contact us and otherwise there is to be
no correspondence. Other clients want a system of passwords. Unless the
password is activated, no information is
divulged. So, it depends on the client. JP: Exactly what services do you specialize in. AK: We incorporate and administer offshore companies, and
establish and administer offshore trusts.
Some clients, depending on the nature of their business, may want to set up the formal
substance that their business so that it appears to actually operate
out of our office. To show there is a
business here, we offer telephone lines that will always be answered in the name of the
client's company, fax lines, letterhead and everything, all
generated from this address. In many of situations, there are offshore bank accounts
associated with these companies and trusts.
These accounts can be anywhere -- in can be administered by us as signatories or we may be
directors of the company and issue a power of attorney back to the
client so the client can administer the
account. We operate thousands of bank accounts on that basis. As there
is no public register of ownership of offshore companies or trusts, it will not be public
record as to who actually owns these accounts. JP: How much will it cost one of my readers to set up and
operate an offshore company or trust? AK The running costs for a company in the should be around $1,000 a year, and perhaps a bit more for
a British banks, they will do similar work for you, but you may find
the costs substantially higher. JP: Can my readers call you? AK: Any of your readers can contact us with questions and
we'll be happy to respond as best we can.
There is no charge for that. We only charge when we are appointed trustee or directed to
set up a company, and only on fixed fee
basis. JP: Andrew, thanks so much for
sharing your thoughts with us. For information on
the products and services of Mr. Keuls' firm, contact him at VP Bank (BVI) Ltd., Town, (809) 494-1199. -- From John Pugsley's Journal,
Private Conversations with the Money Masters |
