Heres Why The Bahamas Are An In-Demand Choice For Luxury U.S. Buyers

Heres Why The Bahamas Are An In-Demand Choice For Luxury U.S. Buyers

Foreign tax credit

MAISON Bahamas, the leading luxury brokerage throughout the Bahamas, dives into the latest on the … [+] luxury real estate market.

MAISON Bahamas

From Nassau to Abaco Island, The Bahamas has various options for resort-style living, making it a popular choice for real estate investors and those seeking second-home ownership. Buyers from the United States are particularly appreciative of the country’s stable economy and its attractive tax advantages.

In the high-end of the market are properties like Villa Sul Mare, an oceanfront estate in the … [+] coveted Ocean Club Estates.

MAISON Bahamas

Getting to Nassau, the capital of The Bahamas, is convenient thanks to a dozen daily flights (currently scheduled) from Miami that take about an hour. American, Delta, and Jet Blue fly from JFK to Nassau in about 3.5 hours. For private flyers, options include Odyssey Aviation Nassau, a 24-hour full-service FBO with on-site customs and immigration services. Easy to access second and third homes in remote locations have become more appealing to today’s luxury buyers.

Luxury finishes abound at higher price-points. This $14.75-million villa features a minimalist … [+] design that provides spacious living with expansive patios.

MAISON Bahamas

I recently checked in with Ryan Knowles, founder and CEO of luxury brokerage MAISON Bahamas, to get the latest market news. Knowles is one of the leading realtors in the Bahamas.

Homes like this 9,000-square-foot mansion by the sea exude luxury and warmth thanks to imported … [+] touches such as Jerusalem stone floors, walls of Venetian plaster, exquisite chandeliers and custom millwork.

MAISON Bahamas

Describe your current market dynamics?

The real estate market in The Bahamas can be described in one word: “hot.” We had the busiest year on record in 2021, with throngs of international buyers hitting our shores in search of their piece of paradise. Demand continues to outstrip supply and we expect this trend to continue throughout the year.

Listed for $15.25 million, this Ocean Club Estates address includes exclusive access to The Ocean … [+] Club, a Four Seasons Resort, the Atlantis Resort & Casino (waterpark included) and their very own private Beach Club.

MAISON Bahamas

What changes have you seen so far in 2022?

Due to the sheer number of trades that occurred last year, there is simply less available inventory in the market for buyers to purchase. So, while demand remains incredibly high, deal volume has slowed a bit due to scarcity of product.

Called Villa La Plage, this contemporary jewel is perched atop a mile-long white sand beach in … [+] Nassau, Bahamas. Asking price: $7.95 million.

MAISON Bahamas

What potential changes do you forecast for the first half of 2022?

We anticipate two major adjustments, the first being that more buyers will opt for pre-construction or pre-completion offerings due to a lack of available inventory, and the second is that more and more sellers will come to the market, sensing an opportunity to take advantage of very favorable market conditions.

New construction in The Bahamas is coveted for its upscale designs incorporating high-end fixtures … [+] and amenities.

MAISON Bahamas

Do you see more sellers coming to market in your area. If so, how will that impact market conditions?

We’ve had an unprecedented surge of interest in recent months, and we don’t see that slowing down anytime soon. While we expect more sellers to enter the market, we believe that they will continue to be outnumbered by the number of buyers who want to get in. Everyone wants a piece of paradise and many of them are willing to pay full ask or more to get it!


MAISON Bahamas is an exclusive member of Forbes Global Properties, a consumer marketplace and membership network of elite brokerages selling the world’s most luxurious homes.

Follow me on Twitter or LinkedInCheck out my website

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Queensland land tax: Media Watch’s false impression on Queensland land tax coverage

Queensland land tax: Media Watch’s false impression on Queensland land tax coverage

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Updated

Viewers of the ABC’s Media Watch on Monday night were given the impression that The Australian Financial Reviews coverage of the Queensland government’s now-abandoned land tax changes fell in with the interests of rich landlords and the property sector rather than with renters.

This rested on the left-wing Guardian Australia and left-wing academic economist (and former Financial Review columnist) John Quiggin.

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Media Watch didn’t properly explain the proposed tax change. 

Media Watch didn’t properly explain the proposed tax change, which would have taxed non-resident investors in Queensland property more heavily if they owned property in other parts of Australia.

It also ignored the prominent views to the contrary from one of Australia’s leading tax economists, Robert Breunig, director of the Tax and Transfer Policy Institute at the Australian National University.

In an op-ed column in the Financial Review posted on Sunday, Professor Breunig described this populist “eat the rich” tax as: “A tax that inclines property investors to take their money out, or not put their money into, Queensland.

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This news is brought to you by IWTA. Founded in 2015 and located on Avenue of the Americas, in the heart of New York City, International Wealth Tax Advisors provides highly personalized, secure and private global tax, GILTI, FATCA, Foreign Trusts consulting and accounting to many IWTAS.COM clients worldwide, including: Singapore, China, Mexico, Ecuador, Peru, Brazil, Argentina, Saudi Arabia, Pakistan, Afghanistan, South Africa, United Kingdom, France, Spain, Switzerland, Australia and New Zealand.

Open up, it’s the IRS. We’re here about the crypto tax you dodged

Open up, it’s the IRS. We’re here about the crypto tax you dodged

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The IRS has been granted a court order to collect records from a bank the agency said will help it identify US taxpayers who failed to report taxable income from crypto trades. 

Uncle Sam yesterday said it’s specifically going after records from New York-based bank M.Y. Safra, which partnered with SFOX – a cryptocurrency prime broker – to offer the latter’s customers access to cash-deposit bank accounts. SFOX users could thus use funds at M.Y. Safra to buy and sell digital coins.

The IRS was granted a similar request against SFOX in August. Both organizations were served with “John Doe” summons, a tactic used by the IRS when it investigates wrongdoing without knowing the names of the accused taxpayers.

Basically, the IRS reckons people have profited from trading cryptocurrencies via SFOX and M.Y. Safra, and haven’t declared that income nor paid the required tax on it, and so the agency wants to chase those people down and strap them into the wallet-emptying ass-kicking machine.

“The John Doe summons directs M.Y. Safra to produce records that will enable the IRS to identify U.S. taxpayers who were customers of SFOX and who engaged in cryptocurrency transactions that may not have been properly reported on tax returns,” the agency said. 

According to the IRS, its probing into the world of cryptocurrencies has revealed “significant tax compliance deficiencies” across the industry, and that it “has strong reason to believe that many virtual currency transactions are not being properly reported on tax returns.” That said, there are many people who use cryptocoins for legit purposes, and pay due income taxes on it.

Per the IRS’s statement, SFOX has more than 175,000 registered users who have conducted more than $12 billion in transactions since 2015. The agency said it has identified “at least ten” – count ’em, ten – US taxpayers who have used SFOX but failed to report transactions. 

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America taps 150+ prosecutors to fight cryptocurrency crime

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With the data it gathers from M.Y. Safra, the IRS said it expects to be able to match the identities of SFOX users with Safra services “which the IRS will then be able to use in conjunction with other information to examine whether these users complied with the internal revenue laws.” 

Damian Williams, US Attorney for the Southern District of New York, where the summons was granted, said that cryptocurrency transactions aren’t exempt from tax liability. “The government is committed to using all of the tools at its disposal … to identify taxpayers who have understated their tax liabilities by not reporting cryptocurrency transactions, and to make sure that everyone pays their fair share,” Williams said. 

And another thing

Meanwhile, America’s Commodity Futures Trading Commission has filed and settled charges against blockchain outfit Ooki (formerly known as bZeroX) and its founders. 

The company and its pair of operators were collectively charged with illegal off-exchange asset trading, operating as unregistered futures commission merchants, and failing to adopt a customer identification program, as is required by the Bank Secrecy Act. 

The CFTC announced its settlement in the case along with the filing, stating that the respondents (the company and its two founders) will have to pay a $250,000 penalty, as well as promising to not to violate of the Commodity Exchange Act and CFTC regulations. ®

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This news is brought to you by IWTA. Founded in 2015 and located on Avenue of the Americas, in the heart of New York City, International Wealth Tax Advisors provides highly personalized, secure and private global tax, GILTI, FATCA, Foreign Trusts consulting and accounting to many IWTAS.COM clients worldwide, including: Singapore, China, Mexico, Ecuador, Peru, Brazil, Argentina, Saudi Arabia, Pakistan, Afghanistan, South Africa, United Kingdom, France, Spain, Switzerland, Australia and New Zealand.

The Supreme Court Gets a Chance to Revisit America’s Imperialist Past

The Supreme Court Gets a Chance to Revisit America’s Imperialist Past

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Who gets to be a U.S. citizen at birth? This question is fairly simple when asked almost anywhere in the United States. If you are born on U.S. soil and you are not the son or daughter of a foreign diplomat stationed here at the time, you are a citizen of this country. The Supreme Court is now considering a case that would require it to decide whether that rule should apply in the only part of the U.S. where it currently does not: the islands of American Samoa.

The case, Fitisemanu v. United States, involves three plaintiffs who originally hail from American Samoa but now reside in Utah. (The petition for review was filed in April; the Department of Justice filed its reply briefs at the end of August.) They are legally considered U.S. nationals, a subcitizenship status of sorts where they still owe allegiance to the U.S. but, unlike Americans on the mainland and in all other territories, did not receive citizenship at birth. This distinction has limited their lives in myriad ways. The case’s namesake, John Fitisemanu, is suing because he cannot lawfully cast a ballot, according to the petition for review. Co-complainant Pale Tuli cannot pursue his preferred vocation as a police officer because Utah law restricts the job to U.S. citizens. And the third plaintiff, Rosavita Tuli, cannot sponsor her parents through the immigration process in the manner to which citizens of the U.S. are entitled.

American Samoa is unique in this regard. Congress has granted birthright citizenship to everyone born in the other U.S. territories—ranging from Puerto Rico and Guam to the U.S. Virgin Islands and Northern Mariana Islands—through federal legislation. While there have been legislative attempts to close this gap, these have met some resistance from local authorities. Both the American Samoan government and the territory’s only congressional delegate moved to intervene in the lawsuit. They argued that imposing birthright citizenship would infringe upon the island’s cultural traditions and right to self-determination.

A federal district court judge ruled in favor of the plaintiffs, however, drawing upon the 1898 case Wong Kim Ark v. United States. That landmark decision helped establish that anyone born on U.S. soil, with the exceedingly rare exception of children of foreign diplomats, automatically acquired U.S. citizenship at birth. The Tenth Circuit Court of Appeals overturned the district court’s ruling in a split decision, concluding that the lower court had applied the wrong set of precedents to the case.

