Puerto Rico Creates Tax Shelters in Appeal to the Rich

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 Puerto Rico is known for its white-sand beaches and killer rums , and hopes to stake a new claim: tax haven for the wealthy.
Since the beginning of the year, Puerto Rico has gone on a campaign to promote tax incentives that took effect last year, marketing its beautiful beaches, private schools and bargain costs in an effort to lure well-heeled hedge fund managers and business executives to its shores.
 So far, Puerto Rico’s pitch has attracted a handful of under-the-radar millionaires. Several American executives of mostly smaller financial firms say they have already relocated to the island, and Puerto Rican officials say another 40 persons, mostly from the United States, have applied.
 The tax savings could add up to “at least in the six figures” each year, said Barry Breeman, an American who said he was moving to Puerto Rico with his wife. Mr. Breeman is the co-founder of the New York-based Caribbean Property Group, a real estate investment firm that has substantial holdings on the island.
 Millionaires are nice, but Puerto Rican officials hope to reel in billionaires like John A. Paulson, the hedge fund manager who Bloomberg News reported earlier this month was weighing a move.
The attention prompted an unusual statement from Mr. Paulson, which declared that he was not relocating. (Still, Mr. Paulson, a 57-year-old New Yorker, had briefly considered a move, say two people with knowledge of his plans.)
 If not Mr. Paulson, government officials and real estate brokers in Puerto Rico hope to sell other wealthy mainland Americans on what they hope will become the next Singapore or Ireland as a favored low-tax destination. Puerto Rico is closer and, compared with Ireland, decidedly warmer. And unlike in Switzerland or other havens, in Puerto Rico, Americans do not give up their citizenship.
 “There’s nothing wrong with spending 183 days a year on a sailboat or yacht and working from here,” said Alberto Bacó Bagué, the secretary of economic development and commerce for the island, in a telephone interview. “We’re catching up to Ireland and Singapore — you can shelter income legally, and legally in a good way.”
 Puerto Rico is a commonwealth of the United States, but for tax purposes, it is treated differently. Most residents of the island, with the exception of federal employees, already pay no federal income tax. A person needs to live 183 days a year on the island to become a legal resident.
 The new tax breaks are a twist on the island’s tradition of using tax perks to bolster the economy. Puerto Rico’s per-capita income is around $15,200, half that of Mississippi, the poorest state in the nation. In 2006, a previous incentive exempting United States companies from paying taxes on profits from Puerto Rican manufacturing ended after Congress said that the incentive had bilked taxpayers.
 The new tax breaks are a radical shift in that they focus on financial, legal and other services, not manufacturing. Puerto Rico slashed taxes on interest and dividends to zero from 33 percent, and it lowered taxes on capital gains, a major source of income for hedge fund managers, to zero to 10 percent.
 The incentives work with existing United States breaks. While residents still have to file a federal tax return, they do not have to pay capital gains taxes of 15 percent on assets held before moving and sold after 10 years of island residency.
 The new tax incentives “likely will be considered more broadly by some taxpayers as a new opportunity for income shifting and tax deferral,” declared Michael Pfeifer, an international tax lawyer at the law firm Caplin Drysdale in Washington.
Mr. Bacó, the Puerto Rican economic development official, is planning a road show on the East Coast next month to woo financial and law firms as well as wealthy individuals to moving to Puerto Rico.
 Because of its new aggressive tax breaks, the island is a supercharged version of Florida, which does not tax individuals on ordinary income.
Recently, a business development group in Palm Beach, Fla., wined and dined 10 executives from the Northeast who had flown in for a two-day tour showcasing the state’s tax advantages, complete with golf outings, showings of oceanfront office space and a soiree aboard a yacht.

 Florida has already landed one big fish: Edward S. Lampert of ESL Investments moved his headquarters from Greenwich, Conn., to near Miami last year.

The sales pitches by Florida and Puerto Rico tap into a growing resentment among affluent people who feel that they have been vilified by politicians or believe they have unfairly become targets for disproportionately higher taxes. In one highly publicized example, the actor Gérard Depardieu, angry over a plan by the French government to raise taxes to 75 percent for the wealthy, accepted a Russian passport from President Vladimir V. Putin. Russia has a flat tax rate of 13 percent.

But a move to Puerto Rico may be easier said than done. Privately, some lawyers and accountants in the United States express concern that individuals who move to the American island for its lower taxes might appear “unpatriotic” in a widening crackdown by authorities on offshore tax dodging through Switzerland, Israel and Singapore.

