Author Archives: Alexander Hay

Try to Understand the US Sales Tax

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Sales tax is not like the VAT in Europe. It is a one time point of sale retail tax limited only to transactions between the retail seller and the end buyer (consumer). It is also not a national tax but a local tax controlled by the states and local governments. So there are literally hundreds if not thousands of different sales tax rates in the USA. Traditionally this complexity was lessened by the interstate sales tax exemption. All sales between different states were generally sales tax free. So if I bought an item from a company in California by telephone or mail order, and it then mailed the item to me in Texas I would not have to pay the sales tax in California or Texas. 

Online sales have significantly complicated things, but not as much as some think. Not all sales are covered by sales tax but often a company will choose to just collect and pay the sales tax to avoid any problems. After all if they sell an item for $10 and the tax is $0.80 the buyer pays the sales tax in addition to the base price; $10.80. Unlike the VAT the sales tax is not hidden within the base price.

Whether or not a company needs to collect the sales tax will be determined on a state by state basis but in general the measure used is the NEXUS approach. Does the company have a significant presence or contact within the state; is it chartered there, does it have a primary office there, does it maintain warehouses and transportation facilities there?

In the past this was fairly simple to sort out. You set up your company in a small population business friendly state like Delaware, Wyoming, Nevada, etc. You usually had a distribution center in that state or some other small population business friendly state. If you could not do that worst case scenario would be that you set up your company in your home state and pay sales taxes on sales in that state but then were exempt from sales in any other state as long as you had no significant presence in that state. So a company set up and operating in California or Texas would only pay sales tax on sales in its home state. This is still the case for most businesses.

With the introduction of Amazon and its Fulfillment by Amazon (FBA) program that has changed. If you sell through Amazon FBA then you are considered to have a NEXUS where ever your products are warehoused by Amazon. Amazon has dozens of warehouses across the country.

If you set up a company in Wyoming (a very small population and a very friendly business climate) and you have no other presence in the USA other than that, and you drop ship from outside the USA or just ship from a single location inside the USA, you will only have to pay sales tax on sales inside Wyoming and possibly the location of the warehouse where your products are stored. If you keep everything inside Wyoming, considering the tiny population of Wyoming that might be close to zero.

However, if you use Amazon FBA (or some other 3rd party sales distribution system like it located inside the USA) you will need to also register with every state where your products are being stored by Amazon. Amazon makes this information easily available to you. Last time I checked, the primary warehouses for Amazon are located in California and Texas. You will almost certainly need to get a sales tax permit in those 2 states in addition to whatever state you chartered your company. As your product becomes more popular in Amazon, Amazon will stock it in other warehouses in other states meaning you will then have to register for sales tax in those states as well.

There are a few companies that offer sales tax accounting services for companies using Amazon FBA and other 3rd party distribution services in the USA since it has become so difficult and costly for small companies to maintain the accounting staff to do it themselves.

Remember, if you are NOT using Amazon FBA or some similar service none of this may apply to you.

Just remember, the US sales tax is not the VAT. It is totally different, and if you think your understanding the VAT, with all its complexities, will help you understand the US sales tax system you are mistaken.

An Analytical Model for Evaluating Strategies

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People often ask me, “What is the best business structure/solution for global business?”

This is a very good question, but sadly leads to some very bad answers. People have a tendency to look at solutions in a rather simplistic manner, and then get surprised when their solutions do not really work. They go from “This is the greatest thing ever!!!” to “This is the worst thing ever!!!”

I prefer to use an Analytical Model to answer this question. This requires some time and patience.

Part of the problem is how service providers tend to market their products. They tend to focus on specific jurisdictions. Frankly, even I find myself doing this. Most of this website is aimed at selling my services to help you set up a US Limited Liability Company that can be used to give you access to banking, merchant services, investment opportunities, etc.

However, I begin my evaluation of a prospective client’s circumstance by analyzing his situation. I have a simple but important Analytical Model to help me to better understand what would be best.