“Between these competing frameworks, the Insular Cases provide the more relevant, workable, and, as applied here, just standard,” Judge Carlos Lucero wrote. “This is so for several reasons: 1) the Insular Cases were written with the type of issue presented by this case in mind, whereas Wong Kim Ark was not; 2) the district court overread the weight accorded English common law by Wong Kim Ark; and 3) the Insular Cases permit this court to respect the wishes of the American Samoan people, whereas Wong Kim Ark would support the imposition of citizenship on unwilling recipients.” Judge Timothy Tymkovich concurred in part, deferring to historical precedent and congressional discretion but declining to apply the Insular Cases outright.

His reticence is understandable. The Insular Cases are among the most controversial precedents that still carry legal weight in American courts. At the close of the nineteenth century, the U.S. acquired a constellation of colonial possessions in the Atlantic and Pacific Oceans by winning the Spanish-American War. Those acquisitions immediately raised questions about when and how the Constitution’s protections applied to the new territories. Did the Constitution follow the flag, so to speak, or could the new possessions be administered under a different type of constitutional order?

In a series of decisions in the early twentieth century, the Supreme Court took the latter approach. Starting with the 1901 case Downes v. Bidwell, the justices distinguished between incorporated territories and unincorporated territories. In incorporated territories, like those on the American frontier that eventually became states, the Constitution carries its full weight. In unincorporated territories, the high court ruled, inhabitants had certain fundamental rights but also did not enjoy the automatic protections of the Bill of Rights or other constitutional measures.

The rulings are widely derided as imperialistic and discriminatory. In some of them, the justices wrote in unabashedly racist terms to muse about whether the nonwhite inhabitants of the new territories were properly suited for “Anglo-Saxon” institutions like jury trials. So condemned are the Insular Cases that the Justice Department under presidents from both parties often disclaims any reliance on them when arguing cases about the territories before the Supreme Court. They nonetheless remain on the books as the prevailing framework for governing the territories where roughly five million people live.

Earlier this year, in the case United States v. Vaello-Madero, the Supreme Court considered whether Congress could lawfully exclude U.S. citizens who live in Puerto Rico from drawing upon a Social Security benefit program that would be available to them if they lived in an Arctic cabin in Alaska, a Central Park penthouse in New York, anywhere else in the 50 states, or the District of Columbia. In an 8–1 ruling by Justice Brett Kavanaugh, the court upheld Congress’s decision to omit Puerto Rico from the program.

Gorsuch sided with the federal government as a matter of precedent. He then wrote a concurring opinion where he forcefully called for the court to “revisit” the Insular Cases whenever it had the opportunity. “The flaws in the Insular Cases are as fundamental as they are shameful,” he wrote. “Nothing in the Constitution speaks of ‘incorporated’ and ‘unincorporated’ Territories. Nothing in it extends to the latter only certain supposedly ‘fundamental’ constitutional guarantees. Nothing in it authorizes judges to engage in the sordid business of segregating territories and the people who live in them on the basis of race, ethnicity, or religion.” Justice Sonia Sotomayor, whose parents were Puerto Rican, echoed his call to revisit them in her dissent from that case.

In their petition for review in Fitisemanu, the plaintiffs cited Gorsuch’s dissent and called upon the justices to follow his lead. They also stressed the high stakes of the case before them. “The importance of the question presented is indisputable,” they told the court. “At stake is not just the meaning of a core constitutional provision that defines the boundaries of a foundational right—U.S. citizenship—on which many other rights are premised, but also whether that constitutional provision even has a fixed meaning that cannot be turned on and off based on evolving or subjective factors.”

One of the most unusual friend of the court briefs came from two women who were the descendants of plaintiffs in past Supreme Court cases involving citizenship. One was the great-granddaughter of Isabel Gonzalez, the namesake of a 1904 case where the court elided whether Puerto Ricans were U.S. citizens at the time. The other woman was the great-great-granddaughter of Dred Scott, who asked the Supreme Court to recognize his freedom in 1859. The justices’ decision not only to rule against Scott but also to declare that no one of African descent could ever become a U.S. citizen and that the Missouri Compromise was unconstitutional, eventually led to the Civil War.

After the war ended, Congress and the states ratified a constitutional amendment to establish citizenship in the clearest possible terms. “The Fourteenth Amendment is unequivocal,” the two women told the court. “Citizenship in no way depends on race, status, or the particular geographic region of the United States in which a person was born or lives. Instead, under the Citizenship Clause, ‘all persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States,’ as well as any ‘State wherein they reside.’” Their brief is a potent reminder of the extraordinary stakes that surround questions of citizenship, as well as the long shadow of history that can fall upon those who were denied it.

The Justice Department, for its part, urged the justices not to take up the case and claimed it wasn’t grounding its position in the Insular Cases. “The government’s argument here does not rest on that framework,” it argued in its reply brief. “The government does not rely on the premise that citizenship is not ‘fundamental,’ or on the view that extending birthright citizenship to American Samoa would be ‘impracticable and anomalous.’ And the government in no way relies on the indefensible and discredited aspects of the Insular Cases’ reasoning and rhetoric that [the plaintiffs] highlight here.” Instead, they argued that the Citizenship Clause does not automatically apply to any territories and narrowly construed Wong Kim Ark by noting that the case’s namesake was born in the state of California.

There is no way to know in advance whether the justices will take up a specific case. If they decline to do so here, they may be influenced by the arguments raised by the government of American Samoa itself, which opposed the plaintiffs’ effort to get the courts to extend birthright citizenship to the territories. “Their contrary view would threaten fa’a Samoa, upend well over a hundred years of settled law and practice, and deprive the American Samoan people of their basic right to determine their own status through the democratic process,” the government told the court in a reply brief, referring to their term for the traditional Samoan way of life.

“Finally, it bears noting that even if this Court were inclined to reconsider and overrule the Insular Cases, it would be remarkably ironic to take that step in a case where those decisions have been cited not to perpetuate racist or imperialist doctrines, but instead ‘to preserve the dignity and autonomy of the peoples of America’s overseas territories,’” they concluded, quoting from Sotomayor’s dissent in Vaello-Madero. The plaintiffs, as one might expect, strongly disputed that assertion. “Extending citizenship has not impaired cultural preservation or self-determination in any other U.S. territory, and there is no reason to suppose the result would be different in American Samoa,” they argued in a reply brief.

Even if the justices decline to take up the question in this specific case, it seems likely that they will inevitably be compelled to decide whether the Insular Cases should continue to apply in a postcolonial world. At issue, after all, is not just whether a justice or group of justices got it wrong more than a century ago when cases involving the new territories came before them. It is also about whether millions of Americans should still exist in that liminal constitutional space today, and whether it should continue to shape their lives and destinies going forward.

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Australian Tax Office is the benchmark in how to build a modern data organisation

Australian Tax Office is the benchmark in how to build a modern data organisation

Cross border tax advice

“Computers don’t get tired,” notes Marek Rucinski, the head of data and analytics at the ATO.

The ATO has more than 150 AI applications looking at these data flows, and was an early adopter of data visualisation and algorithms to better manage the revenue risk.

Much of this work was scattered across the agency among key teams who applied analytics to identify outliers for further investigation.

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“Computers don’t get tired,” says Marek Rucinski, ATO deputy commissioner and head of data and analytics. Olive + Maeve

Whether it was journalists claiming their entire library as a deduction or doctors writing off two cars as an expense, computer models began to be far better at seeing tax avoidance than humans.

The original deployment of analytical tools was relatively organic and, like many agencies now seeking to embrace the data age, the ATO struggled to scale its analytic play.

Rucinski was hired from Accenture in 2018 and set about industrialising the ATO’s approach.

The initial task was to build the infrastructure to make the data available to business units in formats they could easily manipulate.

Training staff in visualisation tools helped “democratise” the data and build literacy, and also tapped an incredible pent-up demand from the business units to play in the smart data space.

Data cataloguing was also critical, so the organisation could have a high degree of confidence in the pedigree, quality and sensitivity of the data. The ATO has long had a healthy obsession with data security and privacy, driven partly by legislative guard rails that can lead to ATO officials being jailed for unauthorised data breaches.

Cataloguing also enables a taxonomy to be developed. Consistently tagging data has long been the secret sauce for enabling the effective integration of disparate data sets.

Similarly, building a culture of transparency and ethical behaviour has been central to building trust both within the ATO and with the many private parties that now share data with the agency. There is an elaborate ethical framework the ATO continues to develop as it pushes into the world of AI, robotic automation and straight-through processing.

Funding data infrastructure is perhaps the key challenge for any public entity seeking to transform its business. Rucinski says this requires you to play the organisational “chessboard”.

“I was very conscious that it is very hard to ask for a lot of money to build foundational things that take a long time to make real,” he says.

When people talk about artificial intelligence, they sometimes think it’s magical in nature. Well, it isn’t.

Marek Rucinski, ATO head of data and analytics

“It’s like building a Taj Mahal. It’s a very thankless task, and it’s never finished. So the strategy here was to use a lot of the energy and a lot of demand that was in the business through either taskforce funding or a very clear legislative agenda that we had to follow or the strategic priorities the organisation had.”

These included increasing pre-fill, reducing fraud or being more sophisticated with the risk models by having a more integrated view of the client base.

“It wasn’t like big bang, it was very much semi-stealth,” Rucinski says.

This approach, he says, has pluses and minuses.

“The pros are that, obviously, it’s extremely value-centric, you can always explain and link what you do to the value in developers. And therefore the funding equation becomes much clearer and much stronger.

“The contrast to that is sometimes you don’t build things in a sequence that is ideal, or the timeline that is ideal. So you have to be flexible in that. And you have to play the chessboard in a bit more complex fashion. But I think that’s the reality for most organisations.”

A hub-and-spoke model was established, and the central team was charged with not just setting the standards, but also actively working with the business.

Getting your hands dirty is critical to the successful maturing and embedding of data and analytics into an agency, Rucinski says.

He has advice for other agencies looking at how to scale their data play: “The key success factor for a hub-and-spoke organisation is for the hub to have operational responsibilities, not just pure standards or centre of excellence.”

Without operational responsibility, the hub won’t have the weight in the organisation and will have no credibility, Rucinski says.

“If you have operational responsibilities, then you are in the trenches with the business.”

Cross border tax advice Mysticism of data science

This also gives the core data team an intimacy with the business units and the ability to understand the pressure points and to respond.

His team has developed more than 150 advanced analytic tools, many using some form of AI. These include applications that pre-fill assessments with data from banks and employers, reducing “mistakes” – either deliberate or accidental.

Rucinski says it was important to demystify these applications.

“The way that I tried to approach it with the team, and with the leadership team, was to really try to demystify it because I think there’s still an aura of mysticism around data science,” he says.

This is particularly true of artificial intelligence.

“When people talk about artificial intelligence, they sometimes think it’s magical in nature. Well, it isn’t. You can lift the lid and see what’s sitting inside a black box if you approach it in a more mechanistic way.”

