Wednesday, August 09, 2006

Why Business Smarts Are Investing Smarts

A great quote from Warren Buffett goes: "I'm a better investor because I'm a businessman, and I'm a better businessman because I'm a better investor." So let me tell you how to be a better investor by being better at business.

Business knowledge varies among these three kinds of people:

1. Non-Investors: They expect that someone (such as their parents, their kids, a spouse, a company, or the government) will take care of them when their working days are over.
2. Passive Investors: They turn their money over to someone or some organization, such as a mutual fund, to manage. It's the passive investor who tends to believe the financial planners' mantra of "work hard, save money, get out of debt, invest for the long term, and diversify."
3. Active Investors: These people tend to manage their own portfolios and assets, as well as hand-picking their advisors, who are not brokers or sales people. To be a successful active investor requires a higher financial IQ, more real world entrepreneurial business experience, and a very smart advisory team.

For non-investors and passive investors, investing is risky. The main reason is because these two groups of people have no control over the investments they're involved in. While active investors know there's risk, they also realize that the greater the control they have, the less the risk.

Getting a Grip on Business

What do I mean by control? Let me illustrate using the example of driving a car. To be a safe driver, there are six basic controls we all must have:

1. Steering wheel
2. Gas pedal
3. Brakes
4. Gear shift
5. Driver's education/license
6. Insurance

You wouldn't drive a car if you didn't have any one of the above controls. Yet, when it comes to investing, this is what most people do -- they invest without having any influence over the six basic controls of investing or a business:

1. Income
2. Expenses
3. Asset value
4. Liabilities
5. Financial education/management
6. Insurance

The reason Warren Buffett says he's a better investor is because he's a businessman who has control of those six levers of a business. In other words, he can tell how good an investment is by how well management manipulates these basic controls. In most of his investments, Buffett doesn't just buy an equity position, he does his best to buy control of the business.

Saturday, July 22, 2006

What Is Offshore Investing?

From small beginnings early in the 20th century, the offshore sector has grown ever faster in response to high tax rates in the developed countries, until it is estimated now that more than half of the world's money is offshore.

'Offshore' has no precise dictionary meaning: the word simply reflects the fact that most low tax jurisdictions are islands. Loosely, it is used to mean 'outside the control of the highly-taxed Western nations', although those nations could have controlled the growth of offshore jurisdictions (International Offshore Financial Centres = IOFCs) much more tightly if they had wanted to. It is an interesting question, why they didn't – maybe a combination of individual self-interest and muddle?

Probably by now the large, rich nations no longer have the financial clout to take on 'offshore' in any comprehensive way. The OECD fulminates about 'harmful tax competition', and the EU complains about 'unfair tax practices', but in the real world of offshore there are only minor changes to low-tax regimes. This is partly because the rich countries have their own tax breaks and incentives for particular local purposes, and partly because the rich countries themselves (both the countries and their citizens) make plentiful use of 'offshore'.

In 1999 and 2000, global concerns about money-laundering have given the rich countries an opportunity to mount a more concerted attack on 'offshore'. This is certainly leading to better regulatory structures in many of the IOFCs, but they are fiercely resisting the underlying agenda of 'tax harmonisation': any tax haven that was weak enough to give in to rich-country pressure in any meaningful way would quickly be picked clean by its competitors. There are 70 self-declared IOFCs already, and another 100 countries that would be only too happy to join them if the business was there.

The Internet brings a new dimension to taxation, because for the first time it is possible for a supplier to offer and deliver some sorts of product (e.g. music) to citizens in ways which completely bypass the traditional tax-measuring and tax-collecting arms of government. It remains to be seen whether the tax leakage this implies will spur governments on to a more effective attack on the Internet and 'offshore'. It must be doubted whether an attack would succeed, and it's more likely that a global approach to e-commerce taxation will evolve in time. This is not a problem that can be solved by individual countries, or even by groups of countries.