I like to think of the various options as tools that can be used to help people do business. These tools are varied and depend a great deal upon what is needed. As the old saying goes, “If the only tool you have is a hammer every problem is a nail.” This way of thinking is unfortunate, dangerous, and unnecessary. I like to think of the various options as different tools in my tool kit. Some work better for some problems, others work better for others.

My first line of questioning is to discover the client’s current residency issues: What is your citizenship? Where are you living? Where would you like to live? What are the tax rules?

Not all countries are the same. For instance, someone from Sweden has almost no problems regarding residency if they want to “opt-out” of the system. They more or less only have to leave. People from other countries often have to deal with some remarkably difficult obstacles. So before I start talking about US LLCs, or UK LPs, or Georgian JSCs, etc. etc. etc. I first want to understand this issue.

Then I ask, “What do you want to do?” I like to know what you want to accomplish before I start trying to sell you a solution.

Yeah, I know that’s crazy.

Once I better understand the issue of residency and what the client really wants to accomplish, only then can I start thinking about which business structure(s) might be best. This is an area where people get very confused. Some company entities are better for certain situations than others. Some jurisdictions work better for some clients than for others. You have to take it case by case.

The biggest problem I encounter is “jurisdictionitis“: the irrational belief that one jurisdiction will magically solve all your problems. Even for the best of jurisdictions this is not the case. Delaware can be great for one client, and Texas might be better for another. The same goes for different countries as well.

For one client I spoke to about a year ago, because of his unique business and family situation combined with his citizenship, the ideal solution would have been very simple:

  • to establish a residency in the Republic of Georgia due to its Territorial Tax Treatment,
  • a US LLC to manage his global professional consulting business, and
  • a Georgian company to establish a new Internet venture.

Georgian residency would have been ideal since it is a “territorial” tax country for individuals (that is you only have to pay taxes on income you earn inside the country — thus his consultancy business outside of Georgia would never be taxed), and his country of citizenship would have then considered him a non-resident and he would owe no taxes there. The US LLC would have allowed him to easily gain access to US banking making it easier for him to get paid from his US-based clients while avoiding US taxes since his business is outside the USA and the US LLC would be a considered a “disregarded” or a “pass through” entity in regards to US taxes. Finally, the Georgian company would have been ideal for the Internet venture because of something called the Virtual IT Zone Company which is a terrible name for an awesome tax exemption; any company in Georgia that is doing business in what the government loosely defines as IT can request a tax exemption for all income earned outside of the country in the IT industry — thus tax free.

Although these three separate solutions would not have been terribly expensive to set up or manage, and would have effectively resolved 100% of his problems, he only wanted one “thing” that would do it all for him. I honestly do not know of any such single “thing” that will accomplish all these tasks, but I hope if and when he finds it he will let me know — though I am not optimistic. I rather suspect he will end up getting cheated by some unethical internet personality claiming to be an expert who will lie to him, tell him what he wants to hear rather than the truth, and then sell him some outrageously priced solution that will not actually work for anything, and will most likely get the man into a great deal of legal trouble.

So there you have it. My Analytical Model for how to resolve these problems: analyze the residency issues of the proposed client, find out what the client actually wants to do, and then find the appropriate tool(s) to address those issues.

The Importance of Running Your Business in a Business-like Way

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I have been practicing law for over 25 years and the attitude I have seen that most disturbs me is that running your business is a chore that the business owner should not have to do. I have seen this attitude gaining ground over the last few years among a group of young entrepreneurs calling themselves ‘digital nomads’.

This is one of the biggest mistakes you can make!

