HOW TO MAKE REALLY BIG MONEY OVERSEAS One of the most valuable elements of offshore investing is the ability to compound earnings tax free. This factor alone is a major reason for selecting offshore opportunities over domestic investments. The value of tax-free compound interest Much of the discussion of the growing value of an annuity investment depends upon the tax free compounding of the earnings. Everyone knows about the "miracle of compound interest." It is such a cliche that almost everyone ignores the powerful, fundamental truth underlying the concept. And few people understand how to make compound interest work for them. Compounding is a two-way street. Debts compound, too. That is why so many "wealthy" people are going bankrupt, for example. Back in the 1970s and 1980s, the fashion of the time was to buy real estate leveraged with debt, and roll over the debt, counting on an increase in the value of the property to pay off the debt and make a profit. And in much of the United States, real estate values did increase at a rate that enabled a lot of people to make a lot of money purely on debt financing. They would buy a property. And they would pay for it with borrowed money, sometimes 90% or more of the total value. (The banks played along with this game. They made money too as long as prices were rising.) Instead of paying off the loan, they would allow the principal and interest to build. At 10% interest...after a year the principal on a $100,000 loan would grow to $110,000. In five years it would be a monstrous $161,000, and so on. The trouble is, real estate values don't go in one direction only. They also go down, as is they are now in many parts of the world. All that built-up, compounded debt eventually has to be paid. And very often, real estate investors do not have the means to actually pay off the debt they contracted. They never expected to have to do so. The secret of compound interest is to be on the right side of it. Debts compound and so do costs. Being on the right side of compounding means positioning investments so that time works for them, rather than against them. When investments are positioned properly, each passing day adds to their value, free from taxes and inflation. More than 2,000 years ago the philosopher Aristotle explained that the secret of success in anything was habit. Aristotle used the word "ethos." To him it was the crucial ingredient of all genius. And it was nothing more than a recognition of the concept of compound interest applied to life itself. Aristotle recognized that people do not simply wake up one day with the idea for a great invention...or jump to the command of a great army...or write down a marvelous essay...or get rich. All progress is made by small increments compounding over time. A great thinker thinks hard for a long time and, over time, comes up with great thoughts. A great builder lays one brick at a time and, over time, builds great monuments. A great artist works day after day and, over time, produces great works of art. So too, a man builds his wealth a little each day...and over time...becomes very rich. The idea of building wealth over time has a kind of tedious ring to it, but it leaves out the entire power of compounding. With compounding, time adds to value. Instead of being tedious, the passage of time in the investment plan becomes an important ingredient that turns the capital into more. Thus the "miracle of compound interest." It is based upon a powerful, fundamental truth, although too few people understand how to make compound interest work for them. The results are incredible. As we showed earlier, a 20% annual free of tax compounds to a sum 1200% larger over a lifetime than the same sum with tax. It is the difference between $8 million and $100 million over 40 years. And the same magic applies when you start with smaller amounts. But we do want to stress that just because money is offshore does not automatically mean it is tax-free. It is important that a proper and legal structure be used to keep the money tax-free, either through annuities, trusts, or other structures that you choose only after proper accounting and legal advice. $2,000 a year into a tax-free account investing in stocks that pay 10% dividends, means $35,062.31 after 10 years -- not including any capital gains. YEAR TAX-FREE INCLUDING TOTAL DIVIDENDS 1 starting capital $2,000.00 $2,200.00 2 add US$2,000 $4,200.00 $4,620.00 3 each year $6,620.00 $7,282.00 4 $9,282.00 $10,210.20 5 $12,210.20 $13,431.22 6 $15,431.22 $16,974.34 7 $18,974.34 $20,871.77 8 $22,871.77 $25,158.94 9 $27,158.94 $29,874.83 10 $31,874.83 $35,062.31 After 25 years, he'd have $216,363.29 -- just by putting $2,000 a year into his IRA, with its $2,000 contribution limit. An annuity has no such limit. 