IOFCs themselves are a very mixed bag, and serve a variety of different purposes for various types of individual and corporation. Not all of those purposes are legitimate: there is no question that drug barons and other illegal 'businessmen' have used and do use IOFCs to wash their money before recycling it legally. The world's Governments and over-arching economic organizations such as the OECD have had some success in preventing abuses, but laundering remains a problem in some IOFCs. Among the main legal uses of IOFCs are
* tax-efficient structuring of international trade
* holding and investment companies
* offshore investment funds
* protection of personal wealth using trusts
* international financial services
* 'captive' insurance companies
* shipping registries

Many IOFCs are most useful in relation to a particular high-tax country, eg the Isle of Man which is offshore the UK. Others have specialized in particular business sectors. The Jurisdictions section of the site describes the characteristics and uses of many of all the main IOFCs in depth, and in the Uses of Offshore later in this section you will find a sector-by-sector analysis of how offshore can be used, with links to the jurisdictions that specialize in each sector.

The word 'offshore' has a certain mystique to those who have never been part of it. Wrongly, they often suppose that participating in 'offshore' is not only a bit naughty, but must necessarily be expensive. It can be both, but doesn't have to be. Many IOFCs use both English legal systems and the English language; and there are many reputable advisers to help a beginner through the early stages of using 'offshore'. It is one of the purposes of to make 'offshore' more accessible and understandable, and to provide a ready means of contacting offshore professionals and suppliers.

Offshore banking and financial services

There is nothing new about offshore to banks, investment funds and other types of financial institution; most of them long ago set up offshore branches in order to service multinational corporations, to facilitate trade, and to provide investment management for high-net-worth individual customers.

Some offshore jurisidictions have developed as centres for particular types of offshore financial service: thus, there are 700 banks in the Caymans, and several thousand investment funds in Luxembourg.

In recent years, growing financial awareness has created strong demand for offshore financial services among a wider community of customers; this is especially true of offshore investment funds. Even so, offshore financial services have tended to remain the preserve of larger companies or of relatively wealthy and sophisticated individuals - transaction costs are high and information not always easy to come by.

The Internet however opens the way to a far broader market for the providers of offshore financial services, by reducing transaction costs and by making information about offshore available instantly to anyone who is interested. This last point is important: until now, the marketing media used by offshore financial service providers have been subject to strong local regulation which controlled and limited the advertising of financial products. Thus, at present, a financial magazine based in, say, EU country X, is obliged by the regulators of country X not to accept advertisements for retail financial services unless the providers have conformed to local regulations (and have joined the appropriate trade body and have paid their dues!). No such pressures exist on the Internet, and it is difficult to see how they could be brought into play. An investment fund may say firmly (and does) on the Internet that its products are not offered to citizens of country X; but the citizens can still read about them, download the offers, and get Uncle Joe living in Spain to make the purchase for them using money in an Isle of Man bank account.

Offshore providers of financial services have strong competitive advantages and the unclogging of marketing channels may unleash a tidal wave of demand for their products. Here are some of the competitive advantages of offshore:

* Profits are less highly-taxed, or untaxed, allowing cheaper products
* Offshore jurisdictions are usually less highly regulated than high-tax countries, so that an offshore financial institution has more flexibility in planning, marketing and delivering products
* Financial products themselves can take advantage of a low-tax environment in order to deliver greater returns to customers
* The cost base of an offshore location is often more favourable than that of a high-tax location

These competitive pressures on the financial services market will be so great that institutions will be forced to use the Internet, and forced to do so from offshore, at least when they are not prevented by regulatory bodies from marketing offshore products. They often are, of course, and it will be interesting to see how far the Internet breaks down many of those regulatory barriers.

The whole range of retail financial services can be provided from offshore using the Internet. Services and products can include:

* Electronic banking including current and deposit account maintenance, paying bills, direct debits etc
* Offer and sale of stocks and shares, investment and mutual fund units, equity derivatives etc
* Foreign exchange services
* Offer, sale and maintenance of savings products including pension schemes
* Offer and sale of insurance products

Of the 28 jurisdictions covered in, 8 have stock exchanges, 15 have significant banking sectors, 12 have large mutual fund sectors, and 7 have insurance industries. What is noticeable is that growth rates in terms of numbers of institutions and volume of assets are far higher than the equivalent rates onshore, and that a high proportion of the institutions concerned are actively making use of e-commerce. Offshore financial services may be starting from a low base, and the volume of e-commerce transactions is not yet great, but if current trends are maintained then offshore electronic financial services will present a major challenge to their onshore brethren in a small number of years.


