Cut Your Tax Bill In Half Living In Paradise

June 3, 2008

Paris, France

PLUS:

n  More Good Tax News From Panama--20-year Property-tax Exemption Renewed...

n  "Tell Your Readers: Life Is Good And Cheap Here In The Philippines"...

n  Hugo Chavez's Latest Economic Reform...

n  "You'd Have To Be Nuts To Own A Car In This Country"...And Other Survival Tales From The Living Abroad Files...

n  Going With The Flow In Buenos Aires...

n  Heads Up And Act Fast: Panama's Reforestation Visa Set To Double In Price Aug. 26...

AND:

n  Chasing The American Dream...Overseas...

------ Borrow To Buy In Central America -----

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Dear Overseas Opportunity Letter Reader,

We didn't move from the U.S. to Ireland 10 years ago to save on taxes. And that's not why we're moving to Panama this summer either.

But, no question, controlling your tax liability can make a big difference in your standard of living. Reduce your tax bill from, say, 40% a year to, say, 20% a year and it's like giving yourself a raise and super-charging your investment portfolios. You're earning no more, but you've got a whole lot more disposable income.

So, again, we're not moving to Panama to reduce our tax burden, and neither should you. You can't organize your life according to tax code. But you don't want to ignore it either.

We Americans have it double tough. No matter where we go, our obligations to Uncle Sam follow. When we take up residence in a foreign jurisdiction, therefore, we've got double the tax masters. We're beholden to both the IRS and the local tax collector.

We must understand the tax requirements on both sides, and we must file annual tax returns in both jurisdictions...but that is not to say we owe double the taxes.

On the contrary. As an American abroad, you can reduce your annual tax burden, even significantly, from what you were paying when you were residing full-time within U.S. borders.

This is where things get interesting...and complicated.

Don't worry. You don't have to become an international tax guru to manage this part of your new life in paradise. After more than 20 years researching this stuff and more than 10 years paying taxes in multiple jurisdictions, I'm still no expert. But I've been fortunate enough to get to know people who are.

Which leads to my first and probably most important piece of advice on this subject: When planning to move, retire, or invest overseas, don't try to become a global tax authority. Hire one.

In fact, hire two. One in the jurisdiction where you're planning to live or invest...and another in your home country.

During one of our scouting trips to Ireland before our move 10 years ago, we met with Ernst & Young in Dublin. We didn't know what we didn't know, but we knew enough to ask for help.

At the time, Ireland taxed its residents on a remittance basis. That is, living in Ireland, you paid tax only on whatever money you earned or brought into the country. You could earn hundreds of thousands of dollars a year. But if you brought (remitted) only $50,000 per year into the Emerald Isle...the Irish tax authorities expected their cut of that $50,000 only. Maybe you owed other tax authorities in other countries other tax on other pieces of your total income...but Ireland cared only about the piece of your income that flowed into Ireland.

The Ernst & Young tax guy we met with explained this to us and then he made a critical recommendation. He told us to organize ourselves so that all assets held prior to our move to Ireland were lodged in separate accounts from any assets we might ever bring into Ireland. This way, there could be no confusion. The Irish tax collectors could never lay claim to any assets clearly separate from other assets that might ever be remitted to Ireland.

And, then, he said, as long as you're living in Ireland, make sure that money you don't intend to remit to Ireland goes into those other accounts. Make sure everything is clearly separate from the start...and keep it that way.

We followed his advice.

In addition, as Americans residing abroad, Lief and I both were able to take advantage of the earned-income tax exemption, meaning that our first $80,000 to $85,000 of income each year apiece (the amount of the exemption has increased over the past decade and stands today at $85,700) was free from U.S. tax.

Plus, Ireland and the U.S. have a double-taxation agreement, meaning we didn't owe tax in the States on any income taxed in Ireland.

Bottom line, by organizing ourselves carefully, as Irish residents, we were able to reduce our overall rate of tax to less than 20% per year.

The tax laws in the Emerald Isle have changed significantly in the past decade, and Ireland no longer taxes its residents on a remittance basis. Today, Ireland taxes residents on their worldwide income...just as the U.S. does (with some complicated exceptions).

Yikes.

As I said, we're not moving to Panama because of its tax laws...but it hasn't escaped our notice that the country's position on taxing its foreign residents is about as good as it gets.

In Panama, we'll be paying tax only on the money we earn in Panama. You gotta' love that.

Panama is not the only tax-advantaged jurisdiction worth a close look right now. Belize is another place where, as a resident, you pay tax locally only on the money you earn locally.

Furthermore, Belize is one of the easiest places in the world to become a full-time (legal) foreign resident...at least if you're older than 45. Show the Belize immigration authorities that you've got a guaranteed income of at least $2,000 per month ($24,000 per year) from outside Belize, and you'll qualify for Qualified Retired Person (QRP) status. They'll roll out the welcome mat.