11 $37,062.31 $40,768.54 12 $42,768.54 $47,045.39 13 $49,045.39 $53,949.92 14 $55,949.92 $61,544.91 15 $63,544.91 $69,899.40 16 $71,899.40 $79,089.34 17 $81,089.34 $89,198.27 18 $91,198.27 $100,318.09 19 $102,318.09 $112,549.89 20 $114,549.89 $126,004.87 21 $128,004.87 $140,805.35 22 $142,805.35 $157,085.88 23 $159,085.88 $174,994.46 24 $176,994.46 $194,693.90 25 $196,693.90 $216,363.29 Compounding this kind of income from investments, in a tax-free annuity, is a guaranteed way to build wealth. There weren't any extra risks, or any extra effort. Once the wealth-building strategy was in place, it was just a matter of time. Most investors are looking for extraordinary capital gains -- and most fail to realize how hard it is to achieve that. Wealth-building investors should seek investments offering decent dividends or interest, and let that yield compound. Think of it another way: Amounts at Compound Interest Multiply the Principal by the Factor in the Table Years 1% 2% 3% 4% 5% 6% 7% 1 1.0100 1.0200 1.0300 1.0400 1.0500 1.0600 1.0700 2 1.0201 1.0404 1.0609 1.0816 1.1025 1.1236 1.1449 3 1.0303 1.0612 1.0927 1.1249 1.1576 1.1910 1.2250 4 1.0406 1.0824 1.1255 1.1699 1.2155 1.2625 1.3108 5 1.0510 1.1041 1.1593 1.2167 1.2763 1.3382 1.4026 6 1.0615 1.1262 1.1941 1.2653 1.3401 1.4185 1.5007 7 1.0721 1.1487 1.2299 1.3159 1.4071 1.5036 1.6058 8 1.0829 1.1717 1.2668 1.3686 1.4775 1.5938 1.7182 9 1.0937 1.1951 1.3048 1.4233 1.5513 1.6895 1.8385 10 1.1046 1.2190 1.3439 1.4802 1.6289 1.7908 1.9672 11 1.1157 1 2434 1.3842 1.5395 1.7103 1.8983 2.1049 12 1.1268 1 2682 1.4258 1.6010 1.7959 2.0122 2.2522 13 1.1381 1.2936 1.4685 1.6651 1.8856 2.1329 2.4098 14 1.1495 1.3195 1.5126 1.7317 1.9799 2.2609 2.5785 15 1.1610 1.3459 1.5580 1.8009 2.0789 2.3966 2.7590 16 1.1726 1.3728 1.6047 1.8730 2.1829 2.5404 2.9522 17 1.1843 1.4002 1.6528 1.9479 2.2920 2.6928 3.1588 19 1.2081 1.4568 1.7535 2.1068 2.5270 3.0256 3.6165 20 1.2202 1.4859 1.8061 2.1911 2.6533 3.2071 3.8697 21 1.2324 1.5157 1.8603 2.2788 2.7860 3.3996 4.1406 22 1.2447 1.5460 1.9161 2.3699 2.9253 3.6035 4.4304 23 1.2572 1.5769 1.9736 2.4647 3.0715 3.8197 4.7405 24 1.2697 1.6084 2.0328 2.5633 3.2251 4.0489 5.0724 25 1.2824 1.6406 2.0938 2.6658 3.3864 4.2919 5.4274 26 1.2953 1.6734 2.1566 2.7725 3.5557 4.5494 5.8074 27 1.3082 1.7069 2.2213 2.8834 3.7335 4.8223 6.2139 28 1.3213 1.7410 2.2213 2.9987 3.9201 5.1117 6.6488 29 1.3345 1.7758 2.3566 3.1187 4.1161 5.4184 7.1143 30 1.3476 1.8114 2.4773 3.7434 4.3219 5.7435 7.6123 Years 8% 9% 10% 11% 12% 13% 1 1.0800 1.0900 1.1000 1.1100 1.1200 1.1300 2 1.1664 1.1881 1.2100 1.2321 1.2544 1.2769 3 1.2597 1.2950 1.3310 1.3676 1.4049 1.4429 4 1.3605 1.4116 1.4641 1.5181 1.5735 1.6305 5 1.4693 1.5386 1.6105 1.6851 1.7623 1.8424 6 1.5869 1.6771 1.7716 1.8704 1.9738 2.0820 7 1.7138 1.8280 1.9487 2.0762 2.2107 2.3526 8 1.8509 1.9926 2.1436 2.3045 2.4760 2.6584 9 1.9990 2.1719 2.3579 2.5580 2.7731 3.0040 10 2.1589 2.3674 2.5937 2.8394 3.1058 3.3946 11 2.3316 2.5804 2.8531 3.1518 3.4785 3.8359 12 2.5182 2.8127 3.1384 3.4985 3.8960 4.3345 13 2.7196 3.0658 3.4523 3.8833 4.3635 4.8980 14 2.9372 3.3417 3.7975 4.3104 4.8871 5.5348 15 3.1722 3.6425 4.1772 4.7846 5.4736 6.2543 16 3.4259 3.9703 4.5950 5.3109 6.1304 7.0673 17 3.7000 4.3276 5.0545 5.8951 6.8660 7.9861 18 3.9960 4.7171 5.5599 6.5436 7.6900 9.0243 19 4.3157 5.1417 6.1159 7.2633 8.6128 10.0197 20 4.6610 5.6044 6.7275 8.0623 9.6463 11.5231 21 5.0338 6.1088 7.4002 8.9492 10.8038 13.0211 22 5.4365 6.6586 8.1403 9.9336 12.1003 14.7138 23 5.8715 7.2579 8.9543 11.0263 13.5523 16.6266 24 6.3412 7.9111 9.8497 12.2392 15.1786 18.7881 25 6.8485 8.6231 10.8347 13.5855 17.0001 21.2305 26 7.3964 9.3992 11.9182 15.0797 19.0401 23.9905 27 7.9881 10.2451 13.1100 16.7386 21.3249 27.1093 28 8.6271 11.1671 14.4210 18.5799 23.8839 30.6335 29 9.3173 12.1722 15.8631 20.6237 26.7499 34.6158 30 10.0627 13.2677 17.4494 22.8923 29.9599 39.1159 How the Dollar Value of Time Helps Disciplined Investors Below are two individuals who have different attitudes toward investing. The early investor chooses to begin investing $5,000 annually for retirement. The late investor waits ten years before beginning a program. Early Investor Late Investor Age Amount Value Amount Value 35 $5,000 $5,524 0 0 36 5,000 11,626 0 0 37 5,000 18,366 0 0 38 5,000 25,813 0 0 39 5,000 34,040 0 0 40 5,000 43,128 0 0 41 5,000 53,168 0 0 42 5,000 64,258 0 0 43 5,000 76,511 0 0 44 5,000 90,046 0 0 45 0 99,475 7,500 8,285 46 0 109,891 7,500 17,438 47 0 121,398 7,500 27,549 48 0 134,111 7,500 