And while the island’s tax breaks are legal, some investors say they do not want their hedge fund managers straying too far from their mainland office.

“Citi Private Bank expects hedge fund principals to be in a primary office with their critical employees close by,” David Bailin, the global head of managed investments for the firm, wrote in an e-mail.

Puerto Rico has been battered by several years of recession. Its unemployment rate is more than 13 percent, well above the national rate, and its economy remains mired. In December, Moody’s Investors Services downgraded the island’s debt to one notch above junk status; and in a recent research note, Breckenridge Capital Advisors said the island was “flirting with insolvency.” The island has the weakest pension fund in America and by some estimates could run out of money as soon as 2014.

An influx of wealthy financiers would provide a much-needed lift to the economy.

Margaret Pena Juvelier is a real estate broker with Sotheby’s International Realty who left the Upper East Side last fall to open an office in San Juan. “We’re getting an average of 10 to 15 calls or e-mails a day from people who want to look at homes,” she said.

Ms. Juvelier often sends a black S.U.V. with a driver in a suit and tie to meet clients, some of whom fly in on private jets and pepper her with questions like “is there aWhole Foods here?” and “if I get really sick, do I have to be medevaced?”

Nicholas Prouty of the investment fund Valivian Advisors, who is moving to San Juan from Greenwich, Conn., said he wanted “the excitement of having new experiences coupled with the worry of the unknown.”

While the real estate broker Ana González Brunet declines to name names, saying “discretion to billionaires is important,” she said multiple individuals had recently looked at the 8,379-square-foot penthouse in the Acquamarina in the chic Condado neighborhood of San Juan. The $5 million condo has underground parking and a panoramic view of the ocean through floor-to-ceiling windows, and is near luxury boutiques like Cartier, Salvatore Ferragamo and Louis Vuitton.

“It’s like being in the best part of Manhattan,” Ms. González Brunet said.

 

               

Yachts Lured To Croatia By EU Accession VAT Perk

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 Yacht owners who are yet to pay European Union value-added tax (VAT) on the purchase of their yachts, and who wish to put their boats into free circulation in the EU, have been encouraged to temporarily register their vessels in Croatia to take advantage of a concessionary VAT rate being introduced ahead of the nation's entry into the European Union on July 1, 2013.
 Under EU law, yachts that have been purchased in the EU are subject to VAT , at varying rates permitted by the European Union. Once VAT has been paid on a yacht it may be transferred from one EU member state to another free from incurring any additional VAT, as with other goods that travel across EU frontiers.
 Croatia is set to join the European Union from July 1, 2013, and Croatian yacht owners, under the rules, will be required to pay VAT on their vessels to establish them as EU goods. Croatian yacht owners may opt to instead relocate their boats to another EU member state ahead of the nation's accession and pay VAT there instead.
 The Croatian Government has recognized that if it were to attempt to levy a 25% VAT on Croatia-based yachts it would lead many owners to pre-emptively relocate their vessels, either to member states with lower VAT rates, such as Italy and Malta, or to territories outside to the European Union to avoid the tax burden. Therefore, the Croatian Government has announced plans to allow a concessionary 5% VAT rate for those persons that register and relocate their vessels to Croatia before May 31, 2013, until after the nation has joined the European Union at the earliest. Vessel owners looking to avail themselves of the concession have been urged to act fast as the process of registering a boat in Croatia can take several weeks, and the offer will be withdrawn on June 1, 2013.

Cyprus economy 'on the brink', Bank of Cyprus warns

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 The Cypriot economy is "on the brink" and desperately requires a liquidity lifeline from Europe, Cyprus' largest bank has warned.

The Bank of Cyprus said: " The next move may prove its salvation or destruction" - itself said to require urgent funding to prevent collapse.
 The European Central Bank has given the island nation until Monday to raise the funds it needs to secure a bailout.
MPs have delayed a vote on a new plan to raise those funds until Friday.
Earlier this week they flatly rejected a plan to tax bank deposits.
They need to find 5,8 bn Euros to quality  for a 10 bn- euro bailout loan from the European Union and International Monetary Fund.
 President Nicos Anastasiades has discussed with political leaders about the options, and the package was then discussed by the cabinet. But MPs said they needed more time to study the nine bills that make up the draft legislation.
 If no "Plan B" can be found by Monday , the ECB may cut off funding to the island's banks, it said in a statement, triggering their collapse and possibly the country's exit from the euro.
 After holding a phone conference on Thursday night to discuss the situation, eurozone finance ministers said they stood " ready to discuss with the Cypriot authorities a draft new proposal"', which they expected " the Cyprus authorities to present as rapidly as possible".
 It is now a race against time to approve the proposals by Monday, says the BBS's Mark Lowen in Nicosia, and anxiety is growing as the country - and the eurozone - enter a critical few days.