And they won't even require that you're physically present in the country more than one month per year. A friend refers to it as "virtual residency." Belize is a beautiful, safe, friendly, affordable little country. In fact, it's one of my favorite places in the world and my favorite spot in the Caribbean. But if full-time Belize life doesn't appeal to you, no problem, say the Belizeans. Spend a month a year with us. In return, you can claim full-time Belize residency.

If you're an American, this offer is particularly appealing. For, if you're a full-time resident of Belize...you can't be a full-time U.S. resident. Which means you're eligible for the U.S. foreign-earned-income exclusion.

It's not quite that straightforward, and, again, you'll want an expert to help you organize yourself properly. But the idea of becoming a full-time resident of a foreign jurisdiction for tax purposes is not only possible, it's also legal and safe...and it can cut your overall annual tax burden dramatically, even in half.

It's even possible, depending on your circumstances, to become a resident of Panama, for example, or a QRP in Belize and live tax-free. It depends on how much income you earn and where it comes from. But, again, it's possible, and it's legal. You just need counsel you can trust to help you consider the options and make a plan.

Don't Google "foreign tax specialist" or "international tax advisor." You'll find lots of resources that way...but none you can trust. The Internet is awash with guys who'll set you up with offshore structures for a fee and who'll be glad to help you get one over on the IRS.

You don't want to get one over on the IRS. You just don't want to pay that U.S. government agency $1 more of your income than you absolutely have to each year.

And you don't necessarily want offshore structures either.

I have no idea what you do want...or need. And, probably, neither do you. But I can tell you this: Take the advice of some offshore expert you find with the help of Google, and your chances of ending up someplace you don't want to be (engaged in a one-on-one conversation with a representative of the IRS, for example) are probably increased.

Neither should you dash off an e-mail to your U.S. accountant or attorney asking for help managing the tax consequences of your new life or investments abroad. He won't have answers for you, and your questions will make him nervous.

My U.S. attorney a decade ago, at the time we were planning our move to Ireland, told me not to mess around with the earned-income exclusion for Americans living abroad. "It's too risky," he counseled me. "Better just to pay what you owe and not to try to get away with anything."

I understood almost nothing about any of this at the time, but I knew enough to know he didn't know enough. He's no longer my attorney.

I didn't replace him immediately or easily--though not for lack of trying. I began looking for a competent, experienced, and open-minded U.S. tax advisor as soon as I realized my attorney of many years was none of those things when it came to the issues faced by Americans living and investing abroad.

In my position as publisher of International Living over the past two-plus decades, I met lots of guys who called themselves "offshore tax experts."

Finally, less than a year ago, I found a guy who I'd call an offshore tax expert. His name is Chris Rusch.

Our situation has grown ever-more-complicated in the decade since we left the States, but Chris has organized and simplified as he has counseled us in how our Panama plans will impact our U.S. tax obligations.

Chris knows his way around the offshore world. He knows what's allowed and what's not, and he respects the rules. He also knows how to solve problems and how to get things done. Our experience with Chris over the past 10 months has been remarkably efficient, painless, and productive...wholly different from our experience with the half-dozen other offshore advisors we tried to work with prior to finding Chris.

I told you, though, that you need not one, but two global tax authorities, one to manage tax, reporting, and structure issues for you in the States...and one to manage those things in your jurisdiction of residency.

For us, the Panama side of things is managed by longtime friend and counselor Rainelda Mata-Kelly. Over the past nine years of doing business in this country, Rainelda has helped us buy and sell real estate, open bank accounts, form corporations, hire and pay employees, acquire residency (through the reforestation visa program)... I know no Panama attorney more experienced or more competent at helping foreigners live and invest safely and successfully in this jurisdiction. And I know a lot of Panama attorneys.

Kathleen Peddicord

P.S. The best way to become a foreign resident of Panama today is through an investment in timber. After considering the eight options for obtaining legal residency in this country, we chose reforestation, for many reasons, including the modest capital requirement--as little as $40,000 per applicant right now.

However, it looks like this is going to change. The Panamanian ministry that manages this visa program has proposed doubling the cost of a single renewable reforestation visa. As of Aug. 26, if the proposal goes through, it'll cost you $80,000, instead of $40,000, to organize residency this way.

Even so, it'll be the best bet, in my opinion. I like hard assets, investments you can see and touch, even go to visit. The purchase of a reforestation visa in Panama is precisely that. With your visa, you also get a hectare of land planted with trees and titled in your name.

At least if you arrange your reforestation visa through United Nature, you do. With some other groups, your reforestation investment gains you a Panama resident's visa...but not a piece of titled land. You may be paid out from the production of the plantation, but you don't own a piece of it outright. With United Nature, you do.

