THE INTERNATIONAL ADVENTURE: SOME EXAMPLES AND IDEAS Sun, sand, and sex. A pipe dream. But reality. If nothing else, the formula illustrates what can be done in international markets. Using ingenuity, Club Mediterranee, headed by general manager Olivier Michel, found a new way to raise OPM when it decided to build a "vacation village" at Point Sable, Haiti. Here's how Michel did it: In the European markets he sold an indexed bond that was linked to the profit performance of the vacation villas, Club Mediterranee. "Club Med" thus introduced a new form of financial instrument. The bonds bridged the gap between straight debt and equity securities while saving up to 400 basis points in costs. In an inflationary world, that meant Michel had a model for many multinational investors seeking long-term dollars at low-cost, long-term interest rates. Club Mediterranee did not do it with mirrors. In a market that would look askance on 12.5 percent interest rates on long-term debt instruments, Michel's group promised something extra. That added element was the promise of future returns of profits. Big future returns, possibly. But if those returns did not materialize, Club Med would pay a minimum of 8.5 percent. How did Club Mediterranee do it? It arranged a deal of outstanding caliber. If the Haitian vacation village should succeed -- and it was only getting under way at the time of the financing -- and reached an 85 percent occupancy level, bondholders would divide up a fund totaling $357,700. Because 8,000 bonds were outstanding, and because each was valued at $1,000, each bondholder would then receive $44.70 per bond. The return on each bond would rise from the minimum of 8.5 percent to nearly 13 percent. In the background, of course, is this fact: Club Med ventures in other parts of the world have made names for themselves. Phenomenally. And the records of six other vacation villages already operating in the Caribbean figured into the payoff picture on Club Med bonds. For every 1 percent increase in the average prices of vacations at these other villages, the bondholder receives 28 cents per bond held. Just in case: if recession should force Club Med to lower its rates to attract vacationers, the bondholders still receive their 8.5 percent in all Club Med bonds they hold. Club Med couldn't print the bonds fast enough. They were oversubscribed. The current problems in Haiti don't change the brilliance of this deal at the time it was done. The Narrower, Tougher, Bigger Opportunity The international entrepreneur scene obviously places higher demands on individual ingenuity. Foreign laws may have to be considered. Foreign customs, insofar as these relate to business dealings, have inevitably to be taken into consideration. Certainly foreign distrust or acceptance of Americans will become a factor in many negotiating sessions. But the complexities can be mastered. The green overseas fields can deliver paper of the same color. How? At least 10 different roads to the creation or protection of wealth in foreign climes can be noted. Each of them involves the completely legal process of avoiding U.S. taxes by operating in tax-haven countries. 1. By establishing holding companies and trusts. In most cases the personal holding company or overseas-based trust has a specific purpose: to hold foreign currency or currencies or foreign currency assets. That means the trust or holding company may be an adjunct to a basic entrepreneurial arrangement. But there are few types of investments that cannot be transferred to a trust for preservation. The trust may also provide a guarantee against unnecessary dissipation of resources. 2. By accumulating dividends, interest, and capital while conducting banking or financial dealings. Here, a company is usually created; unrestricted fund movement becomes possible because withholding taxes are not assessed. The same company can realize big gains in Euro-currency dealings. 3. By amassing unlimited insurance premiums and interest income -- again through establishment of a tax haven company. The company, of course, can re-insure, co-insure, and perform other insurance functions any place in the world. Entrepreneurs seeking their own captive insurance operations have found the tax haven company an attractive alternative. 4. By setting up subsidiary manufacturing operations that can sell back or lease products to a stateside parent company. The tax-free operations of the subsidiary may involve assumption of commissions, discounts, and management income on the foreign sales of the parent group or organization. Thus taxes on the foreign sales are minimized. 5. By engaging in sales and international commodity trading. The entrepreneur with the appropriate background can establish an export trade company or commodity brokerage operation. Working out of a tax haven, the company serves as a conduit for international sales activity and financing. Trade discounts, commissions, and advertising allowances can be accumulated tax free. The parent operation in the United States can claim tax deductions by assuming administrative and sales expenses. 6. By expanding corporate or company operations into international markets to achieve growth and to provide a hedge against swings of the domestic economic pendulum. The tax haven operation with these or related purposes can accumulate revenue tax free. If the company is engaged in industrial activities that create local jobs, the host tax haven usually offers tax, statutory, and other incentives and guarantees. 7. By engaging in international shipping and air transport operations -- for such purposes as transportation, hiring, leasing, bunkering, and others. Again, the revenues from such operations can be accumulated tax free. Beyond that, many tax haven countries offer flag-of-convenience privileges. That means foreign shipowners can register under the tax haven flag and in this way escape home country restrictions and regulations. The latter apply to taxes, competitive ground rules, and labor requirements, among other things. 