When you start a business you are going to have to do a lot of things that may have nothing to do with what you consider is your business. You are going to need to keep a good set of books so that you know how much money you are making, what are your costs, who owes you money, who do you owe money to, how much do you have to pay in taxes, etc. You should sit down and understand what is the best type of business entity for you to use to operate your business. You should try to understand the risks you are going to face. Can someone sue you? For what? Who might that be? Will it be your clients, yours suppliers, your partners, your family, total strangers? Will you have to sue them? What type of contracts are you going to need? How can you manage all that risk so that you do not lose everything you are working for?

If these are questions you do not want to think about, I advise you to do one of two things:

1. Do not start a business and instead go to work for someone who is willing to do all that stuff, or

2. Find a partner who will handle all that dreary ‘non-sense’ for you. (And if you choose to pursue this option be prepared to have your partner remove you at some point from the business since you will most likely be expendable.)

You see all that annoying stuff is your job as a business owner. It is what you are supposed to do. If you do not do it who will?

Take for example a plumber. You may think that the job of a plumber is to fix people’s plumbing. Hopefully the plumber knows better. If he is working for himself, that is if he is operating a business, his job is to do all that annoying stuff to make sure he does not get into trouble while fixing people’s plumbing, and so that he can make the most money he can.

If all he does is fixes people’s plumbing, no matter how good a plumber he may be, it is just a matter of time before he goes out of business. The real money to be made in operating a plumbing business is not in doing the plumbing. The real money is in managing the business. That is why successful business people make more money than employees!

If you do not want to manage your business, then go work for someone else who does. Do not begrudge them the profit they make managing the business. You do not deserve the money that is made by the business person who is doing all the crap that you do not want to do. Not only do you not deserve the profits from the business, you might very well be happier not having to deal with the problems that come with owning and operating a business.

Let us go back to our plumber. Obviously he became a plumber because he liked that trade, and he thought he would make money doing it. But the truth of the matter is that the hardest part of operating a plumbing business is not the plumbing work… it is everything else. If he is running everything else and does not have the time to do all the plumbing work he can hire another plumber to help him out from time to time. In fact as the business grows he may end up doing no plumbing at all and hiring plumbers to do the work as employees. Who is going to make the most money? The plumbers he hires or him – the guy who owns and operates the business? If he is doing a good job operating his business it is going to be him.

So when I talk to potential clients who resist doing simple things like setting up a proper accounting system, I am forced to ask them, “Why are you going into business?”

To make money? Obviously not. If you do not want to operate your business with a basic accounting system you have no interest in money. That is what accounting is all about; managing the money of the business. If you do not want to do that, then go work for someone else. I suspect you will make more money working for a competent business owner than trying to operate your own business.

The same thing goes for setting up the proper business entity, preparing the proper contracts between you and your partners, clients, suppliers, etc. If this is all too much of a bother for you then being in business is too much of a bother for you. That is what operating a business is all about!

I know there are some people who for one reason or another cannot work for other people, and cannot do all the tedious work of operating a business. What should such people do? I advise them to look hard in the mirror and accept the two problems they have:

1. You cannot work for other people.

2. You cannot operate a business on your own.

In both of these cases I would advise seeking psychological counseling of some kind, especially for problem number 1. Perhaps you can find out why you cannot work for other people, identify the cause and find a solution. Although psychologists are the usual go-to profession for solving such problems, perhaps there are other people you can turn to: family, friends, business associates, business mentors, business consultants and coaches, etc. Just understand these later people may not have the training or the interest in helping you solve your problem. If and when you are able to solve this problem you may find it much easier to resolve other business related issues.

As for problem number 2, in additional to resolving your psychological issues you may be able to find someone who is both trustworthy and competent enough to manage the business while allowing you to do whatever it is that you believe you are doing that adds value to the business. Most of the time this is done by bringing the person in as a partner, or it might also work if you hire someone to manage your business and pay them enough to make it in their interest to do so honestly.

Beware! As I mentioned above the person who manages the business is the real business owner. If you delegate all the responsibilities of operating the business without fully understanding what those responsibilities are then eventually you will become redundant. It is always easier to find someone to do the work than it is to find someone to manage the business. If you are ‘in business’ that is YOUR JOB! If you completely abandon that part of your responsibility whoever is doing it will end up being the owner.