Indeed, as Rucinski observes, there is now a large library of algorithms and AI apps available commercially or through open source.

The ATO sits on 50 or 60 petabytes (one petabyte equals 1 million gigabytes) of data, and it is creating an organisation that can effectively use this data that is becoming the hallmark of a modern data-centric agency.

“Increasingly, organisations’ ability to use the data they collect [gives them] the edge because accurate algorithms are becoming relatively commercialised and standardised, you can get them off the shelf,” Rucinski says.

“So that’s no longer a differentiating factor. The differentiating factor is how you assemble them.

“There’ll be more data coming. Our ability to ingest, curate, catalogue the data at an industrial scale and speed is going to be essential because otherwise we are creating a warehouse full of stuff that we cannot use downstream.”

The ATO is moving its data practice to the cloud, an initiative Rucinski says is inevitable.

“Most of the current applications are becoming cloud native. So if we want to have contemporary applications and contemporary client experience or contemporary interactions with our partners and the broader ecosystem, it has to be cloud-centric.”

New laws that finally enable industrial sharing of data between Commonwealth entities represents the next frontier for the broader data transformation of government.

If the ATO is the high watermark, there are many agencies still playing in the sandpit. Building modern data capability across the Australian Public Service remains perhaps the most significant challenge in the reform of the federal public sector.

The ATO holds many of the most valued data sets, but has long been reluctant to share them. Pivoting the organisation into this new era of cross-government data integration will take significant cultural change.

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This news is brought to you by IWTA. Founded in 2015 and located on Avenue of the Americas, in the heart of New York City, International Wealth Tax Advisors provides highly personalized, secure and private global tax, GILTI, FATCA, Foreign Trusts consulting and accounting to many IWTAS.COM clients worldwide, including: Singapore, China, Mexico, Ecuador, Peru, Brazil, Argentina, Saudi Arabia, Pakistan, Afghanistan, South Africa, United Kingdom, France, Spain, Switzerland, Australia and New Zealand.

King Charles III won’t have to pay inheritance tax

King Charles III won’t have to pay inheritance tax

International tax consultant

In the wake of Queen Elizabeth II’s death last Thursday, King Charles III inherited a realm of wealth and he doesn’t have to pay inheritance tax on any of it.

Driving the news: A rule introduced in 1993 by the U.K. government safeguards the royal family’s assets from being wiped out if two monarchs were to die in a short period of time, Business Insider reports.

  • The Queen Mother passed away 20 years ago in 2002, exercising the first part of the provision.

By the numbers: Charles inherits the Duchy of Lancaster estate, which racked in $27 million in revenue for the Queen last year.

  • The Crown Estate, estimated to be worth over $34.3 billion in assets, will now belong to Charles III, CBS reports.
  • Prince William, Charles’ eldest son, inherited the $1 billion Duchy of Cornwall estate from him. 

Why it matters: Members of the royal family do not have to pay the 40% levy on property valued at more than $377,000 while their constituents do.

  • However, the Queen started paying income and capital gains tax on the estate in 1993 of her own accord. Charles may decide to do the same.

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This news is brought to you by IWTA. Founded in 2015 and located on Avenue of the Americas, in the heart of New York City, International Wealth Tax Advisors provides highly personalized, secure and private global tax, GILTI, FATCA, Foreign Trusts consulting and accounting to many IWTAS.COM clients worldwide, including: Singapore, China, Mexico, Ecuador, Peru, Brazil, Argentina, Saudi Arabia, Pakistan, Afghanistan, South Africa, United Kingdom, France, Spain, Switzerland, Australia and New Zealand.

Why King Charles won’t have to pay inheritance tax on Duchy of Lancaster estate

Why King Charles won’t have to pay inheritance tax on Duchy of Lancaster estate

Fatca filing

King Charles III can avoid paying millions in inheritance tax on the Duchy of Lancaster estate due to an old rule designed to protect the Royal Family’s wealth.

His Majesty automatically inherited the estate – worth over £652m – following the death of his mother Queen Elizabeth II last week.

Under UK law, inheritance tax is paid at 40% if you leave assets valued above a certain threshold to your loved ones after you die.

King leads procession behind Queen’s coffin – live updates

But the King will not have to pay the levy because of a rule introduced by the UK government in 1993, which said inheritance tax does not have to be paid on the transfer of assets from one sovereign to another.

Then Conservative Prime Minister Sir John Major said the circumstances of a hereditary monarchy were “unique” and “special arrangements” were required.

He suggested assets of the monarchy were at risk of being “salami-sliced away” through capital taxation over many generations.

He told the Commons: “I believe that is necessary to protect the independence of the monarchy, and I would not wish to detract from that independence in any way.

“The concerns that I would have were the arrangements to be any other would be the danger of the assets of the monarchy being salami-sliced away by capital taxation through generations, thus changing the nature of the institution in a way that few people in this country would welcome.”

‘Clearly inappropriate’

A Memorandum of Understanding on royal taxation from 2013 also states that it would be “clearly inappropriate” for inheritance tax to be paid on assets “which are held by the Queen as sovereign rather than as a private individual”.

It said the monarchy needs “sufficient private resources” to perform its role in national life and to have a degree of financial independence from the government.

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King Charles greets crowds in Edinburgh

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The document said the Prince of Wales confirmed that he intends that these arrangements will apply to him on his accession to the throne.

Sky News has contacted Buckingham Palace for comment.

The Duchy of Lancaster estate generated revenue of £24m and had assets worth more than £650m at the end of March this year, according to its financial records.

The monarch is not legally obliged to pay any tax in the UK. But the Queen began to pay income and capital gains tax on a voluntary basis in 1993, and King Charles is expected to do the same.

The former Prince of Wales also voluntarily paid tax on his income from the Duchy of Cornwall estate, which has now been passed to Prince William, the new Prince of Wales.

Anyone other than King Charles who has inherited private assets from the Queen will have to pay inheritance tax.

Explaining the tax break, Fisher Jones Greenwood Solicitors has previously said the exemption is designed “to safeguard the erosion of the Sovereign’s wealth”.

They said: “The monarch doesn’t work or trade to ‘grow’ their estate as a normal individual would during their lifetime.

“If the monarch’s estate was repeatedly subjected to inheritance tax then their wealth would deplete dramatically.”

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This news is brought to you by IWTA. Founded in 2015 and located on Avenue of the Americas, in the heart of New York City, International Wealth Tax Advisors provides highly personalized, secure and private global tax, GILTI, FATCA, Foreign Trusts consulting and accounting to many IWTAS.COM clients worldwide, including: Singapore, China, Mexico, Ecuador, Peru, Brazil, Argentina, Saudi Arabia, Pakistan, Afghanistan, South Africa, United Kingdom, France, Spain, Switzerland, Australia and New Zealand.

Thousands of Irish families to benefit as Taoiseach reveals ‘no appetite’ to make major tax change

Thousands of Irish families to benefit as Taoiseach reveals ‘no appetite’ to make major tax change

What is a foreign trust

THE government will not inflict more misery on struggling families by imposing extra tax on the amount of money parents can leave their children when they die.

The Taoiseach has said there is “no appetite” in Government to reduce the inheritance tax threshold as will be proposed by the Commission on Taxation and Welfare.

what is a foreign trust Martin said there's no appetite in Government to make the change

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Martin said there’s no appetite in Government to make the changeCredit: PA:Press Association

what is a foreign trust The news is a major boost for Irish families

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The news is a major boost for Irish familiesCredit: Getty Images – Getty

Mr Martin said he believed many families would be “disadvantaged” if it was reduced.

He said: “I don’t believe there’s an appetite in Government to reduce that threshold.

“Many, many families and family homes I think would be disadvantaged by that.

“We’re talking after all about people who have bought their family homes with after income tax.

what is a foreign trust Heartache & tears over closing dream biz - we've to start from scratch

what is a foreign trust Thousands of Irish households set to benefit from three €600 energy credits

“Many people throughout their lives pay tax. And in fact, our taxation system is very progressive.

“Those on the highest earnings, pay the highest amount of tax. I think the top 20 per cent pay up to 80 per cent of income tax for example.

“So I think that proposal to say to people you’ve worked hard all on your life, we’ve bought your house….but now actually we want to take more off you when you die and you can’t leave it to family members, I think there’s an issue with that in terms of fairness.”

His comments come after reports suggested the Commission on Taxation and Welfare has proposed to drastically reduce the amount of money parents can leave to their children tax-free.

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A report by the Commission is set to be published on Wednesday.

He added that the Government would look at the report in its entirety but “I don’t see that happening”.

Mr Martin made the comments at his parliamentary party think-in meeting at the Mullingar Park Hotel in Co Westmeath today.

He said the Government would use the Budget to help people with the increased cost of living.

Martin said: “We are now looking at price increases in energy that we have not seen the likes of ever before, not even in the terrible crises of the 70s when oil prices went up very high.

What is a foreign trust ‘HIGH LEVELS OF INCREASES’

“We’re looking at very, very high levels of increases, which are impacting on people’s livelihoods under household disposable incomes, and also threaten enterprises and threatened jobs so once again the Government will have to intervene to protect people first of all, in terms of basic incomes, and also to make sure that we protect jobs.”

He said the Government would also work with the European Union through the crisis.

He said: “The European Union will be making its intervention in the marketplace to try and stabilise the energy market,.

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“But we also in the next number of weeks through a cost of living package, and the budget will bring in measures to alleviate the pressures on people insofar as we can and to the best and most substantial way that we can.”

He added that Finance Minister Paschal Donohoe and Public Expenditure Minister Michael McGrath are working on proposals with the three party leaders and that meetings would be held later in the week on the matter.

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Americans Spend More on Taxes Than Food, Clothing, Health Care COMBINED…

Americans Spend More on Taxes Than Food, Clothing, Health Care COMBINED…

Non resident alien tax withholding

non resident alien tax withholding (Photo by Zach Gibson/Getty Images)

(Photo by Zach Gibson/Getty Images)

(CNSNews.com) – According to newly released data from the Bureau of Labor Statistics, Americans in 2021 once again spent more on average on taxes than they did on food, clothing and health care combined.

During 2021, according to Table R-1 in the BLS’ Consumer Expenditure Survey, American “consumer units” spent an average of $15,495.28 on food, clothing and health care combined, while paying an average of $16,729.73 in total taxes to federal, state and local governments.

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“A consumer unit,” the BLS says in the glossary for its Consumer Expenditure Survey, “comprises either (1) all members of a particular household who are related by blood, marriage, adoption or other legal arrangements; (2) persons living alone or sharing a household with others or living as a roomer in a private home or lodging house or in a permanent living quarters in a hotel or motel, but who is financially independent; or (3) two or more person living together who use their income to make joint expenditure decisions.”