8. By setting up a tax haven intermediary company to conduct world-wide sub-licensing operations. The operations can, as needed, extend into such areas as royalties, payments in connection with patents, copyrights, inventions, models, designs, and secret formulas or processes. Caution should be exercised in establishing this kind of operation so that tax-at-source requirements are considered and accounted for. Where double taxation agreements exist, these would also be important. 9. By establishing mutual funds, investment trusts, and similar enterprises. Where such groups or companies exist, overseas investors can buy directly into securities in their respective countries. They escape domestic tax liabilities, of course. 10. By providing consulting services through a company or individual qualified to render technical, managerial, engineering, architectural, scientific, industrial, commercial, or other aid. Where such services are provided across international boundaries, the foreign service fees can be channeled through the tax haven company. Where to Look for What The tax haven approach makes possible so many different types of enterprises, and these can appear in so many different forms, that a full enumeration is impossible. The form that each effort finally takes depends on the legal situation in the host country. So do the formulas governing shareholding, capitalization, and so on. Equally important is the nationality of the person doing the overseas dealing. The structure of a tax haven operation established by a U.S. citizen would differ basically from an operation set up by a Japanese citizen. For the entrepreneur interested in exploring tax haven possibilities, various alternatives lie open. The entrepreneur can plunge in, obtaining experience as he goes. Or he can ascertain where local tax laws favor tax haven operations by contacting a tax haven consulting company. Such a firm can structure an entire proposal describing the best way to take the plunge, get your feet wet, conduct the operation -- and accomplish your goals. The entrepreneur would normally have such a proposal double-checked by his own attorney. Still a third and a fourth avenue to venturing in international arenas might be named. The third would involve taking a partner in a foreign country. The Tax Haven Countries Experts on international business and finance say the tax haven countries house more millionaires per square inch than Wall Street. These tax haven nations have deliberately courted the interest and favor of multinational companies and operations. They have, essentially, passed flexible legislation that permits whatever form of organization is required to conduct tax-free or tax-almost-free operations. Normally, the entrepreneur makes the choice of a tax haven on the basis of geographical convenience. But other factors should weigh in the balance: ** The haven's physical resources and legal situation ** The haven country's political stability ** The quality, in a potential host country, of the specific services required ** In some cases the availability and reliability of labor ** Existing personal and other relationships, including those with lawyers, partners, bankers, special contacts, and so on. Just as importantly, of course, the entrepreneur has to know what he wants to do from the outset. He may research heavily before deciding that question. Immediately afterward, he may want to establish in his or her own mind how the profits are going to be distributed and to whom -- if more than one person is involved. If he is a citizen of the United States, he will want to ascertain what his citizenship will require of him. He will find, for one thing, that he stands at a slight legal disadvantage visa vis his foreign counterpart. The latter may become a non-resident for tax purposes if he simply moves to a tax haven and takes up residence there, but Americans are subject to worldwide tax regardless of where they live. Kinds of Havens. Tax havens are classified according to type. There are at least five basic categories. 1. Those that levy no income tax. These countries include the Bahamas, Bermuda, the Cayman Islands, and the Turks and Caicos islands. 2. Those that do not tax foreign-source income. Countries or territories in this group include Hong Kong and Panama. 3. Countries that, like those in group 2, do not tax the foreign-source income of companies that are owned by non-residents. The countries or geographic entities that fall into this category include Barbados, Guernsey, Jamaica, The Isle of Man, Jersey, Liberia, and Gibraltar. 4. Those havens that make special concessions for holding companies, among them Austria, Liechtenstein, Luxembourg, the Netherlands, the Netherlands Antilles, and Switzerland. 