Owning and operating a business is one of the hardest things anyone can do. The idea that you can be successful at that without training, experience or even interest in learning how to do so is ridiculous. Don’t do it!

Royalty Financing – Misunderstood or Mysterious?

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There are three ways that a business can finance its operations and development:

  • Debt
  • Equity
  • Royalty

The first two are the most common and the easiest to understand.

Debt financing simply means borrowing money without giving up actual ownership of any assets. Often lenders will require some kind of security interest or lien against those assets, but as long as you pay your debt properly you do not give up any of your business, your assets, or your revenue.

Equity financing is the process of raising capital by selling shares or ownership interest in your business. How this actually takes place will vary according to the size and strength of the company brand and finances. An established company finds it much easier to issue shares than a start up venture. Start up ventures often have to give up majority control of their company in order to receive funding from Venture Capitalists.

So what is Royalty Financing?

Royalty Financing is often referred to as a “new concept” in investing, however, this is not really true. Royalties have been around for quite a long time. Royalties are what someone receives in exchange for allowing a business to use some kind of valuable asset, or in some cases just money. The most traditional form of royalties usually involve some form of intellectual property such as music, books, or other artistic endeavors which the artist licenses to the company in exchange for a fixed percentage of the sales. Royalties are also very common in regards to licensing of scientific properties such as patents and designs. The royalty can be compared to a sales commission, only the receiver of the royalty does not have to perform any additional tasks to receive the payment.

What is somewhat novel is the idea that investors can receive royalties from the sale of a product or service in exchange for a fixed investment that is often used to further develop the business opportunity. The most common means of royalty financing is to give the investor a fixed percentage of the revenue of the business or the revenue from the sales of a specific line of products or services.

There are many advantages to a royalty financing arrangement:

  • The most obvious advantage for the business is the fact that the company remains in control of its own destiny while facing fewer risks associated with borrowing money.
  • Easier regulatory environment. Since no shares in the company are being sold securities regulations should not apply.
  • It can also be easier to obtain royalty financing when future revenues are predictable and consistent even if other factors may be more risky.
  • Royalty financing is more flexible than equity or debt financing since the royalty payments will vary according to the revenue rather than upon some preset fixed amount. In good years royalty holders will receive higher payments, and in bad years lower payments. This gives the company the ability to better withstand the possibility of future downturns while giving the investors greater opportunities to participate in the upturns that may occur.
  • Royalty payments are usually tax deductible from the company’s gross income thus lowering the company’s tax liabilities, and also avoiding the double taxation that often occurs with dividend or profit sharing payments.
  • Because the company does not have to give up equity in order to obtain financing, the company can often focus more on operations, and less upon exit strategies of the founders and initial investors.
  • Finally, royalty payments are more secure for the investors since the payments are based upon a percentage of the gross sales or revenue rather than profits. Even if the company is unprofitable, if it makes any sales the investors will receive the benefit. It is also much more difficult to use obscure accounting methods to conceal, reduce, or eliminate a company’s gross revenues than profits.

Royalty financing is not ideal for every business. Businesses that lack predictable and consistent future revenues will find it very difficult to successfully obtain such financing. Also, royalty financing may turn out to be more expensive than equity or debt financing, even if it is more flexible for the company and more secure for the investors.

Sometimes royalty financing is misunderstood, but it is never a mystery. It is just a very convenient way for some businesses to attract financing that would otherwise be difficult or impossible to obtain otherwise.

