BY JIM ROGERS
Four Easy Pieces:
Four Accidents of History Want You
When Paige and I arrived in Liechtenstein, the tiny country wedged between Austria and Switzerland, we were greeted by a familiar face. There was Ivan, a man who had been attracted to our car in Moscow on our recent tour through Russia.
He is one of the new Russians, a mix of businessman and outlaw who rules portions of the former Soviet state like the Mafia or the land and cattle barons of America's old West. I asked him what he was doing there and he shrugged and told me he was "just visiting."
Liechtenstein is a very popular tourist site these days and millions of people pass through each year. But I'm fairly certain that Ivan wasn't there to take in the views of the Swiss Alps. More than likely, Ivan was in Liechtenstein for the same reason so many people are drawn to the tiny independent nation: it's a tax haven for the world.
From tax-free shopping to freedom from income taxes, countries like Liechtenstein, as well as Andorra, San Marino and Monaco, are attracting millions of tourists as well as business people and expatriates looking to take advantage of the favorable tax environment. And these tax benefits come in many shapes and sizes.
First and foremost, the countries have become a shopper's paradise. The value-added tax on most everything you buy in Europe is around 15 percent but these four countries impose little to no tax on any purchases. That tax-free status has drawn tourists and shoppers from every corner of the world to these small nations. Shops of every shape and size now abound, from luxury jewelry stores to car dealerships to electronic outlets.
Secondly, citizens of these countries pay no income tax and residents pay little or none, an incentive which has drawn many foreigners to try to establish residency there themselves. That's particularly useful for European citizens, who are only obliged to pay taxes in the country in which they reside. If, for instance, you are a resident of Germany but don't live there year-round, you don't have to pay taxes to the German government. If a German citizen can establish residency in Liechtenstein, the benefit is even greater because he will not have to pay any taxes at all. With demand for residency so strong these days, the governments of all four countries have made it increasingly difficult for outsiders to become residents. Still, the lack of income taxes is an irresistible draw, particularly for wealthy Europeans.
For U.S. citizens, of course, this is not an option. The United States is the one country in the world with a tax law that says its citizens must pay taxes no matter where they live and earn their income for the year. In other words, if an American citizen lives and earns all his money in Ethiopia in 1999, the U.S. Treasury still expects him to pay taxes to the U.S. It's an absurd and protectionist law that has never made any sense to me or any one else in the world and I don't expect it to change unless Staten Island or Miami decide to break off from the U.S. someday.
Ivan has an even more attractive reason to visit Liechtenstein: bank secrecy. Liechtenstein's banks now have some of the strictest secrecy laws in the world, offering the wealthy a place to store money safely. Here's how it works: Once you open an account at one of these banks, no one except the person who establishes the account can ever have access to it. In fact, instead of a person's name, accounts more often use numbers and codes to make them even more anonymous. The banks will even give depositors the choice of having their mail sent to them or held at the bank itself, ensuring the IRS or any IRS-like government service won't be able to trace the bank account to anyone.
While such secrecy used to be the domain of banks in countries like Switzerland and Luxembourg, pressure from the U.S., the European Union and the OECD have forced these banks to relax some of their rules, essentially opening their books for disclosure. (This has become a particularly public debate given the recent discoveries that many Swiss banks secretly held moneys deposited by the Nazis during the Holocaust.) In turn, banks in Switzerland have become less popular with wealthy people looking to shelter their money while the Liechtenstein banks are even more attractive. New 'offshore' banking areas are springing up all over the world, from the Caribbean Islands to Western Samoa. In fact, a study by the International Monetary Fund estimated the amount of money in offshore havens worldwide was $4.8 trillion in 1997, up from $3.5 trillion in 1992. Others estimate that number is closer to $8 trillion.
Looking at a map of Europe, the countries of Liechtenstein, Andorra, Monaco, and San Marino have always struck me as anomalies. Tucked along the borders of countries or hidden in mountainous regions, these four tiny nations have been around for hundreds of years, surviving wars and avoiding the growing consolidation of Europe. You'd think given their small size they would have been absorbed or conquered by a neighbor long ago. And yet they all still stand despite the fact that not one of them represents a formidable empire or even takes up much room. In fact, all together the four are still smaller than New York City. (Take away Andorra, the largest of the four by far, and the remaining three are no bigger than Brooklyn).
Let's take a look at each one.