5. Havens whose tax laws make them ideal for special uses and purposes. These include Andorra, the British Virgin Islands, Cyprus, Nauru, and Macau. Combining Tax Havens. The possibility that tax havens may be combined should never be discounted. In a typical case, a combination may make it possible to avoid withholding taxes on royalties. How does this work? The tax haven company first sets up a Dutch subsidiary -- for example. The company then licenses its patents to a Dutch subsidiary. In its turn, the latter sub-licenses to an American manufacturer. The royalty payments go tax free to the Dutch company. The Dutch company then avoids Dutch withholding tax on dividends by paying the tax haven company -- the patent owner -- a royalty equal to those that it received. The Dutch company would not be taxed in The Netherlands because its expenses equal its income. The tax haven company has acquired a royalty tax free. That royalty would under other circumstances have been subject to a 30 percent U.S. withholding tax. The entrepreneuer or multinational company desiring to incorporate in a tax haven country or area does not necessarily have to locate a headquarters there. Administrative offices may remain in another country offering greater geographical convenience. A Bahamian corporation could have its offices in Belgium. The company would in this case be subject to taxation on its Belgian-source income. But it would at the same time be appropriately located to conduct business in Europe. The Mutual Funds Tax haven utilization has produced a kind of euphoria in some company managements. The offshore mutual funds industry provides a long list of examples. Typically, these companies were not subject to either British or American requirements regarding the length of time securities had to be held to qualify for lower capital-gains tax rates. Nor were the companies taxed at all on their securities trades and deals. Thus they engaged all too easily in short-term profit-taking and speculation. International mutual funds like Fund of Funds and Gramco could invest in high-tax countries. Unfortunately, most of them suffered from poor management. They went under after their managements became involved with excessively speculative sales campaigns. The campaigns dried up liquid capital; but collapse occurred when the mutual funds invested in funds that guaranteed to redeem their own shares at prices based on inflated book values. The funds stand as object-lessons in how not to do business internationally. Get the Overseas Picture As in any other phase of entrepreneurship, preliminary research will ensure that an overseas venture will not only stand on its feet but will make big dollars. The reasoning behind this rubric is simple. Statistically, the United States has less than 10 percent of the world's population. That means that 90 percent of the world's population lives outside the water or land boundaries of the United States. That makes a rather large market. The preliminary study that the experts see as essential will indicate where penetration of that market is possible -- and with what kinds of products or money-making ideas. What to Sell? Your research may guide your intuition into the exact area where offshore dollars are lying around ready to be picked up. But initially it may be wiser to keep an open mind. Just running through international trade magazines and newsletters looking at the listings may spark ideas. Those listings may or may not be the be-all and end-all of making a start in international trade. But they include the names of hundreds of overseas firms that want to buy American-made products, sell their own products to U.S. firms, or represent U.S. companies overseas. Do international business from your home? Why not? The listings in the publications suggest at least three ways to go: -- Locate overseas firms looking for American-made products and bring them together with U.S. firms making the desired products. You take a 5 to 10 percent (or higher) commission on all completed deals. -- Find overseas sales reps for U.S. companies, -- Become the international sales contact for a U.S. manufacturer, and take a commission on all completed deals. -- Locate U.S. buyers of imports and overseas sellers. Bring them together, and again cut yourself in for a commission on the resulting transactions. Has it been done? Of course. In one case entrepreneur Mike Johnson started an overseas product search and licensing firm on a grubstake of $300. Mike had no special secret. He used books and his own stationery. Once he got going, he found that he had to travel. In four years Mike achieved two fundamental ambitions. He made more than 30 trips overseas and he made more than $1 million. He sold anything; he brought overseas firms together with American firms that manufactured almost anything; he represented American firms overseas in almost any kind of import-export deal. The Nitty-Gritty Whatever you decide to undertake in foreign markets, some nitty-gritty facts stare you in the face. For the exporter of finished products in particular, the facts loom large, demanding attention. The entrepreneur considering entry into foreign markets via manufacturing should look at least at three specifics of an overseas or across-boundary operation . . . Cost. Where a U.S. company wants to compete with foreign producers of similar or identical products, cost becomes a controlling factor. To compete successfully, overseas production may become essential. In a typical case, higher labor costs in the United States plus shipping expenses and import duties may raise the price of the American-made product well above the competitive level. The Need for Proximity to Customers. A variety of considerations may dictate a need to manufacture near the locus of the major market. Products may have to be designed or redesigned to meet rigid customer specifications, for example. Where a foreign government is buying American-made products, the entrepreneur may encounter resistance to the idea of importing products that might be obtained locally. Convenience, of course, goes with proximity. manufacturing close to the target market obviously offers both advantages. Alternatives to Exporting. Few companies can afford simply to pick up stakes and start over in a foreign country. Nor do many want to build a manufacturing plant in the foreign country of choice without exploring other alternatives. Nearly everyone in business knows of electronics firms that attempted to launch assembly-line operations in the current offshore assembly haven -- only to surrender in ignominious defeat a year or