On average in 2021, American consumer units spent $8,289.28 on food; $1,754.39 on clothing (apparel and apparel-related services); and $5,451.61 on health care.

That equaled a combined $15,495.28.

non resident alien tax withholding

At that same time, American consumer units were paying an average $16,729.73 in net total taxes.

These included $8,561.46 in federal income taxes; $5,565.45 in Social Security taxes; $2,564.14 in state and local income taxes; $2,475.18 in property taxes; $105.21 in other taxes—minus an average of $2,541.71 in stimulus payments received back from the government.

In 2020, according to BLS Table R-1 for that year, American consumer units paid an average of $17,148.12 in net total taxes and paid $13,927.74 for food, clothing and health care combined.

non resident alien tax withholding

The $17,148.12 in net total taxes that consumer units paid on average in 2020 included $8,811.78 in federal income taxes; $5,392.35 in Social Security taxes; $2,429.71 in state and local income taxes; $2,353.42 in property taxes, and $71.87 in other taxes—minus an average $1,911.01 in stimulus payments received back from the government.

The $13,927.74 that consumer units paid for food, clothing and health care, included $7,316.47 for food; $1,434.26 for clothing; and $5,177.01 for health care.

The business and economic reporting of CNSNews.com is funded in part with a gift made in memory of Dr. Keith C. Wold.

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This news is brought to you by IWTA. Founded in 2015 and located on Avenue of the Americas, in the heart of New York City, International Wealth Tax Advisors provides highly personalized, secure and private global tax, GILTI, FATCA, Foreign Trusts consulting and accounting to many IWTAS.COM clients worldwide, including: Singapore, China, Mexico, Ecuador, Peru, Brazil, Argentina, Saudi Arabia, Pakistan, Afghanistan, South Africa, United Kingdom, France, Spain, Switzerland, Australia and New Zealand.

Recommendation to increase take from wealth, property and inheritance taxes

Recommendation to increase take from wealth, property and inheritance taxes

Offshore trusts inheritance tax

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Sources say the report notes property, land, capital gains and capital acquisitions — which taxes inheritance — as areas where the yield can be increased. File photograph: Getty Images

Increasing the take from wealth, property and inheritance taxes is set to be recommended by the State’s commission on tax and welfare in a shake-up of the taxation system, The Irish Times has learned.

The commission report, which has been submitted to the Department of Finance, recommends that the take from wealth and capital taxes should “increase materially” as a proportion of tax revenues.

Sources say the report notes property, land, capital gains and capital acquisitions — which taxes inheritance — as areas where the yield can be increased.

If adopted, the policies could represent a significant reorientation of the system towards taxing wealth rather than focusing more on income. Wealth taxes are also likely to include income from shares and money on deposit.

The Irish Times has previously reported that higher and more extensive property taxes, which would be a typical tax on wealth, were recommended by the commission. This would include a site value tax aimed at capturing the value in land assets that are held predominantly by the wealthiest 10 per cent of households in the State. The report identifies that Government should aim to increase significantly revenues from taxing property and land.

The report is understood to stop short of advocating for a full-scale wealth tax, which is generally levied on net household wealth, instead proposing targeted taxes on certain income streams which contribute to individual wealth.

Sinn Féin has advocated for a wealth tax of 1 per cent on “net wealth held above €1 million”, which it said in its alternative budget for 2022 would raise some €129 million.

Proponents of taxes on wealth argue they facilitate the transfer of wealth, often intergenerationally, and target embedded wealth inequality rather than income inequality, which is addressed more directly by the income tax system.

Promoting employment

The report of the commission on tax and welfare is set to be published before the end of the year, potentially in the immediate aftermath of the budget. But no date has been set yet. It was established last year to “review how best the taxation and welfare system can support economic activity and income redistribution” while promoting employment and prosperity in a “resilient, inclusive and sustainable way”.

A meeting of the commission in January of this year discussed a paper on “taxes on wealth”, published minutes show. Members discussed the distribution of wealth in the Republic and “options for a wealth tax” including whether it would be recurrent or once-off in structure, and “whether such a new tax on wealth should be considered in the context of existing taxes on returns to, or transfers of, wealth”.

A meeting earlier that month discussed taxation of share-based remuneration and also the “overall balance of taxation between earned income, consumption and wealth”. In October of last year, it discussed intergenerational equity in the housing market and changes to the taxation of property wealth.

The report is also understood to warn Government that it will need to raise billions of euros in additional revenue, primarily through increased taxes, to fund age-related spending.

Elsewhere, State fiscal watchdog the Irish Fiscal Advisory Council (Ifac) has said increasing welfare and pension payments to keep pace with inflation, combined with the costs of public pay and capital investment, would mean expenditure increasing by almost €7.5 billion in Budget 2023. Ifac said in its pre-budget submission that this would grow the budget well in excess of rules which limit expenditure growth to 5 per cent — and which have already been paused by the Coalition, which intends to grow core spending by 6.5 per cent in 2023.

offshore trusts inheritance tax Jack Horgan-Jones

Offshore trusts inheritance tax Jack Horgan-Jones

Jack Horgan-Jones is a political reporter with The Irish Times

Offshore trusts inheritance tax Ian Curran

Ian Curran is a Business reporter with The Irish Times

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Liz Truss Considers Cutting VAT to 15% to Ease UK Crisis: Telegraph

Liz Truss Considers Cutting VAT to 15% to Ease UK Crisis: Telegraph

Global intangible low taxed income

Liz Truss is considering cutting Britain’s VAT sales tax by as much as 5 percentage points across the board, the Telegraph reported, a move that may head off criticism she lacks a plan to tackle the country’s cost of living crisis.

Author of the article:

global intangible low taxed income Bloomberg News

Bloomberg News

Susanne Barton

global intangible low taxed income Liz Truss, UK foreign secretary, speaks during a Conservative Party leadership hustings in Manchester, UK, on Friday, Aug. 19, 2022. The job of picking the ruling Conservative Party leader and British prime minister falls to about 175,000 grassroots Tory party members.
Liz Truss, UK foreign secretary, speaks during a Conservative Party leadership hustings in Manchester, UK, on Friday, Aug. 19, 2022. The job of picking the ruling Conservative Party leader and British prime minister falls to about 175,000 grassroots Tory party members. Photo by Anthony Devlin /Bloomberg

(Bloomberg) — Liz Truss is considering cutting Britain’s VAT sales tax by as much as 5 percentage points across the board, the Telegraph reported, a move that may head off criticism she lacks a plan to tackle the country’s cost of living crisis.

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The potential reduction to 15%, flagged in a newspaper that has strongly backed her leadership campaign against Rishi Sunak, represents something of a change of tack by Truss. Hours earlier, a strongly worded editorial in the Sun newspaper called the government’s near silence on the crisis “a disgrace,” and urged Truss to abandon traditional Tory ideology. 

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With the contest entering its final week — there’s one hustings remaining in London on Wednesday — Truss is favored to win the backing of Conservative Party members and become Britain’s prime minister.

The reduction in the value added tax headline rate would be the largest ever and may save the average household more than £1,300 a year, the Telegraph said. It could protect businesses from failing and may be accompanied by additional measures to help the most vulnerable pay their energy bills, which are set to almost triple this winter from a year earlier, the Telegraph said, citing officials. 

The Treasury will present the next prime minister with plans modeled on former Prime Minister Gordon Brown’s response to the 2008 financial crisis as part of a series of options to offset soaring energy bills, according to the Telegraph.

A 5-point cut would cost the taxpayer £38 billion to keep in place for one year, the Telegraph said, citing analysis by the Institute for Fiscal Studies. It may also reduce inflation temporarily by around 2 points.

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This news is brought to you by IWTA. Founded in 2015 and located on Avenue of the Americas, in the heart of New York City, International Wealth Tax Advisors provides highly personalized, secure and private global tax, GILTI, FATCA, Foreign Trusts consulting and accounting to many IWTAS.COM clients worldwide, including: Singapore, China, Mexico, Ecuador, Peru, Brazil, Argentina, Saudi Arabia, Pakistan, Afghanistan, South Africa, United Kingdom, France, Spain, Switzerland, Australia and New Zealand.

Will China’s bubble finally burst?

Will China’s bubble finally burst?

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Below is a complete transcript of the Sinica Podcast with Tom Orlik.

Kaiser Kuo: Welcome to the Sinica Podcast, a weekly discussion of current affairs in China, produced in partnership with The China Project. That’s right, from September 1, as you hopefully already know, we are changing our name from SupChina to The China Project. Subscribe to Access from The China Project to get access to, not only our great daily newsletter but all the original writing on our website at thechinaproject.com. We’ve got reported stories, essays and editorials, great explainers and trackers, regular columns, and of course, a growing library of podcasts.

We cover everything from China’s fraught foreign relations to its ingenious entrepreneurs, from the ongoing repression of Uyghurs and other Muslim peoples in China’s Xinjiang region, to Beijing’s ambitious plans to shift the Chinese economy onto a post-carbon footing. It’s a feast of business, political, and cultural news about a nation that is reshaping the world. We cover China with neither fear nor favor.

I’m Kaiser Kuo, coming to you from Chapel Hill, North Carolina. Joining me from the other side of the Appalachians is a man who only picks quarrels and provokes trouble while strolling the streets of Beijing and other Chinese cities wearing a kimono, the one and only Jīn Yùmí, a.k.a. Jeremy Goldkorn. Greet the people, won’t you?

Jeremy Goldkorn: Oh, Kaiser, that was a pretty ridiculous one. You’re referring, of course, to the poor young lady in Suzhou who was arrested, a cosplayer, she was, for just walking around the streets of Suzhou in a kimono.

Kaiser: Unforgivable there.

Jeremy: Apparently, wearing a kimono is kind of evidence that you are a traitor, anyhow.

Kaiser: Wow. Jeremy, you’re joining the podcast for a second week in a row. It must be slow over on the newsletter side of things. Are you excited, though, about the name change?

Jeremy: Yeah. No, not slow. Not slow at all. The name change is great. So, we’re going to be The China Project, which means, hopefully, certain people who thought our old name was a bit ridiculous are going to love the new name. And we’re also, we’ve been launching a lot of new stuff. We have a new YouTube show, Live with Lizzi Lee, in which Lizzi interviews all kinds of interesting and influential people who know about China, and business in China, and politics. And we have a new TikTok channel by a young lady by the name of Susan St. Denis. And if you are into TikTok, it’s called ChinaVibe. Go check it out. It’s really good. And I say that as someone who doesn’t actually like TikTok, anyhow.

Kaiser: Well, I love that channel. I think she’s fantastic. I think she represents our viewpoints very, very well.

Anyway, a little over two years ago, in June of 2020, Bloomberg’s chief economist, Tom Orlik, joined me on the show to talk about his then-new book, China: The Bubble That Never Pops. I think Jeremy was speaking at a QAnon event and couldn’t make it at the time. Isn’t that right, Jeremy?