A Nevada LLC Should Not Be Blindly Trusted… Nothing Should

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Some bad news for those who think Nevada is some sort of Magical Talisman against creditors:
 
“This Opinion once again illustrates, as have so many similar opinions before it, that it is not nearly enough that a person set up a labyrinth of legal structures to protect themselves, but that for the legal structures to hold up against creditors they must be respected as such. Here, the debtor set up a complicated structure that might normally have put off creditors, but then treated the structure willy-nilly, transferred assets around with little or no purpose or documentation, and then also — the Mortal Sin in creditor-debtor law from time immemorial — personally used and benefitted from the very assets that he claimed were not his.
 
We also again see the implicit application of the ancient legal maxim of delicatus debitor est odiosus in lege, which is translated as “the extravagant debtor is condemned in the eyes of the law”. In other words, a debtor who continues to live a wealthy lifestyle should get no sympathy from the court. So it is here, another case where the debtor claims that he has no money with which to pay their creditors, but maintains a wealthy lifestyle including the use of residences in both in Las Vegas and Southern California. Is it really any wonder that the courts frequently go out of their way to slam such debtors? Not paying one’s debtors while living it up is not only flipping The Bird to creditors, but is also doing the same thing to the Court which has an interest in seeing that judgments are enforced. Why do debtors have such a hard time seeing that?
 
The problem is fundamentally one of clients (1) having some common sense and knowing when they should live an austere lifestyle, and (2) being able to actually follow the legal structure that was created for them. An attorney can create the very best asset protection structure for a client, but if the client then starts ignoring the structure and treating all the assets as his own, then good luck defending that.”
 
Another problem with Nevada noted in the article: Nevada has a very thin record of court rulings compared with other states, and as a result tends to favor California law in the absence of Nevada decisions. This is never a good thing.
 

How a US LLC can Uniquely Benefit a UK Resident

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A prospective client approached me recently regarding the benefits of establishing a US Limited Liability Company (US LLC), becoming a non-resident of the UK, and in which order should he proceed. Due to the unique status of how the UK interprets US LLC status, residents of the UK can receive some very unique benefits if they neither incur US or UK “effectively connected income”. This was my answer:

Well I first must fully agree with you about non-res status. It can be a real deal changer. However, in your case it is not absolutely necessary, and I would feel free to proceed with a company formation prior to actually leaving the UK.

If you own a US LLC it will be treated very oddly because of the way that the US and the UK deal with how US LLCs are treated for tax purposes.

In the USA the default setting of the US LLC is “disregarded entity” which means it does not exist for US tax purposes. So if you do not live in the USA and you do not earn “effectively connect US source income” then you will owe no US taxes. In fact you will not even have to file tax returns. This will be the case even if you have a US bank account and do all your banking in the USA. Just receiving money in the USA, even if that money comes from US sources, does not create a tax liability. For that you need to do more; make things, store things, deliver things, maintain permanent offices and staff, etc. from inside the USA.

Now that all sounds pretty good! However, it only gets better for citizens of the UK. Even though the US considers the US LLC to be a “disregarded entity” the UK treats the US LLC as a separate entity. If the US LLC does no business in the UK and incurs no income in the UK then there will be no UK taxes due from the income earned by the US LLC. Now you will need to pay taxes on income you receive as a salary or profit distribution, but you will be able to provide yourself with many tax free benefits since the US LLC will have no taxes to pay anywhere. Money you do not distribute to yourself, or use for your personal benefit will be deferred taxation allowing you to further invest that money. Now it is wise to be careful about how you give yourself these “tax free benefits” since the UK may decide that what you are really doing is giving yourself income and then fraudulently evading taxes; not good. So don’t be greedy. If you are receiving real economic benefits while living in the UK then pay taxes on that income. Keep in mind that you get to choose how you get paid and can select the method with the least tax; profit distributions, salary, reimbursement for contract work, etc. You get to choose whatever is best for you, but again don’t be greedy.

This takes us to the interesting issue of how to really avoid UK taxes. Move out of the UK. I am not a UK attorney, and I do not even pretend to play one on TV, but it is my understanding that in order to gain full non-resident status you must do more than just leave the UK and stay out a certain number of days. You must also obtain a legal residency in some other country. In this regard there are a lot of interesting options out there.

