Invest Smart

Interesting that the word “burden” is so often associated with tax. And this is not merely a coincidence or a play of words. Tax is a burden, but we got used to this burden and many people were brainwashed to believe that paying taxes are inevitable and even patriotic! You invest smart when you lighten your tax burden.

Many tax regimes, especially in countries with oppressive tax policies, spend millions on marketing to dupe the masses that they are actually blessed to be able to pay taxes.

Tax avoidance should not be the sole reason why you relocate your business and yourself. You should only relocate if you can enjoy entrepreneurial freedom and a much improved quality of life in your chosen Jurisdiction of Choice. Only then do you really invest smart. The savings on tax is your bonus. In this article I would like to show you how big that bonus could be.

A study in the early eighties in America showed that the resistance level of people and businesses when paying income tax was at 20%. This means that people will happily pay taxes to their government, in exchange for basic services and security, as long as this resistance level is not exceeded by too much. Ronald Reagan shaped much of his financial policies around this study and it became known as Reaganomics. It resulted years later in the biggest boom America ever had. It lasted for eight years in spite of the excesses and abuses of the Clinton Administration.

Jurisdictions of choice like Switzerland, Singapore, and Ireland, realise that personal income tax must honour this resistance level. They went further and attract businesses to incorporate in their jurisdictions by offering very attractive company taxes too – way below the resistance level. The net results are growing economies for those countries, and employment opportunities for their people.

Low tax jurisdictions

Here’s a short extract from one of my articles:

When you buy a car you would shop around to see where you can get the best deal and service.  Is it illegal?  Is it immoral?  In the same way you should evaluate the low tax jurisdictions available to you.  There is a lot of ranting and raving going on, by officials from countries unable to attract foreign investment, about low tax jurisdictions.  But these low tax jurisdictions make a living by giving excellent services.

Another argument for low tax jurisdictions is that you are free from restrictions that larger countries love to enforce.  I recently re-discovered the following news item in some old email illustrating the brutality of tax regimes:

The IRS seized the $26.37 bank account of a 6-year-old girl in order to help reduce her parents' debt. And because the US indicted Bobby Fischer for violating economic sanctions by playing a chess match in Yugoslavia Fischer faces forfeiture of his chess prize if he returns to the US.

Subsequently Bobby Fischer never returned to the US.  All his assets in the US were sequestered and there is a warrant out for his arrest.  Much weirder than most of us, but Bobby Fischer is still considered the best chess player the world has known.

Through your business on the Internet you might be trading with a client in a jurisdiction that is out of favour with some of the big boys.  The low tax jurisdictions never have these restrictions.  They are as neutral as Switzerland.

Case study I

In South Africa a successful husband-and-wife Entrepreneurial team who carefully structured their tax planning would pay 36.9% of their annual taxable income to the taxman as Income Tax. Under the terms of provisional tax, ignoring the ever present cash flow issues that haunt entrepreneurs, this tax will have to be paid in advance based on the taxes paid in previous years.

It gets a bit complicated because under current legislation this husband-and-wife team will have to have at least one non-white partner, preferably the wife, to carry on with their successful Entrepreneurial Business if it remains based in South Africa. They will also have to pay some 5% on profit before tax in terms of the Skills Development Act and sundry “sustainable accredited projects.” Then comes Metropolitan Council Levies, Municipal Property Tax, and of course Toll Fees on the freeways. A tax on every credit card and bank transaction and Value Added Tax of 14% on every purchase with few exceptions although these Entrepreneurs would be registered for VAT and they would be able to offset much of the VAT paid against the VAT they collected. Then there are airport taxes, transfer duties, stamp duties, capital gains tax, and estate duties.

You would expect efficient Government in return for all these taxes? Not so. This husband-and-wife team will have to pay escalated insurance premiums and spend a fortune on personal security because of the inability of the Government to maintain law and order.

Entrepreneurial Independence

Frankly how Entrepreneurs still have money left after all these taxes to invest and grow their enterprises in South Africa beats me. And yet, Entrepreneurs are eternal optimists. They cheerfully slog on; some go bust but see it merely as a temporary set-back and start a new enterprise.

The above scenario of oppressed Entrepreneurs is not restricted to South Africans alone. It applies to a lesser degree to Entrepreneurs in the US and other high tax countries and to a larger degree to countries like Zimbabwe.

And the amazing thing is that with a little footwork and a massive mind shift our husband-and-wife team can avoid the worst of the above taxes. Legally. I recently assisted clients, a South African based husband-and-wife team, to set up their Entrepreneurial Business offshore with no business presence, known as a Permanent Establishment, in South Africa. Under the full scrutiny, and eventual acceptance, of a very suspicious-by-nature South African auditor. But the main reason for this structure was to ensure their entrepreneurial freedom and eventually they want to relocate to Switzerland for personal quality of life.

Case study II

You too can invest smart. To illustrate the profound difference it would make if you were able to avoid some taxes, let’s look at a scenario where our husband-and-wife team’s tax burden is a flat 40% of their taxable income. Would it really make much difference if they were able to reduce their tax burden to say 30% of their taxable income? Let’s see. Suppose their taxable income is $100,000. If they were able to reduce their tax burden to 30%, they would in effect be giving themselves a non-taxable salary increase of 16.66%! They will be earning an extra $10,000 on top of their $60,000 – like earning an instant non-taxable interest of 16.66% on their $60,000. Very few other investments available in the world today would be able to match this rate of return. Is that investing smart or what? You can extrapolate the calculation to see what your return would be if you were able to reduce your tax burden to the resistance level of 20%!

Some quotes

If you leave it too long to plan your move, it might be difficult when your business became hugely successful. As Robert Perlman, Intel's vice president of taxes, stated before the Senate Finance Committee on March 11, 1999 (much to the consternation of Senator Daniel Patrick Moynihan, D-N.Y.), “it is for this reason that Intel wishes it had incorporated in the Cayman Islands, rather than in the United States.”

Here’s a quote from Ken Evoy, President of the hugely successful SiteSell:

In Canada, "financial services" means that we hire accountants to figure out whether we get to keep any of our money that we made last year! We are heavily taxed and government is wasteful. (Recent example... a supposed $2 million dollar self-financing government gun registry has now cost taxpayers $1 billion - and guess what - the bad guys still have guns!)

So, while we discovered Anguilla due to a weird coincidence of a great little book (A Trip to the Beach by the Blanchards) and a friend who had just secured a long-term rental on a villa on Barnes Bay's beautiful beach, I became very interested in Anguilla's political and financial model, and its tax haven status, very quickly.

Isn’t it time for you to lighten your tax burden? To start planning. To invest smart.

Kind regards.

Philip de Bruin