two or three later when Quality Control had clearly become an impossible dream. The Alternatives The alternatives to straightforward overseas manufacturing in leased or wholly owned premises include three that have proven extremely useful. The first, contract manufacture, involves production by a foreign firm of the U.S. firm's products to the American company's specifications and under its label. Large firms have turned in numbers to contract manufacture because the technique makes it possible to gain a foothold in a foreign market while maintaining domestic market penetration. Entrepreneurs have also used the technique. Establishment of a wholly owned subsidiary and plant may follow after a period of several successful years of overseas production. A second method, licensing, presents large-caliber complexities. But done properly, licensing offers a way to tap the potential of foreign markets without risking a direct investment. Some words to the wise may save the entrepreneur contemplating an overseas licensing arrangement a bundle of headaches. The licensing plan should be worked out in every detail over whatever period of time is required -- and it can be considerable. Potential returns should be assessed carefully in advance to make sure they will make the venture worth the effort. Also: -- The licensee should be carefully selected and investigated. The first candidate that appears, whether reputable or not, may not be the right one. -- The licensing arrangement should be drafted in such a way as to make it possible for the U.S. firm to control the licensee's activities. What you don't control, you can't trust. The U.S. entrepreneur will thus want to make certain he ensures adherence to agreements on product quality, on royalty payments, on the market area, and on the use of the brand name. Provision should also be made for protection of the U.S. parent firm's interests -- by manufacturing one or more components in the United States, registration in the foreign country of patents and trademarks, including protocols on new products and improvements in existing ones, or all of the above. -- If possible, U.S. management should obtain an equity position in the licensee from the beginning. Later, if and when the enterprise succeeds, obtaining agreement on such a maneuver may be difficult or impossible. A final method of penetrating a foreign market involves creation of a joint venture. In this type of operation the U.S. firm not only holds a major equity position but can generally take part in management decisions to which it would not even be privy under a licensing arrangement. The participants in a joint venture should carefully study one another's methods and philosophy before even signing an agreement. Each participant should understand clearly the other's management approach. Understandings should be reached on such areas of common interest as potential market position, financial policies, growth, and product development. Where a foreign firm is privately owned, don't forget to investigate the attitudes of the owner's family. They may have, or think they have, a loud and powerful voice in the firm's activities. Entrepreneurs slavering over foreign markets should also remember the incentives that many governments offer to attract American or other investment. These governments may provide tax concessions. They sometimes make long-term loans at favorable rates. They have even been known to construct plants for foreign investors -- and then to assist in recruiting employees. The Endless Opportunities Let your imagination wander. Think of Club Med. Sun, sex, and sand. Think franchise. You can list 100 kinds of fast foods, junk foods, superfoods, takeout foods, trick foods, fad foods, foolish foods. Is there one that isn't sold by someone holding a franchise? In Japan, is there one man holding an All-Japan Franchise under which he controls the books on every hamburger sold under the Big Yellow M? Why not you? The bloom is off the franchise rose, you say. True. But franchising still provides a way to get into international as well as domestic business. Think of a big way to do it. A Seven Wonders of the World Way. Fact: With some consistency foreign stock markets have outpaced those of the United States. Some of the foreign markets have the NYSE eating Paris, Tokyo, or Roman dust. An idea? Fact: The U.S. firm setting up a regional office in various countries bordering the Mediterranean can enjoy substantial tax savings on foreign-source income. Among the countries that offer such advantages: Greece, Jordan, Tunisia, Malta, Cyprus. Fact: China -- the Peoples Republic of China -- has been fingered as the big hope for many U.S. firms (and, undoubtedly, individuals) in the 21st Century. That, of course, posits the need for continuing good relations with the Far Eastern colossus. Speak any Mandarin? But turn the telescope around for just a second. Maybe you don't want to go overseas. You want to accommodate people who want to buy in the United States. Buy what? Well, many things, as noted. One of which is land. The story of William A. Stiles, former Marine Corps brigadier general, adds a dimension to the entrepreneurial sagas already noted. Stiles' firm was involved in the sale of $60 million worth of American farmland to overseas purchasers -- in three years!. Stiles got into that aspect of the real estate business when he saw opportunity in it. Big opportunity. He was thinking, searching. He didn't circumscribe his research efforts, one could wager, or stop after scratching the surface. Some would call him lucky. The entrepreneur would call him the man who found an international niche. As someone said, the price of folly can't be described as ill fortune. Just as truly, the rewards of shrewd common sense cannot be dismissed as pure luck.