I chose the Republic of Georgia for a number of reasons. For me it was mostly lifestyle issues and economic opportunities, but there are also a lot of tax benefits to be had here. Getting a residency is simple and easy, and it can lead to citizenship for some in under a year! I don’t know of any place else on earth where that is possible without some sort of ancestral claim or a huge investment in the country; at least not a country that I would actually want to be part of.

Some other interesting options that provide great tax benefits: Montenegro, Mexico, Malta, Latvia, etc. Each has its advantages and its disadvantages. Note, you do not necessarily have to live in the country that you have a residency. It might just be a legal formality so that you can claim non-res status. On the other hand it might be nice to combine the issue of tax status and where you like to live.

The Most Important Thing We Don’t Want to Think About: Asset Protection

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14915380_605027526288899_4904488283081663198_nWhat an important topic! But sadly one that elicits so little interest!

I have been practicing law for about 25 years, and I have sadly concluded that people will not pay attention to asset protection issues until they lose everything they have, or they get pretty close to it and are scared. Fear seems to be the only motivation for asset protection planning. Sadly I must admit to suffering from this same problem myself when I was younger.

I was recently asked what is the most common mistake in Asset Protection?

My Answer:

Thinking nothing bad will ever happen to you and doing nothing.

There are so many good strategies out there. But you actually have to do something before they sue you, or you get the service of divorce papers, etc. I find people don’t like to think about depressing things. Thus they fail to prepare for them.

I like to consider myself a stoic (not the kind that stands around in hair shirts and such), and one of the lessons is to consider all the things that can go wrong in your life without getting hysterical about it. It helps you to prioritize and prepare.

Some good reading:

“Disregarded Entity” vs “Taxable Association”: What is the best way to structure your LLC?

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For the past 15 years I have been promoting the USA as the ultimate banking solution for non-residents (or as some might say a “Tax Haven” for non-residents). My traditional proposal was to simply set up a US LLC, take the default election of ‘disregarded entity’ (“disregarded entity” is an LLC that is treated by the Internal Revenue Service as a complete pass through entity. For tax purposes it does not exist. For all other purposes it does.), open a bank account, and as long as you are not earning any US Source/Effectively Connected Income, you are fine. No need to file tax returns let alone pay any taxes.

That is no longer entirely the case. FATCA has not changed the tax treatment issues, but has changed the reporting requirements for US payors. The issue of the W-9 (reporting form for US resident payees receiving funds) and W-8Ben (reporting form(s) for non-US residents receiving funds) was always a little murky but now it is downright impossible. Non-residents receiving payments from US payors, even if the funds are “not effectively connected” to US income, are now facing serious problems. No one really understands how the new W-8Ben system works since they have replaced the one form with 4 or 5 related forms that no one really understands how to use. And the penalties for getting it wrong are quite serious so payors are paying a lot more attention, or just choosing not to do business with anyone who cannot execute a W-9.

In short, it has become very difficult for non-residents to use their US bank accounts to receive funds from US payors.

My solutions:

For those non-residents who do not need to receive funds from US payors, the Disregarded LLC is still fine. Nothing to worry about.

For those receiving money from US payors, we need a more sophisticated structure. The US LLC will elect to be a ‘taxable association’ (that is an entity that will be taxed separately like a C Corporation), but it will only act as an agent of a non-resident business (with a written agency agreement) to resell non-resident goods and services in the USA. 90% of the gross income goes to the foreign provider (with appropriate W-8Ben — that will be very easy), and all operating expenses will come out of the 10% agency fee — there should be little or no taxes.

This solution is simple and easy to implement. In fact old Disregarded LLCs can be converted to “Taxable Association” LLCs with little effort. The only downside is that there is now a requirement to file an annual tax return which means there is a requirement to maintain a good set of books so that the tax preparer can accurately file the return. There may be no taxes due, but failure to file a tax return can cause a lot of problems. I have always advised my clients to maintain a set of books for professional reasons, but they were not required for US tax purposes. Now they are.