Jeremy: Yeah.

Kaiser: That was, of course, just a few months into the pandemic, and with this weird time dilation fact that COVID seems to have had, it does feel like an awfully long time ago. Certainly, a lot has happened in the time since, and Tom has a revised edition of the book coming out any day now at a moment when, once again, there are a lot of people who are convinced that this time it really will pop. So, we’ve invited Tom back onto the show to talk about what’s new in the book to see whether events of the last couple of years have either reinforced or caused him to rethink his earlier positions and to get his take on the current situation.

Jeremy: In March of this year, I had a brief conversation with Tom, from my “Invited to Tea” Q&A column for the website, where we talked about, among other things, the reasons why he doesn’t think setting GDP targets is such a bad idea. And I would encourage anyone interested in more to read that column, which you can find easily by just searching for Tom’s name and my name, and SupChina.

Kaiser: Yeah. Anyway, Tom Orlik, welcome back to Sinica, always great to have you, man.

Tom Orlik: Great to be here, Kaiser, Jeremy. Before we kick off, I’ve got one burning question for Jeremy. Jeremy, when you spoke at the QAnon event, were you wearing a kimono or was that a late…?

Jeremy: You’re giving away my secrets, Tom, and I’m going to be in trouble on both sides of the Pacific. We’re going to have to change the subject now.

Kaiser: Yeah. I have a great way to change the subject. Tom, I think we should start off with a little bit of a recap for those of our listeners who didn’t hear our podcast with you two years ago or who haven’t read the first edition of the book. So, as succinctly as you can manage, what are the main reasons that the China bears had, at least recently, been so fundamentally wrong? Why has the Chinese bubble not popped?

Tom: So, I lived in China from 2007 to 2018. And throughout that time, there was a thread of pessimism, even a thread of doom running through the Western commentary on China’s economy and financial system. Yes, we said the headline growth numbers look impressive, but if you poke a little bit beneath the surface, what you discover is that it’s a Potemkin village. The boom is built on an unsustainable basis with a huge build-up in debt and an outsized role for big inefficient dinosaur state-owned enterprises. So, it can’t last and it’s going to end in a bust. And as I was packing my bags in 2018, I sort of looked around and had a rare moment of self-awareness and realized, you know what? This bust we’ve been predicting for the best part of the last two decades doesn’t seem to have arrived. So, as I put pen to paper for my book, I was trying to explain why.

The conclusion I arrived at was that the China bears aren’t wrong in their identification of the problems. China does have too much debt. It does have a big inefficient state sector of the economy, but what the China bears fail to recognize is that China also has countervailing sources of strength. Debt is too high. Banks have made too many loans. Many of those loans, more than the banks acknowledge, have probably turned bad, but China’s banks also have a really, really stable funding base. And banks with a stable funding base don’t normally fall over. State-owned enterprises are big and they are inefficient, and they can be a drag on growth, but they’re also engines of development. They’re instruments which China’s government uses to build the infrastructure which the country needs to move up the industrial value chain.

And they’re also instruments which the Chinese government can use to right the ship coming out of a slump, like the second quarter slump following the COVID lockdowns in Shanghai and Beijing. It’s the state sector which leads the charge, beginning capital spending, beginning to hire more workers at a moment when the private sector is still too cautious to get the economy going again.

Jeremy: But, of course, Tom, as Kaiser said, a whole lot has happened since we last spoke on the podcast and since you published the book. Obviously, it’s almost impossible to write a book on something as fast moving as the Chinese economy that will stay relevant for years. You were, in fact, able to write a chapter on the covered response. And that chapter, given China’s rapid recovery, was still fairly sunny. And you did have a postscript about the common prosperity agenda, which we were all talking about for some months. We were calling it the red new deal, you might remember. But, of course, things changed again with the Shanghai lockdowns and all, and things are looking quite a lot less sunny than they were in the earlier months of the pandemic. We’ll get into this a little later this hour, but generally speaking, is China looking quite as clever as it was four months ago?

Tom: So, if we were having this conversation at the end of 2020 or the end of 2021, China’s response to the COVID pandemic looked pretty formidable. Yes, there are some big unanswered questions about opacity, both in terms of failing to share information with the Chinese people and the rest of the world right at the beginning of the pandemic. But in terms of containing their domestic outbreak, saving lives and getting the economy going again, in 2020 and 2021, China’s policy-makers looked pretty clever, certainly pretty impressive relative to most of the rest of the world. Right now, the situation looks considerably different. Here, in the United States, in Europe, at an enormous expense in human life, let’s not forget that more than a million people have died here in the United States and hundreds of thousands of people have died in Europe, populations have achieved a measure of resilience, a measure of immunity to the COVID virus.

And that means that the economy is open, people are back in the office, children are back in school, and daily life looks, well, not quite like it did pre-COVID, but not too far away. In China, because there’s been no widespread outbreak, and because there’s been no move to acquire the advanced mRNA vaccines, which give a high level of resistance or immunity to the virus, the population is still COVID naive. And we’ve seen some of the big costs of that in the Shanghai lockdown in the second quarter of this year. We’ve seen the enormous negative impact it has on growth. We see the problems continuing with lockdowns in Hainan, China’s island holiday destination. And there’s still a big unanswered question, how does China exit from COVID-zero, and how costly will that be in human lives and in economic growth?

Kaiser: Yeah, yeah, absolutely. Well, it’s kind of a Catch 22. I mean, the immunological naivete is kind of a result of China’s early successes, and now that is precisely what’s keeping it from being able to open faster in the absence-

Jeremy: Well, also, the fact that they don’t seem willing to import vaccines and thus kind of show up the fact that the Chinese vaccines aren’t that great. Isn’t that the other factor?

Kaiser: The thing is we don’t really know, because there are so few COVID cases, how the Chinese vaccines perform in terms of reducing hospitalizations.

Jeremy: As a cynic, I can offer an interpretation of that, Kaiser, but let’s not get stuck in a COVID argument.

Kaiser: Let’s move on.

Jeremy: I have a QAnon meeting to go to later.

Tom: And a kimono to press ahead of that.

Jeremy: That’s right.

Kaiser: Tom, you used the same phrase that I’ve used before when talking about Chinese experience of recent years, stress test. Though, you used it mainly to talk about the economic system. What was this stress test? How did the Chinese economy fare in the early months of 2020 and so forth? And what conclusions do you think the leadership drew from that?

Tom: So, if we are to believe the China bears, the pessimists on China’s economy who say that it’s on the verge of collapse, then China’s debt is so high and China’s state-owned enterprises are so inefficient, and China’s leaders, so incapable of acting effectively that when a huge challenge came along, and clearly COVID was a huge challenge, China’s economy should have collapsed.

And that’s clearly not what happened. In the first quarter and the second quarter of 2020, the economy locked down, but because the banks are well funded, they could continue operating, they could extend forbearance to businesses who had shut down and were temporarily unable to repay their loans because state-owned enterprises can act, from time to time, on national priorities, rather than a sort of narrow quarterly results basis. They could hold on to their workers. And once the economy was reopened, they could catalyze the recovery by beginning more investment projects and bringing more workers on.

I think, in some respects, at least in 2020 and 2021, China passed the COVID stress-test rather well. In an important other respect, though, I think COVID has underscored some of the bigger weaknesses of the Chinese system. So, China has pointed at the problems of democratic systems, which were evident during the COVID crisis. Democratic systems where everybody has a voice and no one can tell anybody what to do were not able to contain the virus, not able to even have people do common sense things like wear masks. And that had some terrible consequences here in the United States and in Europe.

But non-democratic systems, single-party systems, authoritarian systems, like China, also have some very serious weaknesses. And one of those weaknesses is that they find it too hard to listen to critical voices and too hard to move away from the wrong policy, even when it’s clear that it’s the wrong policy. And I think we’re seeing that now with COVID-zero.

Kaiser: Yeah, yeah, yeah. I would tend to agree.

Jeremy: Tom, in response to the Great Financial Crisis that seems like ancient history right now, 2008, 2009, China opened the stimulus taps and coordinated with the United States. And the conventional wisdom now around the world seems to me to be that China was very successful and that the benefits weren’t just seen by China, but the whole world actually benefited from China’s handling of the crisis and from the stimulus. Now, it comes to COVID, the U.S. economic policy response has involved impressive amounts of stimulus. I think people are starting to argue now that there was too much of it actually. But it wasn’t much by China, at least not in 2020 or 2021. What was behind that lack of interest in stimulus? Why did they not do a stimulus program back then? And why are they apparently opening the taps now?

Tom: So, I think there’s a couple of reasons for it, Jeremy, and they both actually go back to what in China is viewed as the failures of the stimulus back in 2008 and 2009. Yes, China’s stimulus back then, the sort of famous Wēn Jiābǎo 温家宝 $4 trillion UN stimulus and all of the bank lending and investment, which that catalyzed, it restarted China’s growth. But it also put China on an unsustainable trajectory. Debt rose too high. It proved very difficult to turn the lending taps off. And that has contributed to the high level of financial risk in China, which is one of the reasons they can’t now run a massive stimulus. Debt’s already too high, they’ve kind of maxed out. The other reason is, well, you mentioned that the 2008, 2009 stimulus was a kind of a generous stimulus, a stimulus that restarted the global economy, and that’s true.

And China, of course, will take the positive PR from that as they took the positive PR, for example, from their decision to stabilize the yuan during the Asian financial crisis back in the 1990s and provide a kind of anchor for stability in the region. But being generous to the rest of the world isn’t normally an objective of national economic policy. Here, in the United States, Jerome Powell at the Federal Reserve or Janet Yellen at the Treasury don’t think to themselves, how can I set an optimum economic policy for the rest of the world? They think to themselves, how can I set an optimum economic policy for the United States? And that’s the same in China. It was a kind of desirable side effect for the rest of the world that China’s stimulus was so generous in the great financial crisis, and did catalyze a huge amount of commodity demand, for example, good news for the Australias and the Brazils of the world.

But from China’s perspective, that wasn’t actually what they were aiming for. It wasn’t a huge positive. And they’ve actually become smarter about how they can deliver stimulus now, so they can deliver more benefits at home at a smaller cost and with less spillovers to the rest of the world.

Kaiser: So, what’s the, the next round of stimulus looking like? What form will it take?

Tom: I mean, perhaps we’re going to want to get into this a bit in the discussion, but China’s got two really big problems right now. So, the first really big problem is COVID-zero and how to exit from that, and the drag on growth that comes when you have to lock down big cities, even entire provinces. The second problem is what’s happening in the real estate sector. Real estate’s the biggest driver of Chinese growth, but it’s on an unsustainable trajectory, too much building, too much debt. And the attempts to kind of right the ship have triggered a significant downturn with sales, construction, and prices for China’s property now, all falling. Now, those two problems are difficult to solve at the same time, right?