It's hard to believe that less that three or four decades ago, Liechtenstein was dominated by farmland. Today, Liechtenstein has a highly commercial economy with a bustling financial service sector. In fact, Liechtenstein boasts one of the highest standards of living of any country in the world, with a per-capita gross-national product of $44,350. In particular, the many banks and financial services in Liechtenstein cater to individuals (like Ivan) as well as corporations looking to establish nominal offices there in order to take advantage of the country's easy incorporation rules and a maximum tax rate of 18 percent on businesses. In fact, this country, roughly less than a 10th the size of Washington, D.C., has close to 80,000 so-called "letter-box companies" while its population totals only 32,000. Still, those letter-box companies provide roughly 30 percent of the state's revenues. There's no income tax for citizens living there, but it's nearly, impossible to become a citizen unless you are born inside. Still, roughly a third of the labor force live on the border towns in Switzerland or Austria and commute to work in Liechtenstein each day.
From what I saw, Liechtenstein is certainly the wealthiest of the four tiny countries. Luxury boutiques and shops line the streets. The roads are filled with expensive cars of every make and model. Not suprisingly, banks are everywhere. Signs giving instructions and directions are often written in German as well as English and Japanese. This clearly says to me this country is fully aware of the wealthy and international audience to which it caters. In fact, many of the clerks we ran into in shops were not locals but Japanese who had been brought in to work.
I've been told the prince of Liechtenstein is an arrogant man and reading the plaques in town squares, it's clear he thinks he descended from heaven above. In fact, he lives in a palace overlooking the capital city, supposedly because he wants his subjects to look up to him, literally and figuratively. In a recently published interview, he said if his people didn't like his country, then he would just sell it to somebody like Bill Gates. Even with his arrogance, he runs an efficient and prosperous nation.
In terms of luxury, Monaco is comparable to Liechtenstein. This country is one of the smallest in the world, only one-half of a square mile in area. It's probably the best known of four because of the marriage between Prince Rainier and the late film star Grace Kelly in 1956, and the recent death of banking mogul Edward Safra.
Like Liechtenstein, Monaco is a popular place for foreign companies to register in order to take advantage of the low tax rates. With no income tax, it's also a hot spot for individuals to try and establish residency. The service industry -- banking, finance, shopping, hotels -- dominate the economy accounting for over half the country's annual revenues. The infrastructure is impeccably well-maintained; underpasses beneath the streets are all mirrored and spotless and someone is always sweeping the streets. I can imagine what would happen if the subways of New York City had mirrored hallways: the mirrors would be broken or graffittied before you even had a chance to see your reflection. And despite its small size, Monaco is well protected with more than 300 policemen for a population of around 30,000.
Monaco is also well-known for its famous casino located in the town of Monte Carlo. It's a beautiful beaux arts building built in 1863, on the same square where the famous Hotel de Paris was built a year later. When I was young it wasn't uncommon to hear the expression, 'he broke the bank at Monte Carlo' because it was one of the few legal casinos in the world where the wealthy could go to gamble. Despite the growing number of casinos in the area, the rich still descend on the famous Casino in Monte Carlo. The parking area in front of it is littered with Rolls Royces and Lamborghinis. In terms of luxury per square foot, I've never seen anything quite like it.
Unfortunately, it's clear not every one leaves the casino rich. In the casino, we noticed a high-class pawn shop allowing gamblers to buy and, more importantly, sell their jewelry for cash. It doesn't open until three in the afternoon, when I suspect the gamblers are just beginning to arrive. I can imagine many gamblers walk into the shop ready to hock their watch for another spin of the roulette wheel or another hand at the baccarat table. Leaving Monaco had an interesting twist, too: In order to drive out of the parking area we needed to have a 'check out card' proving we had paid our bill for our hotel. I presume many people must lose their shirts at the casino and then try to make a run for it.
San Marino is located in the Apennine Mountains of northeastern Italy. Most of it sits atop Mount Titano and the entire country covers only 24 square miles. San Marino is the oldest republic in the world, independent since the 300s A.D. Most of the 24,000 people who live there work in the tourist sector, which accounts for more than half of the economy. Still, a steady influx of capital into the growing banking sector has helped the economy grow and expand beyond tourism. Although late to exploiting its unique situation, San Marino is playing catch up in the banking arena. It's also a particularly popular place for philatelists as seasoned and novice stamp collectors alike flock to the region.
On the border between France and Spain, Andorra is the largest of the four tax havens, covering 175 square miles (or about two and half times the size of Washington, D.C.). With a population of roughly 65,000, it is easier to become a citizen here simply because there is more room to live. For years, the country was ruled jointly from France and Spain under a medieval contract. In 1993, the country became self-governing. (The two outsiders still have a say in international relations affairs and in establishing treaties.) On a personal note, I had actually never heard of Andorra until I was travelling through Europe during college years. I was hitchhiking through Spain on my way to Paris when a man picked up my friend and me. He said he would drive us to France but that he was going through Andorra. We didn&'t know what he was talking about until he showed us a map and there it was, Andorra, right on the border of the two countries.