" Doomed"

 Bank of Cyprus and Laiki ( two biggest banks in Cypru ), are believed to be reliant on the ECB's Emergency Liquidity Assistance, provided via the Central Bank of Cyprus.
All Cypriot banks have beeen shut until next Tuesday to prevent mass withdrawals, but long lines have been forming at cash machines.
They are still dispensing cash but with such demand are frequently running out, and on Thursday Laiki radically  lowered the daily withdrawal limit to 260 euros.
 " There are rumours that Laiki Bank will never open again. I want to take out as much as I can", retired government official Phaedon Vassiliades told AFP news agency as he withdrew cash at a machine in the capital, Nicosia.
 " I have nearly 60,000 euros as savings in this bank and some credit societies. I don't know if I will ever get it back now. This is what I had and now it seems it is all gone".
Neophytos Constantinides said : " We are doomed. Our sunny days are over".
State broadcaster CyBC said employees of Laiki - The country's second largest bank - were told on Thursday afternoon the bank would be closing down, but on state radio a Laiki  spokeswoman denied those reports.
 On Thursday there were reports that the government was considering the restructuring of Laiki Bank in to "good" and "bad" banks. Bank employees clashed with police as they protested over possible lay-offs.
Earlier crowds gathered outside parliament in anticipation of a vote on a new proposal - a key component of which is the establishment of a state " investment solidarity fund" which would issue bonds on state assets to raise the 5,8 bn euros required.
 Other elements of Plan B could include restructuring other Cypriot banks, use of pension funds, and accepting an offer of help from Cyprus' wealthy Orthodox  Church.
 A revised levy on deposits also remains a possibility.
It might also contain some kind of Russian help. Cypriot Finance Minister Michael Sarris is in Moscow discussing possible assistance.
big Russian investors are believed to hold about a third of all Cypriot deposits - and reacted with fury when the initial plan to tax deposits by up to 9,9%.
But the chairman of the Eurogroup of eurozone finance ministers, Jeroen Dijsselbloem, told the European parliament that Moscow had indicated it was not willing to extend " another loan or an investment in the banks", Reuters reported.
Reports suggest Moscow could consider buying interests in recently discovered offshore gas reserves.
 But analysts point out that any revenue from such discoveries remains years off, and unnamed Turkish officials have been quoted as saying Ankara - which lays claim to some of the gas - would challenge any such arrangement.
 The banking sector dominates Cyprus' economy and if a viable rescue is not organised soon the island state risks having to abandon the euro.
 Cypriot banks were among the bondholders who had to take a big "haircut" in the second massive bailout for Greece.
 Since 2008 the eurozone has been badly bruised by the massive bailouts provided for Greece, the Republic of Ireland and Portugal. There is a widespread reluctance to commit more EU taxpayers' money to ailing banks in southern Europe.

Canada To Join Plurilateral Trade Talks

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 The Canadian Government has announced that it will participate in negotiations toward a new agreement on international trade in services.
 The talks will be launched with the initial involvement of 21 World Trade Organization members, which together represent more than two birds of world trade in services.Both during and after conclusion of the negotiations, the agreement will be open to all other World Trade Organization members who wish to join.
They will cover all services sectors, including information and communication technology services, logistics and transport, financial services and services for businesses.
 According the Government figures, services represent almost 70% of the Canadian economy, and are responsible for the employment of nearly 13,5m workers. In 2011, Canada exported a total of almost CAD 83bn ( USD 81bn ) worth of services.
 The Government believes that a potential agreement could provide increased access to and legal stability in markets that are open but not subject to trade agreements. It has launched a public consultation on the talks, seeking views from businesses, citizen-based organizations and individual Canadians, as well as from the provincial and territorial governments. These consultations will run until April 30.
 Making the announcement, International Trade Minister Ed Fast said: " A high-quality international agreement that will liberalize trade in services will lead to new and exciting opportunities foe Canada's small and medium-sized enterprises and boost trade in Canada's financial, engineering, energy, mining and environmental services sectors. As part of the most ambitious trade expansions plan Canadian history, our government will continue to expand Canada's global trade and investment footprint."
 Chair of the Canadian Services Coalition, Michael Landry, welcomed the news :
 " Services are vital and growing component of the Canadian economy. Today they represent almost two-thirds of our Gross Domestic Product, yet movement on this front has long been stalled by the Doha Round. The Canadian Services Coalition is pleased that the Canadian government is prepared to be at the table for this important negotiations, and we look forward to the rapid conclusion of an ambitious and comprehensive agreement on services."