Kaiser: Right.

Tom: If you want to solve the real estate problem, you want to pump a bunch of stimulus into the economy. If you want to maintain COVID-zero, actually, pumping a bunch of stimulus into the economy can push in the other direction.

Kaiser: Right. I see. Yeah. It’s a tough nut to crack. And we will, as you say, get into both of these problems a little more extensively. But first, let me ask, “dual circulation” was a thing not too long ago. We talked a lot about, especially the sort of boosting of domestic demand, this was the initial response, I think, after the first big COVID wave in the spring of 2020. That policy was sort of rolled out in May or June of that year. Have we seen continued growth in domestic consumption as a percentage of GDP? And is this a priority right now for Beijing?

Tom: So, one of the problems with the COVID pandemic is that it has made the various different imbalances in China’s economy even worse. One of the big imbalances in China’s economy is too much reliance on investment and exports to drive growth and not enough of a role for the domestic consumer. What’s happened during the COVID lockdowns is, well, the government has been much better at keeping industry going than it has at keeping consumption and services going. And there’s an obvious reason for that, which is, if you keep growth going by having a bunch of people continuing to go to work in their hygienic factories, you can probably control COVID. If you keep growth going by encouraging everyone to go to restaurants or nightclubs or tourist sites, well, that’s going to be pretty bad for containing COVID.

So, the dual circulation economy aims to boost domestic demand. And the pressing need to address the imbalances in China’s economy mean that there’s a need for more consumption. But the patent over the last two years, because of the overarching need to contain COVID, has been; industry has done well, exports have done well, but domestic consumption, especially consumption of services has suffered.

Kaiser: Yeah. So, that seems to have been sort of back burnered a bit. Let’s talk a little bit about the common prosperity agenda. We talked just now about stress-tests, and in various talks that I gave last year, I often said that China’s governance system had undergone a series of such stress-tests in recent years as well, beginning with the trade war and American efforts to kneecap Chinese tech, the opprobrium that China had suffered because of Xinjiang, of course, because of the massive extralegal internments there, and of course, the crackdown in Hong Kong, and most recently, the COVID pandemic. And Beijing felt, though, that it had emerged from this, at least when they were rolling out this common prosperity agenda, that they felt like they had passed the stress tests with flying colors at levels of regime support, of political capital and credibility had never been higher.

And for that reason, I was arguing China was ready to break eggs and make an omelet. And that omelet was this whole common prosperity package, this red new deal. Addressing the primary contradiction that they decided was in 2017, the main contradiction in society, the whole range of social ills putting the economy on a totally different footing, to what extent has now this whole agenda been derailed? Have these ambitions been backburnered or scaled back? Are they, maybe, still moving forward just without so much fanfare?

Tom: So, common prosperity agenda has got a lot in it, right?

Kaiser: Yeah.

Tom: You’ve got the canceled Ant Financial IPO. You’ve got the smackdown of Didi for having its IPO here in the U.S. You’ve got the anti-monopoly crackdown on the big tech companies. You’ve got the crackdown on the entire online private tutoring industry. So, there’s a lot which kind of comes under the umbrella of common prosperity. Now, many people, not people here on the Sinica Podcast, which is so balanced that I’m surprised you haven’t got the Guild of Tightrope Walkers throwing bricks through your window because they’re scared about the competition, but some people who don’t have the balance of the Sinica Podcast have been quick to kind of scone the common prosperity agenda. And say, “This is a Chinese Communist Party that hates entrepreneurs that can’t stand any challenge to their power,” and which is kind of capricious and unpredictable and throws destabilizing policies out there without any thought for the consequences.

My take on it is a little bit different. And I think it’s reflected in your characterizing it as a red new deal, right? I think, actually, if we think about the objectives of the common prosperity agenda, let’s have a more equal society, let’s constrain the power of some of the tech monopolies, which have grown so quickly and now have such an enormous influence over the economy and over our lives, those are not specifically Chinese objectives. Here in the United States and in Europe, there’s also a desire to have more equality. There’s also a desire to constrain the power of the giant tech monopolies. I tend to think that we can find, kind of, an explanation for the common prosperity agenda. Not in the kind of capriciousness and perniciousness of the Chinese Communist Party, but rather in the kind of social policy objectives that we see here in the United States, here in Europe, and guess what? in China as well.

Now, even if we agree that achieving a higher level of equality and constraining the power of the tech monopolies is a good idea, I think many people would agree that it is a good idea, it does come at a cost. That cost is a cost of growth. Now, if you’re sitting in the middle of 2020, and you think you’ve solved COVID and the economy’s booming, you probably think to yourself, “Yeah, I can pay a bit of a cost in terms of growth. I can pursue these kind of farsighted long-term social objectives, and GDP will be a bit lower, but I don’t care.”

Kaiser: Yeah. After all, you’ve just had this instance in where you’ve suffered short-term pain for enduring gain, like the whole V-shaped recovery thing, right? China tanked its economy quickly right away and then bounced back, right? So, that was the lesson.

Tom: Yeah. I think that’s exactly right. I also wonder if that experience of the COVID lockdowns, where the economy didn’t grow and there wasn’t an enormous problem is actually going to prompt a longer-term reevaluation by China’s policy-makers on what level of growth is acceptable. If the economy can grow 0% or even contract without there being massive problems, perhaps they don’t need to be targeting 5%, 6% a year. But back on the common prosperity agenda, from where they are in 2022, still dealing with COVID-zero, now dealing with a very, very challenging real estate slump, I think they probably think this isn’t a good time to pursue those farsighted objectives, which come at a cost in terms of short-term growth. And so, yes, it wouldn’t be surprising if they were putting them on the backburner.

Kaiser: Yeah. Some of the controls have been kept in place, like fintech companies, they’re not really letting up on the cram schools that much. They’re still barreling forward and pushing toward hard tech, away from the tech sectors that the party seems to think are more frivolous gaming and that sort of thing. Yeah.

Jeremy: That was a feature of common prosperity, the push for chips for hard technology. Which I would imagine, Tom, is likely to continue, especially with the U.S. now, apparently trying to restrict even older generations of chip-making tools from export to the PRC. So, how would you say China is faring in its efforts to be more technologically independent?

Tom: So, one of the really striking things which has happened over the course of the COVID pandemic is China’s international reputation has been hammered. I’m sure Sinica listeners have seen that famous Pew survey which shows unfavorable views of China rocketing up in the United States, in Europe, and also amongst Asian neighbors. And part of the reason for that is the blame game over the origins of the COVID crisis, but there’s also more to it. People don’t like what they’re seeing in Xinjiang. They don’t like what they’re seeing in Hong Kong. And for China, this is a pretty significant problem. It’s a significant problem because China is an exporting nation. And in general, you want to have good relations with the countries you’re selling to. It’s also a problem, and this comes back to your question, Jeremy, because China is a net beneficiary of global technology transfer.

China is still playing catch up with the west on technology. And so, it has to import a bunch of things as part of its manufacturing processes, notably a bunch of semiconductors. And it is also working aggressively to try and assimilate technologies which it sees being used to drive higher productivity in the U.S., in Germany, in Japan and elsewhere. Now, of course, China is not blind to the fact that its international ties are fraying. That was already clear under the Trump administration with the trade tariffs, it’s become even more clear and kind of become… It’s become clear under the Biden administration that Trump wasn’t an aberration, and rather that global ties, U.S.-China ties are now permanently damaged. We’re not going to go back to the sort of happy relations we saw under Clinton, or Bush, or Obama. And that’s accelerating the Chinese drive for technology independence.

Now, in one really important area, semiconductors, China doesn’t appear to have made very much progress. And people point at that and say, “see, China can’t achieve technological independence. I don’t actually hold that view. I think, if you think about the history of the last 40 years, it’s the history of China throwing a huge amount of money at attempting to assimilate foreign technologies, starting with simple stuff, like how to make metals, and then moving up the value chain to things like trains and ships, and then moving up the value chain even further to stuff like sustainable energy. Throwing huge amounts of money at those challenges, failing, failing, failing, but then succeeding.

Once they succeed and they have that technology, they can operate at such enormous scale that they can effectively price out any of their competitors elsewhere in the world. So, so far, they’ve not managed to deliver that on semiconductors. And that’s sort of seen as a source of reassurance for the U.S., and Europe, and Japan and others, kind of, “Ha-ha, China’s trying, they’re throwing a huge amount of money at it, but they haven’t succeeded yet.” I think the lesson of the last few decades is yeah, they don’t always succeed at first, but that doesn’t mean they’re not going to get there in the end.

Kaiser: Right.

Jeremy: That’s something Kaiser and I used to hear a lot of, especially in the ‘90s, but the 2000s, in the sort of tech scene in China when most Chinese tech companies were basically copying their Silicon Valley peers. And then, suddenly, companies like Tencent came out with WeChat. And I think that was the first time when Western technology people suddenly got a bit of a fright, because they were like, hell, that these people can innovate. Anyway.

Kaiser: Yeah. Tom, you’d add to the litany of things that people outside of China don’t like the Ukraine war and China’s position in that, the Taiwan Strait situation, especially surrounding speaker Pelosi’s trip and China’s response, and, of course, the controversial zero COVID policy and the lockdown. Some pundits and some reporters are convinced that under all these accumulated external and internal stresses, we are now seeing cracks in the facade of unanimity within the highest echelons of the leadership. When it comes to economic policy, at least, because Lǐ Kèqiáng 李克强 is often invoked as the leader of this tacit opposition. What do you make of these claims?

Tom: I tend to view any claims about Chinese elite politics with extreme skepticism. I just don’t think that we have good sourcing for those claims. I don’t think anyone in the standing committee or the politburo, or the central committee, or the central committee alternate is sharing their thoughts on what’s going on inside Chinese elite politics with anyone who’s not already in that circle. That was what was so fascinating about that Bó Xīlái 薄熙来 moment, right? That huge scoop by Jeremy Page of The Wall Street Journal, back when Xí Jìnpíng 习近平 was jockeying for his position as general secretary. It was that it kind of opened a crack in Chinese elite politics. And for a moment allowed people to look into the kind of the reality and the conflict and the maneuvering, which was going on.

But I think that was a particular moment when there was a crisis and it opened a crack in the sort of facade and we could peer in. I don’t think that happens very often. I do hear these things from time to time, like Li Keqiang has a short-term view on the economy because he wants to get renominated, but Xi Jinping is already certain that he’ll have another term, and so he’s not so worried about it. That was one that we heard a few years ago. I tend to sort of have some skepticism about the basis of these claims.