Tourism is the major breadwinner of Andorra's economy, accounting for about 80 percent of the annual gross domestic product. Located amidst the Pyrenees, many people come to Andorra to take advantage of its duty-free shopping. We started to see stores as soon as we crossed the border, clearly an attempt to lure shoppers from the bordering towns in France and Spain. Every big car company has a showroom there, from BMW to Mercedes but still Andorra doesn't feel as rich or luxurious as a Liechtenstein or Monaco. My guess is that since the country has only been self-governing for seven years, its leaders are still figuring out how to take advantage of the favorable tax situation and draw more tourists and investors. Still, the indications of growth are everywhere; cranes and construction sites dot the landscape and new stores and hotels are constantly opening.
How have these four tiny countries survived? In part, I believe it has to do with geography. All of them are fairly off the beaten track. Liechtenstein is buried in the Swiss Alps. Monaco is accessible on the coast but is bordered by mountains to the north. San Marino is on top of a hill. And Andorra is high up in the middle of the Pyrenees. That's kept these regions out of the path of marching armies and made them less attractive politically and economically.
On an everyday level, these countries seemingly don't have a profound impact on U.S. citizens. Except for Monaco, I doubt many Americans have even heard of Andorra or tiny San Marino. Still, they could have a bigger impact than you think. Clearly, these places have become large repositories of capital that must be invested somewhere. If the U.S. decides to go after these places for their banking secrecy, I wouldn't be surprised if money invested in the U.S. is pulled out. I know Swiss bankers who to this day will only invest in North America through Canada because the U.S. blocked the accounts of just about everybody (including our allies, the British) who had investment in the U.S. during World War II. The last thing a Liechtenstein banker is going to do is invest in General Motors or IBM if there's a threat the money will be confiscated or blocked. Let's hope that doesn't happen. After all, as a debtor nation, the U.S. needs all the help it can get.
Still, U.S. citizens can take advantage of these places. The obvious -- and legal -- way most people do it is to go there and shop because you can buy high-ticket items without having to pay tax. (Of course, if you take the products back to the U.S. you are supposed to declare anything you are bringing in over a certain limit and pay a duty on it.) Otherwise, you might want to open a bank account there and put your income in it. Legally, as an American citizen you are supposed to declare any and all income anywhere in the world but given the secrecy these banks pride themselves on, you can be confident they will never tell.
Another way would be to go there and open a hotel or restaurant. As more and more money streams into these countries and more people go to visit, there will continue to be a need for services. While, there's little real estate left in San Marino or Monaco, Andorra is just at the beginning of its boom and has much room to grow. Believe it or not, you might even consider selling stamps in any one of these countries. It may not sound like a lucrative business but keep in mind that in Liechtenstein, for instance, the sale of stamps accounted for roughly 3 percent of the national income in 1997 and San Marino's stamp industry is booming.
Let me be clear: I'm not suggesting that anything that goes on in these tax haven countries is bad. I've always been in favor of free markets. These countries have simply recognized a golden opportunity and seized on it. The U.S. Treasury may tell people that these places are the playground of drug smugglers and money-laundering bandits and, to a certain extent, I'm sure they are right. But I bet Liechtenstein bankers would probably say their depositors are all upstanding citizens. (My Russian friend Ivan most likely falls into the former category, although I'm not certain if he was there as a courier or on his own behalf. When I asked his last name, he said it was just Ivan). From my experience, though, it's probably a mix of shady types taking advantage of the bank secrecy but also honorable citizens who simply know a great opportunity when they see it.
In fact, I believe the world needs places like these, places that are economically and politically stable. One reason Switzerland has survived over the years is because every dictator, politician or leader who has rattled his saber has also needed a safe place to put his money.
The same exists in Latin America with Uruguay, the small country wedged between Brazil and Argentina. Montevideo, the capital of Uruguay, has the banking center for these two enormous countries, a safe and politically stable area where the rich can shelter their money no matter what unrest occurs in their own country. And, if the powers that be (the U.S., the E.C., etc.) force them to play by different rules, I'm fairly certain another Liechtenstein or Andorra will spring up elsewhere. The U.S. and the common market may have little patience for the tax havens, but I can't imagine the EC will march an army out of Brussels into Andorra or Liechtenstein. This is capitalism at best and worst, and it's not about to disappear any time soon.
Updates are available at www.jimrogers.com.
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