38,719 49 0 148,154 7,500 51,059 50 0 163,667 7,500 64,691 51 0 180,806 7,500 79,751 52 0 199,738 7,500 96,387 53 0 220,653 7,500 114,765 54 0 243,759 7,500 135,068 55 0 269,284 7,500 157,496 56 0 297,481 7,500 182,274 57 0 328,631 7,500 209,645 58 0 363,043 7,500 239,883 59 0 401,059 7,500 273,287 60 0 443,055 7,500 310,190 61 0 489,448 7,500 350,956 62 0 540,700 7,500 395,991 63 0 597,318 7,500 445,742 64 0 659,865 7,500 500,702 65 0 728,962 7,500 561,417 The early investor contributed $107,500 less than the late investor, but outperformed the late investor by over $167,000. Let time work to your benefit! There is also an insurance aspect here that is not shown by the pure numbers. The early investor is protected should he become disabled or a bad economy limit his earning potential. He already has his money doing the work for him. Using offshore havens legitimately The words "tax haven" or "offshore haven" bring to mind far off corners of the planet with millionaire populations. This population, of course, spends most of its day drinking daiquiris on the beach, its funds secure in various numbered Swiss bank accounts. Not so. Tax havens need not be the exclusive recluse of the ultra-rich. People of average means need no longer be captive slaves to the politicians in today's modern jet-set era. As modern governments continue to expand and swallow human rights, deficits and taxes grow. All free-minded individuals must seek a means to protect their assets from this monster out of control. It is legally possible to pay absolutely no taxes. Your government may want you to think otherwise. The media may love to tattle about the misery of a particular celebrity "tax-evader," but a very important point remains unnoticed. While "tax evasion" is illegal, "tax avoidance" is not. This distinction is crucial. A recently published report covers tax havens from start to finish, without hopping on the bandwagons for the latest "fad" tax havens. (It is not commonly known, but tax havens are just as interested in finding you as you are in finding them.) It explains everything from the basic criteria you should use when assessing a tax haven to how you can put them to work to save you that big chunk of your income whisked off each year by the politicians. For information on The Tax Haven Report, by Adam Starchild, ask for a free catalog from Scope International Ltd., 62 Murray Road, Waterlooville, Hants., PO8 9JL, Great Britain. Another source of information is Eden Press, which publishes a series of special reports on different havens and techniques by which Americans can use them. You can obtain their catalog free by writing to them at P. O. Box 8410, Fountain Valley CA 92728. If you want to gain a good understanding of how the government views tax havens, University Microfilms International, through its Books On Demand program, is now making available Tax Havens and Their Uses by United States Taxpayers by Richard Gordon. Frequently referred to as "The Gordon Report," this was a 1981 U.S. Treasury Department study prepared at the request of Congress. It was described earlier. For more information on private offshore banking services, obtain Using Offshore Havens for Privacy and Profit from Paladin Press, Box 1307, Boulder, Colorado 80306. (This should be available through most bookstores.) Tax havens are one of the most important subjects for an international investor, yet few understand and use them properly. One group discount them as hiding holes for dirty money, which is not a legitimate use for tax havens. Others think they are only for banking money after you have made it. Not true either. Money grows much faster if a tax haven is part of your planning, and almost any international investor has an opportunity to use tax havens. It is the purely domestic investor, confined to one country, that cannot benefit from the international fiscal loopholes. Simply stated, a tax haven is any country whose laws, regulations, traditions, and, in some cases, treaty arrangements make it possible for one to reduce his overall tax burden. This general definition, however, covers many types of tax havens, and it is important that you understand their differences. No-Tax Havens. These are countries that have no income, capital gains, or wealth (capital) taxes, and in which you can incorporate and/or form a trust. The governments of these countries do earn some revenue from corporations; "no-tax" means that what you pay is independent of income derived through a company. These states may impose small fees on documents of incorporation, a small charge on the value of corporate shares, annual registration