Managed timber has beaten the stock market over the past 30 years, returning about 15% a year, while stocks, during the same period, have returned only, on average, about 11% annually.

Furthermore, not only is timber a good way to beat the markets, it's also a great way to hedge them. Timber operates blissfully ignorant of things like NASDAQ, housing bubbles, and Wars on Terror.

Meantime, the demand for this commodity continues to grow, while the supply, especially for certain kinds of timber, like teak, the world's most valuable hardwood, is limited.

The world's remaining natural teak forests are being logged at a rapid rate. Some predictions are that Burmese forests could be logged completely in the next few years, meaning the growing world demand would have to be fulfilled by teak plantation production. And, right now, there aren't a lot of teak plantations worldwide.

Meantime, United Nature's 14-year-old 3,000-hectare plantation in Panama's Darien region is thriving.

If we hadn't decided to move to Panama and therefore weren't shopping residency options, we probably still would have bought some of United Nature's teak. Our residency requirement was only the impetus to act sooner rather than later.

Which is my best advice for you right now: Act sooner rather than later if you're interested in Panama residency (and all the tax benefits that entails). Aug. 26, 2008 the price of residency through a reforestation investment is set to double. The paperwork can take two-plus months to process. In other words, contact United Nature right now.

P.P.S. You can reach U.S. attorney and offshore specialist Chris Rusch here. And you can get in touch with Rainelda Mata-Kelly, premier Panama attorney, here.

FROM THE MAILBAG:

J. Massey writes from the Philippines:

"This must be one of the cheapest places to buy property and retire. We bought a three-bedroom, two-bath detached house in Antipolo, 20 miles from Manila, for 30,000 pounds sterling. This allows us to keep our house in the UK.

"Retirement visa was easy and straightforward. Right now, we spend six months in the Philippines and six months in the UK, but we're thinking of living here full-time.

"Language is no problem, as everyone speaks English. Cost of living is very low. You should tell your readers."

ALSO RIGHT NOW:

Receive your building permit by July 1, 2009, and complete construction of your new home by Dec. 31, 2011, and your Panama residence is 100% property-tax exempt for 20 years. The good tax news from this country just keeps coming...

Debate about eliminating, then renewing, then eliminating, then renewing the 20-year property-tax exemption in Panama has continued over the last half-dozen years. The most recent expiration was last September, but, immediately, there was talk of another extension.

I'm happy to be able to report that this most recent extension has come through. According to the current legislation, you must receive a building permit by July 1, 2009, and you must complete construction of your home (including obtaining your occupancy permit) by Dec. 31, 2011. Do that, and your house will be exempt from property taxes for 20 years.

Note, though, that the land your house sits on is tax-exempt only if it has a registered value less than $30,000. If the land value is greater than $30,000, you'll owe annual property taxes on it.

The two-and-a-half-year construction timeframe allowed by the current legislation, by the way, is to accommodate highrise development projects, which can take up to 30 months to complete. You should be able to build a house in Panama in about six months.

I'll be applying for the building permit for our new home at the beach (on the west coast of the Azuero peninsula), which I'm very happy to know now will be property-tax exempt for 20 years, as soon as we arrive in the country, mid-July.

One of Hugo's latest economic fixes: Lop three zeros off the rate of exchange between the bolivar and the dollar. Call it the bolivar fuerte...

"Through the end of last year," writes correspondent Don Ellers from the coast south of Caracas, "the Venezuelan currency, the bolivar, was pegged to the U.S. dollar at 2,150.

"The parallel market saw exchanges of up to 4,000 bolivars to the dollar and more. The more dollars you exchanged, the better rate you got.

"Starting this year, though, the government has been issuing the bolivar fuerte (the strong bolivar...I say with as much of a straight face as I can manage).

"They chopped off three zeros and issued new notes. Much like Mexico did with the peso nuevo years ago. Prices are the same, rates are the same. The new BF is pegged to the U.S. dollar, but now it's represented as BF2.15 to US$1. Looks a lot nicer, doesn't it? Chavez must think so.

"Word on the street is that all old currency must be returned to the bank and replaced with the new bolivars fuerte by July, or it will become 'null and void.'"

Globe-trotting Christian MacDonald reports from the "Sometimes You'll Wonder Why You Ever Left Home" front:

"Next time you mail off your car registration renewal, count your blessings," Christian advises.

"I never owned a car during my two years in Ecuador, but once I accompanied my roommate on registration day, an event that takes place sometime during the first quarter of each year.

"The day begins early, as you jockey for position among a hundred other cars in an undersized lot. The hours tick by as two mechanics work their way among the vehicles, checking serial numbers, verifying that you haven't installed a stolen motor since last year.

"But that's just the start. Next, you stand in line to obtain verification that you have no unpaid tickets. Then you stand in line to verify that you haven't changed your address. Then you stand in line for an administrative review. If, during any of these exchanges, some uncertainty arises, you typically have to start the process over another day.