Jeremy: So, it’s bullshit is what you’re saying. Okay. Tom, let’s go back to the real estate industry property and talk about the situation of Evergrande and the other big developers. With all the news about mortgage strikes, desperate exhalations to get patriotic carters to buy property to shore up the realty sector, I mean, is this the thing that could bring it all down and finally pop the bubble? Just today, the FT reported on how the property developer, Country Garden, which is another one of the biggest ones in China, estimated that first half profits fell by as much as 70%. How has Beijing tried to address this situation? Is it actually working?

Tom: So, real estate could be the thing which knocks China’s economy over. It could be the thing which finally means the Chinese bubble bursts and forces me to make an unpleasant call to Oxford University Press and ask if we can rename my book.

Jeremy: Why the bubble finally popped? What’s the…

Tom: Exactly. With the new preface on how I called it. If we look around the world and we sort of survey the history books, property plays a kind of starring role in financial crises. In 1989 in Japan, it was the bursting of the real estate bubble, which was the catalyst for the end of Japan’s development miracle and the beginning of its lost decade of zero growth and deflation. Here in the United States, the subprime crisis back in 2007 was the catalyst for the great recession and the global financial crisis. And in China, there’s a really serious problem. The fundamental demand, which drove decades of real estate boom, has started to dry up because of shifting demographics. Less people means less demand for property. And the end of the urbanization boom, which brought hundreds of millions of rural residents into the cities, and of course, they needed homes as well.

China’s property developers are overaged and have built too many houses, those ghost towns, which you read about, and it’s not a pretty picture. And we’re seeing now some indications that an unraveling is underway. Prices are down. Construction is down. Sales are down. Big real estate developers, you mentioned Evergrande, have defaulted. Other big developers, you mentioned Country Garden, have seen a very, very significant drop in profits. So, a systemic crisis is a possibility and I don’t rule it out. At the same time, it’s not my base-case scenario for a couple of reasons. The first reason is, if you look at the history of China’s real estate sector, it’s not a unbroken upward trajectory, it’s a series of peaks and troughs.

And what that means is that this is not China’s policymakers first rodeo when it comes to addressing a downturn in the property sector. They’ve been here before and they have a bunch of policy instruments, which they can use to turn the sector around. They can cut down payment requirements, they can cut mortgage rates, they can ease financing conditions for real estate developers. They began to do all of these things, they can do significantly more, if that’s what’s required, to prevent a systemic crisis. And the second reason is that we are where we are, in part, because of a deliberate policy choice by Beijing. Beijing decided in 2020 that it was time to put the real estate sector onto a sustainable trajectory. And they imposed significant restrictions on real estate developers’ access to finance. Now they did that because they wanted to address the problem of moral hazard in the sector, to address the kind of view of investors and real estate developers, that they could take on any risks. And if things went right, they’d make a huge amount of profit. And if they went wrong, the government would be in there to bail them out.

Now, addressing moral hazard means allowing some real estate developers to fail. China allowed Evergrande to fail. They allowed other big developers like Kaisa and Fantasia to default on their borrowing. They’ve moved to address the problem of moral hazard. But China’s policymakers are not crazy. They’re not going to take their campaign against moral hazard so far that it craters the entire Chinese real estate sector and spills over into problems for the banks, which tips the economy into a financial crisis.

Jeremy: Oh, and I should point out that Kaisa Real Estate Company has got nothing to do with Kaiser Kuo.

Kaiser: Well, that you know of, that you know of.

Jeremy: Oh, I see. I see.

Kaiser: I mean, I don’t think it’s a coincidence that they named it after me, right? So, Tom, what is Xi Jinping prioritizing right now as we move closer to the 20th Party Congress? I mean, it seems like there are an awful lot of fires to put out, a lot of simultaneous crises, both domestically. How is the leadership around Xi going about triage as it were?

Tom: So, it’s a really good question, Kaiser, and I’m afraid I don’t have a brilliant answer for you. I think it’s-

Kaiser: Okay. I’ll then put it another way. How would you, what would you prioritize? What do you think are the most urgent crises?

Tom: I think there’s two big problems to deal with. The first is COVID-zero and the second is real estate. And neither of them have an easy solution. On COVID-zero, the challenge is how to move from a country which is COVID naive to a country which has a measure of immunity, and so can reopen and resume kind of normal life and openness to the rest of the world. I’m not an epidemiologist. I don’t know exactly how China’s policy-makers are going to address that challenge. But when I think about how they address other challenges, what I generally see is a gradual incremental adaptive approach, right? Let’s not try and do everything at once. Let’s take a small step, see if we succeed, and then take another small step, retreat a bit if we have to, but keep things moving forwards.

For the exit from COVID-zero, I wonder if what that’s gonna mean after the Party Congress is a province by province or city by city approach to exiting. Let’s pick a province, let’s seal it off from the rest of China, let’s bring in all of the best vaccines we have, all of the healthcare resources we have, and then let’s let COVID go within that province so we allow that province to build up some natural immunity whilst hopefully minimizing the public health costs. And then let’s learn from that experience and try and do it better in the next province and better in the next province. And then, over the course of a year or a year and a half, you move the country from lockdowns and COVID naivety, to hopefully immunity and openness.

Kaiser: From your lips to Xi Jinping’s ears.

Tom: On the real estate crisis, I think there’s a bunch of stuff they’ve got to do. I think they need to ease macro policy, right? So, they need to cut interest rates, they need to cut a tool, which is kind of specific to China, called the reserve requirement ratio to free up more money for banks to lend. They need more fiscal stimulus. They need to encourage local governments to issue more bonds, to pay for more infrastructure building to offset the drag from property. They also need to take steps which are specific to the property sector. They need to cut down payment requirements. They need to cut mortgage rates. They need to ease controls on who can buy a home to encourage more people to buy property. Within the property developers, they probably need to have a kind of tough decision which separates preterit from the elect, right?

They need to say, “You property developers do not have a sustainable business model. We’re gonna allow you to go into bankruptcy. And you are the property developers, we think your finances look okay, we think you know to run your business, you are going to survive, and you’re going to take a larger share of the market, which ultimately will be more profitable for you. But guess what? You are going to need to help us out with the failed projects from these other developers which are going into bankruptcy.” And lastly, I think that, however, they do this, there’s going to be a bunch of defaults, a bunch of bad loans. And so, I suspect there’s going to be a need to recapitalize some of the smaller banks as well, to make sure that they have the buffer needed to withstand that shock.

Kaiser: And they surely are worried about social stability now with this phenomenon of the mortgage strikes and so forth. Are they prioritizing making the ordinary person, who paid for a property on which ground hadn’t even been broken yet and will never move into the place, are they going to make them whole first? Is that the plan?

Tom: So, in the financial world, when we think about a default, there’s a kind of hierarchy of investors who get paid, right? So, if you are a shareholder in a company, you are going to get wiped out. If you are a bond holder, who’s lent the company some money, then you’re going to get some of that money back, but there’s going to be a kind of a hierarchy, right? Some people are going to get more money back, some people are going to get less money back. And I think that’s a kind of a useful way of thinking about what’s going to happen in China’s property sector, right? You can think about the people who’ve bought a home as the people who are going to have the highest priority, right? So, there’s going to be a bunch of pain as the challenges in China’s real estate sector are worked out and there is going to be some pain for homeowners who see prices fall.

And there’s going to be some pain for home buyers who maybe see a significant delay before their property is delivered. But they’re going to be the people who are at the top of the list when it comes to getting paid or being protected, precisely as you say, Kaiser, because the last thing the CCP wants is for this to spill over into challenges of social instability. Who’s at the bottom of the list in terms of getting paid? Well, we’re already seeing it is the foreign bond holders, right? It’s the foreign investors who lent China’s property developers money in the dollar bond market. They’re the first people to get burned.

Jeremy: Yeah, I’ve been somebody, for so many years, have always thought that the Chinese government will stumble through whatever crisis comes its way and soon or later will kind of do the right thing, at least when it comes to economic terms, if not the advancement of human freedom. But I have to admit to feeling that in the last couple of years, and particularly this year, that I wonder if the leadership structure, the political environment has just become so completely stuck by the Xi Jinping cult that the decision-making is not quite what it used to be. And that might take some time to figure out, but what we will know relatively soon is just how bad for China’s economy this year’s COVID lockdowns have been. I don’t know if we’ll be able to attribute everything exactly to the lockdowns, but how bad do you think the damage will be to China’s economy because of the covered policies when the numbers come in at the end of this year, Tom.

Tom: We’ve already seen a bunch of it, Jeremy. Second quarter, China’s economy contracted. That’s pretty unusual. We saw it in 2020 during the first COVID wave. That’s pretty much the only time we’ve seen it during the reform era. So, there’s significant damage to China already from the COVID-zero strategy. There’s more damage to come, right? As long as you stick with COVID-zero, you are constrained to lock down entire cities, entire provinces when there’s just a few cases. We’re seeing that happening again, right now, in Hainan. There’s no reason to believe that other cities and provinces are going to be immune in the months ahead. So, it’s difficult to make a clear forecast on it, but clearly, it’s a possibility that we’ll see a repeat of what we saw in Shanghai, and Beijing, in other big cities in the months ahead with a further negative impact on growth.

Now, as China, hopefully, after the Party Congress, begins the process of exiting from COVID-zero, there’s more costs to come, right? There’s more costs to come both in terms of public health and in terms of economic impact.

Kaiser: Well, Tom, thank you so much for taking the time to speak with us. Just to remind everyone, the new edition of China: The Bubble That Never Pops will be published on August 26, so just a couple of days after this episode drops, but it is available to pre-order right now, and I highly recommend that you do so. Let’s move on now to recommendations, but first, Jeremy is going to tell you what you can do to support the work that we do with the Sinica Podcast and all the other shows in the network. Over to you, Jin Yumi xiānshēng 先生.

Jeremy: Thank you, Kaiser xiansheng. Yes, please, please, please subscribe to Access. This is our membership program, which gives you our daily email newsletter that goes out in the afternoon, New York time, every day, summarizing all the big news from China, from the Chinese media, from the Western media, and from our own sources and our own original journalists. You also get access to everything behind our paywall. And I have to tell you, for the freeloaders out there, the paywall is getting much, much tighter. So, we’re asking you for actual shackles if you want to see the goods, and it would be really great if you would subscribe to Access.

Kaiser: All right.

Jeremy: You can find details on our website. Just click the subscribe button at the top right-hand corner of the page. And the URL, thechinaproject.com is working, and that is where we will be from September the 1. September 1, all of our stuff is gonna be at thechinaproject.com.

Kaiser: All right. Okay. On to recommendations, Jeremy, you start, what do you have for us this week?

Jeremy: You know I like crime fiction.

Kaiser: You like crime.

Jeremy: I like crime. Yeah. But my father actually turned me onto this incredible series written with the pseudonym, Richard Stark. The name of the actual author is Donald E. Westlake. And he wrote, I guess, ‘70s to end of the ‘90s, early 2000s, I think. This series with a hero, an anti-hero named Parker, who is a career criminal who does mostly large-scale heists and thefts. And these books are completely immoral. There’s not a single moral person in them, but they’re amazingly compelling and really, really tight writing that is just a pleasure to read.

