Monday, November 28, 2005 - Vol. 7 No. 238

In Today's Letter: WEALTH: Where the Profits Are: Offshore.   COMMENT: Little Caesars at the I.R.S.  OFFSHORE: Andorra, Monaco, Ireland, Bermuda, Dubai, Cayman Islands, Vanuatu.

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Emerging Markets Boom

The Sovereign Society has consistently promoted offshore investing, especially in emerging markets -- because that's where the greatest profits are to be found. Yet the US government places numerous unneeded legal roadblocks to direct offshore investments, treating Americans like so many ignorant children.

Investing in emerging markets has been particularly profitable of late, as our Sovereign Society investment newsletters have shown. After the Asian recession (1997-98) many developing countries began taking serious steps toward economic improvements with reduced debt, turning trade deficits into surpluses, increasing foreign reserves and lowering borrowing costs. The leading developing countries have allowed their currencies to trade more freely, giving their economies more flexibility. While only about 10% of emerging-market bonds in the benchmark J.P. Morgan Emerging Market Bond Index were rated investment grade in 1998, around half of those bonds are ranked in that category today.

For investors, the changes have contributed to some sizable gains lately. Since the end of 2002, the Morgan Stanley Capital International Emerging Markets stock index has surged 128% -- the most powerful three-year rally that stocks of developing countries have seen. That compares with a 31% rise in the Dow Jones Industrial Average in the same period. Share prices have surged in former crisis places such as Russia and Argentina and in ignored markets like Pakistan and Egypt. Some have even benefited from European politics: Turkey's stock market has surged 46% this year in dollar terms, helped by the start of talks that might lead to the country's joining the European Union.

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 Little Caesars at the I.R.S.

Dear A-Letter Reader:
That wonderful US Internal Revenue "Service" is at it again -- smearing any American who dares to engage in offshore financial activity.

The latest IRS bologna barrage, as reported in the Wall Street Journal , threatens: "The IRS, intensifying its crackdown on tax dodgers, plans to increase the number of tax audits it conducts next year. The agency will focus more of its resources investigating taxpayers with incomes of $100,000 and above. Agents will also examine more returns of high-income taxpayers in search of what they call abusive shelters, or transactions with no real economic purpose other than dodging taxes. The agency will devote particular attention to abusive transactions involving parking money in offshore accounts."

Note that "parking money in offshore accounts" phrase.
 
Do you think the IRS might just be a bit prejudiced against any American who has the audacity to keep their finances beyond the immediate jurisdictional reach of the IRS, US courts, lawsuits and the PATRIOT Act?

The fact that offshore bank accounts, investments and other financial activity are all completely legal under American law does not seem to deter the IRS from their overt prejudice against "offshore". It's as if the US Department of Justice announced they were going to concentrate on investigating African Americans or Latinos because those groups have higher crime statistics. Imagine the howl that would produce in the liberal media! The New York Times would have apoplexy.

The IRS bologna included this interesting gem: "Some wealthy individuals are turning to foreign entities, such as offshore trusts and insurance policies, as part of their tax planning and asset protection strategies. Although US citizens generally must report any foreign accounts and entities with the US government each year, going offshore could add extra roadblocks on an audit trail. Still, some advisers caution that using foreign entities could be a red flag to the IRS."

And no doubt those "advisers" include American lawyers, accountants, investment gurus and insurance salespeople who do everything they can to discourage Americans from going where the best investments and best asset protection resides -- offshore. Add to that motley, self-interested group, your friendly local IRS agent who wants you to keep your money in the US, right where he can attach or freeze your accounts.

An IRS study this year estimated that tax evasion and other forms of noncompliance cost the government "more than quarter of a trillion dollars in lost revenue each year." This from a muscle bound government agency that has wasted hundreds of millions on computer systems that, after 10 years trying, still don't work.

Let me give you an example of IRS "statistics." When he quit in 2002, then IRS Commissioner Charles O. Rossotti said the IRS had identified 82,100 taxpayers whom he said used offshore accounts to evade taxes, with an estimated annual tax loss at $447 million, less than $7,000 per taxpayer.

But in 2000 the IRS estimated that 505,000 taxpayers had an offshore bank account; by early 2002 the IRS upped the number to 2 million. But the same IRS Commissioner in May 2001, demanding subpoenas for offshore credit card records, claimed offshore tax evasion was costing the government $20 billion to $40 billion in 2000 alone! Jack Blum, a Washington lobbyist and IRS consultant on tax evasion, estimated that offshore evasion cost government $70 billion annually.

Well, if an IRS Commissioner, even with his crummy computers, can't figure out whether it's $447 million or $70 billion being lost, or whether supposed offshore evaders number 82,000 or 505,000 or 2 million, that's completely consistent with the way in which IRS mishandles most matters.

The IRS loves to issue these threatening press releases, strangle citizens in its incomprehensible rules and regulations, and persecute taxpayers who can't understand the IRS gobbledygook.

Unlike almost all other nations, the United States taxes all world-wide income of its citizens and those with permanent US resident status, regardless of where they live in the world. (Many nations exempt their citizens from taxes if they live abroad). US Internal Revenue Code sec. 61 states: "Except as otherwise provided... gross income means all  income from whatever source derived... " The IRS and courts interpret this to include income of every nature wherever it is earned in the world, and that includes offshore trust income.

Frankly we think it's time the US government followed most other major nations and adopt a territorial policy on taxes -- tax what is earned within the US, period!

W. William Woods, a member of the Sovereign Society Council of Experts and former head of the Bermuda stock exchange, reminds us of a position that US courts have repeatedly endorsed: "There is nothing sinister about tax minimization arrangements and the technical term for such a strategy is 'tax avoidance'. Tax avoidance is legal and smart." He continued: "What is not legal and not smart is tax evasion. Tax evasion is when you breach the letter of the law and it often boils down to outright deception or fraud."

Charles Cain of the Isle Of Man, editor of Offshore Investment, states "the line between tax avoidance and tax evasion is purposely being blurred by governments, with honest people (and their tax advisors) being jailed for failed attempts at tax avoidance while tax evasion is put down on a moral level with heroine and cocaine pushing."

Don't be scared by all this IRS bluster. Obey the US tax laws, file all the reports, and make sure a substantially portion of your assets and investments are -- (whisper!) offshore!

The biblical admonition to "render unto Caesar" does not mean Americans must surrender unto the IRS little Caesars.

That's the way that it looks from here.

BOB BAUMAN, Editor

Andorra, Monaco, Ireland, Bermuda, Dubai, Cayman Islands, Vanuatu.