"If, though, you get the A-OK from each of these reviews, then you're set. You get to come back tomorrow, to pick up your new one-year registration. And to wait in line to have it laminated.

"People wondered how I got along without a car in Ecuador. I wondered why any sane person would keep one."

More reminiscences of the good life overseas from Paul Terhorst:

"Buenos Aires, 1981. My boss told me to get a checking account at Bank of America, Buenos Aires branch. He figured it would make it easier to deposit my pay automatically. I opened the account, several months went by, and I never received a statement. Our treasurer assured me the account was fine, and she withdrew money from it for me now and again, but getting statements, she told me, would take time.

"After about six months, I got curious and went to the bank's main branch, where I had my account. I wanted to do something, anything, to see if the account really worked. I decided to buy dollars.

"For most of Argentina's history, buying dollars or any other currency has been illegal. But, in 1981, there was a window of opportunity. I went to the dollar desk and handed the clerk my check.

"'No check, only cash.'

"I replied to explain, 'This is my personal check drawn on this branch of this bank. You can verify that the check is good.'

'No. Cash only.'

"I insisted. Finally, he took my check, went upstairs, waited in line, cashed my check himself, came back downstairs with the pesos, put them in the drawer, and gave me the dollars. All the while, he was shaking his head. How stupid could this gringo be?

"About six months later, I finally closed the account out of frustration. A year had gone by without a single statement. After about another year, I finally did receive a couple of statements, which I threw away.

"I learned later that there was nothing unusual in any of this. Argentine insurance companies, for example, routinely issue a first annual renewal notice...without ever having issued the policy in the first place..."

Boquete, Panama, has become the country's answer to Ajijic/Lake Chapala, Mexico, home to thousands of expats chasing the American Dream abroad.

When you retire or move abroad, you must choose. Either you're going to live like an American (or a Canadian or a Brit, etc.)...or you're going to live like a wealthy local.

Veteran retiree abroad Paul Terhorst explains...

"Vicki and I recently found ourselves in Boquete, Panama, the country's gringoland. Colorful mountains with their cloud forests look down on Boquete's village in the valley below. Breathtaking.

"According to Boquete's information and tourism office, some 3,000 foreigners lived in Boquete at the end of 2007. Those numbers are expected to increase to 10,000 by 2016.

"Why so many expats in and around this little town? Beautiful setting, good climate, straightforward pensionado rules (for Panama), and more. But I get the feeling that most expats move to Boquete for another reason.

"They move for the American Dream--a beautiful home of their own, brand new, on a lush highland site whacked out of a coffee plantation. Many houses here are built to American standards, even by an American builder.

"Retirees I saw typically ran around in big 4X4's, imported from the States, with American music coming out of the CD players.

"We spent a week in Boquete, and, whenever I overheard a snippet of conversation in English, the subject was real estate or cars, what they cost, and how to make a buck on them.

"Americans and Canadians began moving abroad in big numbers in the 1950s and 1960s. Most went to Mexico and typically bought or rented Mexican houses in Ajijic village, for example, or in San Miguel de Allende. They learned Spanish, or tried to, and ate, drank, played tennis, sailed, and otherwise hung out with Mexicans and gringos, both. These expats definitely wanted to become part of the Mexican culture. They were expats in Mexico first, Americans or Canadians second.

"All this changed several years ago. Vicki and I happened to be living in Chapala/Ajijic, Mexico, at the time. A Canadian developer built expensive condos, with Canadian architecture and design, Canadian fixtures, Canadian amenities, features, and finishings. He marketed to Canadians an all-Canadian project, all Canadian all the time.

"To my astonishment, the project quickly sold out. Canadian buyers wanted to move to Mexico, all right, as long as everything around them was Canadian. They paid a big premium to cocoon in a Canadian enclave overseas.

"Fast forward to Boquete, 2008. American and Canadian and other expats have flooded the place over the past four years. With few exceptions, most want the American (or Canadian or what have you) Dream, call it the American Dream abroad. The fact that Boquete lies in the Panamanian highlands seems a minor detail. The American lifestyle goes on much like back in Dubuque. The new expats in Boquete are Americans (or Canadians, etc.) first, expats in Panama second.

"Which is better...the old way of assimilating into the local culture or the new way of isolating yourself in the American Dream abroad?

"The way I look at it, it's entirely up to you. But I suggest you be clear about it in your own mind. Move to Boquete or Sante Fe, Panama, for example, if you want to build or to buy the American Dream abroad.

"Move to Buenos Aires, Chiang Mai, or Guanajuato, on the other hand, if you want to change your environment and immerse yourself in a new culture.

"Choose between the American-style house in the highlands or an old colonial house in the village. Choose between a big, comfortable American community or a vibrant local one. And so on.