If you have any further questions please do not hesitate to contact me.

Can the IRS take your US Passport? Yes.

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The IRS can now take away your passport.

A little-noticed provision in the highway funding bill Congress passed this week threatens a right most Americans take for granted: the right to travel abroad. The provision in question gives the Internal Revenue Service the authority to revoke the passport of anyone the IRS claims owes more than $50,000 in back taxes.

Congress is giving the IRS this new power because a decline in gas tax receipts has bankrupted the federal highway trust fund. Of course, Congress would rather squeeze more money from the American people than reduce spending, repeal costly regulations, or return responsibility for highway construction to the states, local governments, and the private sector. On the other hand, most in Congress fear the political consequences of raising gas, or other, taxes. Giving the IRS new powers allows politicians to increase government revenue without having to increase tax rates. Some even brag about how they are “cracking down on tax cheats.”

If you think this is nothing to worry about then you are not paying attention. The IRS can and does routinely fabricate/estimate tax liabilities prior to auditing someone for a variety of reasons. Usually it involves some kind of missed filing or missing documentation. But the IRS is now a highly politicized organization that has been used to attack political opponents. This measure will make it even easier. The IRS can simply “estimate” that you owe more than $50,000 and you will not allowed to leave the country. Beware. You need a second passport more than ever if you plan on staying in the USA.

read more:  Ron Paul: Will The IRS Take Your Passport? – OpEd

High-Tax Nations Under Increasing Pressure

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OECD_logo.svgThe Organization for Economic Co-operation and Development (OECD) was initially established to promote economic progress and world trade. It has now become a front organization committed to protecting the high-tax inefficient elements of the First World Economies from economic competition.

Twenty years ago the OECD took aim at “tax havens” that provide(d) tax-free and private banking for the wealthy businesses and individuals of the world. This effort has largely been successful by dishonestly painting “tax havens” as facilitators of drug cartels and terrorist organizations. As such the ability to freely move your money around the world has been severely curtailed, at least among the members of the OECD nations.

Now the OECD nations have taken it upon themselves to stamp out “tax competition” where ever it may be found. Tax competition is when one jurisdiction competes with another jurisdiction for business by lowering or simplifying the tax rate. For the high-tax rate nations who control the OECD this is a grave danger. They have already taxed their nations into economic stagnation with low growth rates and high unemployment. They have bought off restive populations with expensive social programs that provide cradle to grave security, but give little hope of jobs or economic advancement. Up and coming nations that try to attract industry by creating a lower and more efficient tax climate for business are real threats.

It remains to be seen how successful these efforts will be. Attacking the “tax havens” was a much easier project since most of them were small economically struggling Third World nations trying to us private banking, beneficial legal systems, and liberal financial service regulations to bootstrap themselves out of poverty. Such countries were relatively easy to intimidate into compliance. Even Switzerland was forced to dramatically adjust its age-old banking rules in order to comply with its neighbors.

However, the OECD seems to be having less success in the area of “tax competition”. In Europe, the heart of OECD darkness, countries are modernizing their tax codes in order to provide their own citizens and foreign businesses better opportunities to compete. Ireland, Latvia, Estonia, Hungary, etc. have all established lower flat rate tax systems that have increased the efficiency of the tax system making these countries more attractive for foreign investors. Russia has recently implemented a broad ranging tax reform that lowered the tax rate to a flat 12%. In most cases, as the tax rates go down and the tax codes are simplified, the tax receipts actually go up. Companies spend less money trying to avoid taxes, and instead invest their time and efforts in making more money which in turn creates more tax revenue.

Attacking impoverished Third World countries who tried to become “tax havens” is one thing. “Tax Competition” is a much harder concept to stamp out as is seen even among the OECD nations themselves.