OECD Urges Overhaul Of French Spending

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As France's public finances suffer from a weak economy, the Organization for Economic Cooperation and Development urged President Francois Hollande's government Tuesday to focus on longer-term spending cuts in areas like healthcare and pensions.

"France faces serious long-term challenges," the OECD said in a study of the country published Tuesday. "The improvement of the economic outlook will depend closely on the reduction in inefficient public spending and the implementation of crucial reforms aimed at reducing structural unemployment and restoring firms' competitiveness."

The OECD expects French gross domestic product ( GDP ) to expand only 0.1% this year before an acceleration to 1.3% growth in 2014. With slow growth, the budget deficit will fall less than Paris initially hoped to 3.5% of GDP in 2013 and 3% in 2014 from 4.5% in 2012.

 Francois Hollande has already said he'll fail to meet the 3% target in 2013 - as he pledged to when he took power in May last year - because the government argues the extra austerity that would be needed to get there would plunge the country into deeper economic difficulty.

The OECD cautiously backed Mr. Hollande's approach, saying sticking to targets that ignore the depressed economic situation could exacerbate the downturn. But the Paris-based organization put pressure on Mr. Hollande to step up measures to cut spending in the longer term in areas including pensions and healthcare.

Out of the OECD's 34 members, France has the second-highest public spending ratio and state employees account for 23% of employment. Public debt as a percentage of gross domestic product will rise to 96.1% in 2014 from 94.5% this year and 91.3% in 2012, the OECD forecast.

"There is substantial scope for cutting public spending," the OECD said.

France should rapidly adjust the parameters of its pensions system to limit spending in the short and medium term, the OECD said. It also recommended a potentially controversial move to make pensioners pay higher social security contributions and taxes on capital gains.

Mr. Hollande has pledged to begin negotiating with unions this year to change the pension system as forecasts show it will post a deficit of EUR20 billion in 2020 if nothing is done.

"The projected trajectory of the pension system deficit requires that hard decisions be taken soon to limit spending in the short and medium term," the OECD said.

The OECD identified other savings France could make in healthcare by reimbursing only the price of generic drugs and treating more patients out of hospitals.

France's complex system of local government was also criticized in the report. Some of France's 36,700 municipalities should be merged and larger regional authorities abolished, the OECD said.

Mr. Hollande's government should also more take steps to cut costs and rigidities of labor. His government has already introduced EUR20 billion of tax credits for employers and secured an agreement between unions and employers for greater labor flexibility, but the OECD said these are only "encouraging signals."

Among the OECD's recommendations, France should simplify layoff procedures and make redundancies for economic reasons easier.

"The functioning of the labor market needs to be further improved," the OECD said. It forecasts unemployment to reach 11% in 2011 and 11.2% next year.

Cyprus parliament delays vote on bank deposits tax

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Cyprus' parliament on Sunday postponed a debate and vote on a controversial levy on all bank deposits that the cash-strapped country's creditors had demanded in exchange for €10 billion ($13 billion Cdn) in rescue money.

The vote, which had been expected later Sunday, has been pushed back to Monday afternoon, parliamentary official Antonis Koutalianos said.

The announcement set off an immediate scramble among top European officials, with reports that the European Central Bank was pressuring Cypriot authorities to hold the vote without delay.

The stakes are high for the tiny island nation of one million people, because a rejection of the levy by lawmakers could push Cyprus into bankruptcy and possibly out of the common euro currency. Officials also fear a massive run Tuesday on Cypriot banks — after a national holiday on Monday — no matter which way the voting goes.

The state-run Cyprus News Agency said President Nicos Anastasiades had personally requested the postponement, but no reason was given.