There are several reasons why people invest offshore:

Tax Reduction - Many countries (known as tax havens) offer tax incentives to foreign investors. The favorable tax rates in an offshore country are designed to promote a healthy investment environment that attracts outside wealth. For a tiny country with very few resources and a small population, attracting investors can dramatically increase economic activity. Simply put, offshore investment occurs when offshore investors form a corporation in a foreign country. The corporation acts as a shell for the investors' accounts, shielding them from the higher tax burden that would be incurred in their home country. Because the corporation does not engage in local operations, little or no tax is imposed on the offshore corporation. Many foreign companies also enjoy tax-exempt status when they invest in U.S. markets. As such, making investments through foreign corporations can hold a distinct advantage over making investments as an individual. (For additional information, read What is an Emerging Market Economy?)

In recent years, however, the U.S. government has become increasingly aware of the tax revenue lost to offshore investing, and has created more defined and restrictive laws that close tax loopholes. Investment revenue earned through offshore investment is now a focus of regulators and the tax man alike. According to the U.S. Internal Revenue Service (IRS), U.S. citizens and residents are now taxed on their worldwide income. As a result, investors who use offshore entities to evade U.S. federal income tax on capital gains can be prosecuted for tax evasion. Therefore, although the lower corporate expenses of offshore companies can translate into better gains for investors, the IRS maintains that U.S. taxpayers are not to be allowed to evade taxes by shifting their individual tax liability to some foreign entity. (To learn more, see How International Tax Rates Impact Your Investments.)

Asset Protection - Offshore centers are popular locations for restructuring ownership of assets. Through trusts, foundations or through an existing corporation individual wealth ownership can be transferred from people to other legal entities. Many individuals who are concerned about lawsuits, or lenders foreclosing on outstanding debts elect to transfer a portion of their assets from their personal estates to an entity that holds it outside of their home country. By making these on-paper ownership transfers, individuals are no longer susceptible to seizure or other domestic troubles. If the trustor is a U.S. resident, their trustor status allows them to make contributions to their offshore trust free of income tax. However, the trustor of an offshore asset-protection fund will still be taxed on the trust’s income (the revenue made from investments under the trust entity), even if that income has not been distributed.

Confidentiality - Many offshore jurisdictions offer the complimentary benefit of secrecy legislation. These countries have enacted laws establishing strict corporate and banking confidentiality. If this confidentiality is breached, there are serious consequences for the offending party. An example of a breach of banking confidentiality is divulging customer identities; disclosing shareholders is a breach of corporate confidentiality in some jurisdictions. However, this secrecy doesn't mean that offshore investors are criminals with something to hide. It’s also important to note that offshore laws will allow identity disclosure in clear instances of drug trafficking, money laundering or other illegal activities. From the point of view of a high-profile investor, however, keeping information, such as the investor’s identity, secret while accumulating shares of a public company can offer that investor a significant financial (and legal) advantage. High-profile investors don’t like the public at large knowing what stocks they’re investing in. Multi-millionaire investors don’t want a bunch of little fish buying the same stocks that they have targeted for large volume share purchases - the little guys run up the prices.

Because nations are not required to accept the laws of a foreign government, offshore jurisdictions are, in most cases, immune to the laws that may apply where the investor resides. U.S. courts can assert jurisdiction over any assets that are located within U.S. borders. Therefore, it is prudent to be sure that the assets an investor is attempting to protect not be held physically in the United States. (For further reading, check out Internationalizing Your Portfolio.)

Diversification of Investment - In some countries, regulations restrict the international investment opportunities of citizens. Many investors feel that such restriction hinders the establishment of a truly diversified investment portfolio. Offshore accounts are much more flexible, giving investors unlimited access to international markets and to all major exchanges. On top of that, there are many opportunities in developing nations, especially in those that are beginning to privatize sectors that were formerly under government control. China’s willingness to privatize some industries has investors drooling over the world’s largest consumer market. (To read more, see Investing Beyond Your Borders.)