fees, etc. Primary examples are Bermuda, Bahamas, and the Cayman Islands. No-Tax-on-Foreign-Income Havens. These countries do impose income taxes, both on individuals and corporations, but only on locally derived income. They exempt from tax any income earned from foreign sources that involve no local business activities apart from simple "housekeeping" matters. For example, in such a haven there is often no tax on income derived from export of local manufactured goods. The no-tax-on-foreign-income havens break down into two groups. There are those that allow a corporation to do business both internally and externally, taxing only the income coming from internal sources, and those that require a company to decide at the time of incorporation whether it will be one allowed to do local business, with the consequent tax liabilities, or one permitted to do only foreign business and thus be exempt from taxation. Primary examples in these two sub-categories are Panama, Liberia, Jersey, Guernsey, Isle of Man and Gibraltar. Low-Tax Havens. These are countries that impose some taxes on all corporate income, wherever earned. However, most have double-taxation agreements many the high-tax countries that may reduce the withholding tax imposed on income derived from the high-tax countries by local corporations. Cyprus is a primary example. The British Virgin Islands is another, but no longer has a tax treaty with the U.S. Special Tax Havens. These are countries that impose all or most of the usual taxes, but either allow special concessions to special types of companies (such as a total exemption from tax on shipping companies, or movie production companies) or allow very special types of corporate organization, such as the very flexible corporate arrangements offered by Liechtenstein. The Netherlands and Austria are particularly good examples of this. To understand the precise role of tax havens, it is important for you to distinguish two basic sorts of income: (1) return on labor and (2) return on capital. The first kind of return is what you get from your work: salary, wages, fees for professional services, and the like. The second kind of return relates, basically, to the return from your investments: dividends on shares of stock; interest on bank deposits, loans and bonds; rental income; royalties on patents. It is the second kind of income, income from an investment portfolio, that tax havens are useful for. Forming a corporation or trust in a tax haven can make the second form of income totally tax free, or taxed so low that you will hardly notice. Certain types of businesses can be effectively based in a tax haven. If you publish a newsletter, for example, you might be able to set up the entire operation in a totally tax free country such as the Bahamas or the Cayman Islands. If your income comes from copyright royalties, perhaps on the computer program you invented, the Netherlands is famed as a base for sheltering royalty income. A source of help One of the best sources of help in setting up offshore trusts and corporations is an American certified accountant who has a large practice in Panama. Marc Harris holds a master's degree in business administration from Columbia University in New York, and completed the certified public accountancy examination at the age of 18. He is believed to be the youngest person in the U.S. to pass the examination. He opened his Panamanian firm in 1985, after being a consultant with the accounting firm of Ernst & Whinney. His services are highly recommended because he is able to create and administer offshore corporations and trusts with complete compliance with U.S. laws. Often an American client uses a tax-haven based advisor who knows the local laws but is not familiar with American tax law requirements and technicalities, and the client eventually gets into trouble, so Marc Harris has a unique ability to bridge the two worlds for his clients. Although based in Panama, he can create and administer corporations and trusts that are registered in all of the popular tax havens. For more information, please write to The Firm of Marc M. Harris, Inc., Attn: Traditional Client Services, Estafeta El Dorado, Apartado Postal 6-1097, Panama 6, Panama. Tax haven trusts and corporations are a very complex subject, but the hours you spend studying their use will probably pay you more per hour than the hours you spend directly earning an income -- an unfortunate commentary on the confiscatory taxation policies of most governments. Just stop and think for a moment how much faster your money can grow if you are not paying out an average of 40-60% to a taxing government somewhere.