The decision by Cyprus' 16 eurozone partners and the International Monetary Fund to impose a one-time tax of 6.75% on all deposits under €100,000 and 9.9% over that amount has enraged Cypriot politicians, who have condemned it as unfair and disastrous. That brings into sharp doubt its approval in the 56-seat parliament.

It marks the first time that the IMF and the 17 eurozone nations have dipped into people's savings to finance a bailout, a move that analysts worry may roil international markets and jeopardize Europe's fragile economy.

 Lose-lose situation

"There are two choices, voting in favor which allows the country to avoid a disorderly bankruptcy, or rejection, which will have us face a disorderly bankruptcy with all that that entails," said Averof Neophytou, deputy chief of the ruling Democratic Rally party.

It's not only Cypriot depositors who will take a hit but foreign nationals as well, including many Russians who are estimated to have some €20 billion sitting in Cypriot banks.

At their peak, Cypriot banks had assets totaling eight times the country's €17.5 billion economy. Those numbers have prompted accusations from some European countries, primarily Germany, that Cypriot banks serve as money laundries for dirty Russian cash.

"It's a lose-lose situation. There will be a huge deposit withdrawal from Cypriot banks with or without a (levy)," said Cyprus Greens lawmakers Giorgos Perdikis. "We should have the courage to make the right decisions that will restore the public's confidence which was drastically shaken."

To counterbalance their cash loss, depositors will receive Cypriot bank bonds. Neophytou said there are efforts to back up those bonds — which have little value now — with Cyprus' newfound offshore gas reserves, although extraction is still several years away.

"Now the faith in Cyprus as a place where it is convenient to keep one's money will be undermined," Anatoly Aksakov, president of the Association of Regional Banks of Russia, was quoted by the Interfax news agency as saying.

Aksakov also suggested some of the Russian money now deposited in Cypriot banks will move back to Russia.

Meanwhile, Britain's Treasury chief said the government will compensate about 3,500 U.K. troops who will lose money to Cyprus's bailout tax.

British Chancellor of the Exchequer George Osborne said Sunday the government would compensate troops and civil servants. But those among the 59,000 British residents of Cyprus who not working for the U.K. military or the government could still be out of pocket.

  

Fischer: Interest rate gap can't get too big

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 Israel's central bank must guard against letting interest rate differentials with the United States and Europe get too big, its head said Wednesday, raising the possibility it might respond to any further policy easing in Washington or Brussels.
  Stanley Fischer said that a rate gap is too large would tend to harm Israel's economy, adding upward pressure an on already strong shekel currency and weakening exports.
 "We are a very open economy-open to exports and even more to flows of capital. And our interest rates are heavily affected by the rest of the world," he declared in a conference in Herzliya.
 "If our rates are high relative to the United States and Europe, money comes here to take advantage of the high rates and that creates an appreciation of the shekel and that has negative effects (on the economy). We can't let the interest rate gap get too large."
 The Bank of Israel has left its benchmark lending rate at 1,75% in the last two months, well above the 0 to 0,25% base rate in the United States and the European Central Bank's 0,75%.
 Both foreign central banks are using ultra-loose policies to stimulate weak economies.
 The US Federal Reserve is focused on a bond-setting panel meets next week, while a minority of economists believe the ECB could cut rates in coming months.
 Minutes of the Bank of Israel's February meeting suggested on Monday that further interest rate cuts look unlikely for the time being given signs the economy is improving and residual concerns about a lively housing market.
 Israel's shekel is at 3.685 per dollar, close to a 16-month peak.
 The country's economy, 40% depended on foreign trade, expanded 3,1% in 2012 but growth is projected to slow to a rate of 2,8% in 2013 excluding the start to natural gas production.
 " This is a very strong economy," Fischer said, pointing to the ability to have withstood many shocks-including three military campaigns the past eight years-while weathering the global economic crisis better than most.
 Fischer, who is stepping down at the end of June, attributed much of the economy's success to a stable and conservative banking system.
 But one glaring problem in the short run is fiscal policy, and Fischer said that even if the government makes the necessary budget cuts, raises taxes and meets at budget deficit target of 3% of GDP in 2013, the budget will be expansionary.
 To meet the deficit target, about NIS 14 billion( $ 3,8 billion) of spending will need to be reduced while tax revenue of an extra NIS 6 billion ($ 1,63 billion) is required, analysts said.
 Prime Minister Benjamin Netanyahu is in the process of forming a new government. Passing a budget will be one of the first items the government will need to address.