Tax Laws are Tightening - Tax agencies like the IRS aren't ignorant of offshore strategies. They've clamped down on some traditional ways of tax avoidance. There are still loopholes, but most are shrinking more and more every year. In 2004, the IRS amended the Internal Revenue Code (IRC) and began to collect taxes from both American corporations that operate out of another country and American citizens and residents who earn money through offshore investments. (For more information on tax laws that affect offshore investors, see the IRS' "International Taxpayer - Expatriation Tax".)

Cost - Offshore Accounts are not cheap to set up. Depending on the individual's investment goals and the jurisdiction he or she chooses, an offshore corporation may need to be started. Setting up an offshore corporation may mean steep legal fees, corporate or account registration fees and in some cases investors are even required to own property (a residence) in the country in which they have an offshore account or operate a holding company. Furthermore many offshore accounts require minimum investments of between $100,000 and $1 million. Businesses that make money facilitating offshore investment know that their offerings are in high demand by the very wealthy and they charge accordingly.

How Safe Is Offshore Investing?

Popular offshore countries such as the Bahamas, Bermuda, Cayman Islands and Isle of Man are known to offer fairly secure investment opportunities. More than half of the world's assets and investments are held in offshore jurisdictions and many well-recognized companies have investment opportunities in offshore locales. Still, like every investment you make, use common sense and choose a reputable investment firm. It is also a good idea to consult with an experienced and reputable investment advisor, accountant, and lawyer who specializes in international investment. If you are looking to protect your assets, or are concerned with estate planning or business succession, it would be prudent to find an attorney (or a team of attorneys) specializing in asset protection, wills or business succession. Of course, these professionals come at a cost. In most cases the benefits of offshore investing are outweighed by the tremendous costs of professional fees, commissions, travel expenses and downside risk. (For more information, see Investment Scams: Prime Banks.)

We are not lawyers, tax accountants or offshore investment experts in any country. Every individual’s situation is different. Offshore investment is beyond the means of most investors, and above the risk tolerance of others.

Despite the many pitfalls of offshore investing, it can still pay off to shift some investment assets from one jurisdiction to another. As with even the most insignificant investment, do your research before parting with your money - unless you’re prepared to lose it.

Commonwealth of Dominica International Business Corporation

Commonwealth of Dominica is One of the Most Discreet and Newest Offshore Centres in the World.
The International Business Companies Act No. 10, Passed in 1996, Allows Significant Flexibility. This Act Exempts IBCs Incorporated in Commonwealth of Dominica from all Taxes and Duties for 20 Years
An IBC Cannot Engage in Business with Residents of Dominica but Can Engage in all Corporate Activities Subject to its Articles and Memorandum of Association.
A Commonwealth of Dominican IBC is Not Permitted to Conduct or Carry Out Banking; Insurance; Mutual Fund Management; Public Investment Management; or any Associated Activity Without Proper Licensing.
There is exemption from all local taxes, death duties and other similar charges.
Bearer Shares are Allowed and There is Strict Confidentiality.
There is No Requirement to File Accounting Information with any Authority.
Commonwealth of Dominica has a Closed Registry, Meaning Directors and Shareholders are Kept Totally Secret.
There is No Capital Gains Tax.
Shareholders May Re-Issue and Re-Acquire their Own Shares and Sole Directors and Shareholders are Allowed.
The Sole Director May Also be the Sole Shareholder. Directors May be Persons or Another Company.
Shareholder's and Directors' Meetings Can Be Held Outside Commonwealth of Dominica.
There is No Statutory Requirement to Hold an Annual General Meeting.
Asset Security is Maintained, as Provisions Restrict Seizure, Expropriation or Confiscation by Foreign Authorities.
There is No Requirement for Your Company to have a Secretary.
There are No Minimum Capital Requirements.
There is No Need to Come to Commonwealth of Dominica to have Your IBC Formed.
Commonwealth of Dominica IBCs Include:
- Resident Registered Agent
- Registered Office
- Nominees Directors
- Bearer shares if desired
- NOTARIZED General Power Of Attorney
- ALL Original Documents
- Bank Introduction to a Caribbean Bank for Account Opening
Total First Year Costs for a Commonwealth of Dominica IBC are Only: $1,595 USD
The Annual Costs to Keep the Corporations in Good Standing are Only $875 USD All Inclusive of Registered Agent and Office, and is Due on the Anniversary Date of Incorporation