Kaiser: Oh, wow. You’ve sold it well. I’m definitely going to check those out. They all sound terrific. Tom, what about you? What do you have for us this week?

Tom: So, I think, probably like you guys, I read a bunch of China books, and in the last couple of years, there’s been, what I think has been a rather dreary series of China books often focused on U.S.-China relations, which arrange a kind of already publicly known set of facts and quotes into a slightly new configuration, apparently for the central purpose of allowing the author to claim that they’re a China expert and they’ve written a book on the subject. So, I wanted to recommend a couple of books, which I think do not fall into that category, and which brings something significant and new to the table in terms of the research and the reporting behind them.

The first is Surveillance State by my old Wall Street Journal colleague, Josh Chin, and his co-author, Liza Lin. Now, Hannah Arendt, the great philosopher of totalitarianism, described the process by which the German secret police tracked people they were interested in. For every person of interest, they had an index card, and they put the person of interest as a dot in the center of that card, and then they drew a concentric circle around it. And within that concentric circle were all that person’s immediate friends and family. And then they drew a second concentric circle. And into that circle, they placed all of their acquaintances and work colleagues. And Hannah Arendt said the only thing which prevents that surveillance approach from being completely all-encompassing is the size of the piece of paper. Now, of course, with social media, and with geospatial data, and with cloud computing, businesses and governments now have the capacity to do that surveillance on a much, much larger scale. And nowhere has that process been brought to a higher standard of horrifying perfection than in Xinjiang Province.

And what Josh and Liza do in Surveillance State is tell the story of what’s happening in Xinjiang, and also expand out to tell the broader story of surveillance technology and the way it’s being used by state actors elsewhere in China here in the United States. It’s a really compelling book, brilliantly reported, beautifully written. I highly recommend it.

The second recommendation I have is from an academic called Victor Shih. Victor actually makes a cameo appearance in the China debt story. It was Victor who used an innovative research technique to first draw to public attention, the extent of the problem of debt in China’s local governments.

Kaiser: Sure.

Tom: But Victor’s interests go much more broad than that. He’s also an expert in China’s elite politics. And in Coalitions of the Weak, he presents a deeply researched and revisionist history of China’s elite politics from Chairman Máo Zédōng 毛泽东 through Dèng Xiǎopíng 邓小平, Jiāng Zémín 江泽民, Hú Jǐntāo 胡锦涛, and Xi Jinping, and makes the case throwing the analysis forwards that Xi Jinping, as he moves into a third term, might adopt a coalition of the weak governing strategy, surrounding himself with relatively weak followers from rival factions who can’t challenge his position as the number one leader with negative consequences for the quality of China’s governance. So, Surveillance State by Josh Chin and Liza Lin, Coalitions of the Weak by Victor Shih, both highly recommended.

Kaiser: Yeah, both of those books are actually in my current pile and I’m planning on interviewing all the authors. I already have something scheduled with Josh and Liza, or Liza, and we’ll be reaching out to Victor really soon. All this sort of ahead of the 20th Party Congress. I’ve got a lot of work to do. Hey, thanks. Those are great recommendations.

All right. For my recommendation, I’m going to go something frivolous. It’s a show on Hulu called The Bear. It’s a great TV show. It’s about a top-flight chef who comes back to Chicago, he’s native Chicago, to run this grimy Italian beef place that his brother left to him when he died. And it’s in shambles. I mean, the finances are all completely screwed and everything is… It’s not up to code, but the food is great and it’s got a loyal clientele.

The show itself is getting its really, really rave reviews everywhere, and deservedly. It’s really compelling. It’s super-fast paced. It’s really brilliantly shot. The acting’s great. Just the gritty kind of local authenticity of Chicago. I’ve actually learned a ton from it. And plus, just watching all that cooking happening, this guy really does seem to have great chef chops.

Tom: Kaiser, I can’t decide if the contrast between your recommendation and my recommendation is making me seem like intellectual and high-minded or unbearably pompous. But I’m going to hope it’s the former.

Kaiser: Or me just being very low-brow and intolerably just kind of frivolous, right? But in any case, I think we can be all things, right? So, we can watch TV shows about chefs in Chicago and we can read books about the techno-authoritarian dystopia of Xinjiang and can contain multitudes. Anyway, Tom, thanks so much, man. It’s great to talk to you as always.

Tom: Thanks Kaiser. Thanks Jeremy. It’s been a blast.

Jeremy: Thank you, Tom. That’s always such fun and so informative to talk to you.

Kaiser: Jeremy, yeah, as always, just lots of fun.

Jeremy: Kaiser, thank you. That was a pleasure.

Kaiser: The Sinica Podcast is powered by The China Project and is a proud part of the Sinica Network. Our show is produced and edited by me, Kaiser Kuo. We would be delighted if you would drop us an email at sinica@thechinaproject.com, or just give us a rating and a review on Apple Podcasts as it really does help people discover the show. Meanwhile, follow us on Twitter or on Facebook. We’re now at @supchinanews. And be sure to check out all the shows in the Sinica Network. Thanks for listening, and we’ll see you next week. Take care.

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This news is brought to you by IWTA. Founded in 2015 and located on Avenue of the Americas, in the heart of New York City, International Wealth Tax Advisors provides highly personalized, secure and private global tax, GILTI, FATCA, Foreign Trusts consulting and accounting to many IWTAS.COM clients worldwide, including: Singapore, China, Mexico, Ecuador, Peru, Brazil, Argentina, Saudi Arabia, Pakistan, Afghanistan, South Africa, United Kingdom, France, Spain, Switzerland, Australia and New Zealand.

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This news is brought to you by IWTA. Founded in 2015 and located on Avenue of the Americas, in the heart of New York City, International Wealth Tax Advisors provides highly personalized, secure and private global tax, GILTI, FATCA, Foreign Trusts consulting and accounting to many IWTAS.COM clients worldwide, including: Singapore, China, Mexico, Ecuador, Peru, Brazil, Argentina, Saudi Arabia, Pakistan, Afghanistan, South Africa, United Kingdom, France, Spain, Switzerland, Australia and New Zealand.

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“The carried interest loophole is a stain on the tax code,” Ackman said in a Thursday tweet

While a billionaire hedge fund manager may seem like an unlikely backer of the Dems’ fight against tax loopholes, Ackman has actually been arguing for the closure of the carried interest loophole for a decade now.

But before jumping into the billionaire’s beef with carried interest, it’s best to define some key terms.

Cross border tax advice Carried interest: A ‘loophole’ or an entrepreneur’s best friend?

Private equity and hedge funds earn money in two key ways. First, they charge a base management fee on the total amount of money a client has invested. Second, they earn a share of the profits from their fund’s investments if they achieve a minimum return known as the hurdle rate. Any profits earned by managers above the hurdle rate are called carried interest.

The carried interest provision allows fund managers to pay a capital gains tax rate (roughly 20%) on these earnings, instead of the much higher regular income tax rate (37% for single filers’ taxable income above $539,900). 

This tax treatment, or “loophole,” depending on who you ask, is supposed to incentivize money managers to earn better returns for their investors. But Ackman questioned this purported purpose on Friday in a Twitter thread.

“The daily activity of investment management does not need the additional incentive of lower carried interest taxation to drive behavior,” he said. “Put simply, there should be no difference in the tax rate on the management fee income investment managers receive compared to the incentive fees they receive as they are simply fees in various forms…They don’t need the extra boost from lower rates to motivate them to work better or harder for their clients. The fees are sufficient to motivate their behavior.”

Ackman isn’t the only big name on Wall Street that has spoken out against the carried interest loophole. Berkshire Hathaway CEO Warren Buffett has argued for closing the loophole for over a decade. 

 “If you believe in taxing people who earn income on their occupation, I think you should tax people on carried interest,” he said at a congressional hearing in 2010.

Still, proponents of the current carried interest tax treatment argue that changes to the tax code will hurt entrepreneurs.

“Increasing taxes on carried interest means many entrepreneurial firms and small businesses across sectors will not have access to the capital they need to compete, scale, innovate, and navigate challenging economic conditions,” the Small Business and Entrepreneurship Council said in a Friday statement.  “This will only hurt local economies and workers, and more broadly undermine U.S. competitiveness.” 

Drew Maloney, the CEO of the American Investment Council, also rebuked attempts to close the carried interest tax treatment in a Thursday statement.

“Over 74% of private equity investment went to small businesses last year,” he said. “As small-business owners face rising costs and our economy faces serious headwinds, Washington should not move forward with a new tax on the private capital that is helping local employers survive and grow.”

The Commercial Real Estate Development Association also argues that closing the carried interest will “disproportionately impact the real estate industry since real estate partnerships comprise a large number of partnerships and many use a carried interest component in structuring development ventures.”

And even Ackman noted on Friday that carried interest has value for entrepreneurs, allowing them to have favorable tax treatment as a sort of payment for the risks they take that can drive economic growth.

“This system has driven enormous job and wealth creation and is the biggest driver of our economy. It, therefore, needs to be preserved at all costs,” he wrote. “Giving favorable tax treatment for entrepreneurs who build businesses, develop real estate, drill for gas, sequester carbon, etc. creates powerful incentives that drive these high-risk activities and presents investment opportunities for passive investors who don’t have these capabilities.”

But when it comes to private equity and hedge fund managers, Ackman said the carried interest loophole doesn’t add any value.

“It does not help small businesses, pension funds, other investors in hedge funds or private equity, and everyone in the industry knows it. It is an embarrassment, and it should end now,” he said.

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Is your crypto exchange prepared to issue 1099-Bs? Here’s how to do it easily

Is your crypto exchange prepared to issue 1099-Bs? Here’s how to do it easily

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” alt=”us totalization agreements Is your crypto exchange prepared to issue 1099-Bs? Here’s how to do it easily” data-src=”https://cryptoslate.com/wp-content/themes/cryptoslate-2020/imgresize/timthumb.php?src=https://cryptoslate.com/wp-content/uploads/2022/07/crypto-exchange-tax.jpg&w=70&h=37&q=75″ data-srcset=”https://cryptoslate.com/wp-content/themes/cryptoslate-2020/imgresize/timthumb.php?src=https://cryptoslate.com/wp-content/uploads/2022/07/crypto-exchange-tax.jpg&w=105&h=55&q=75 1.5x, https://cryptoslate.com/wp-content/themes/cryptoslate-2020/imgresize/timthumb.php?src=https://cryptoslate.com/wp-content/uploads/2022/07/crypto-exchange-tax.jpg&w=140&h=74&q=75 2x” />Is your crypto exchange prepared to issue 1099-Bs? Here’s how to do it easilyTrent Bigelow ·6 hours ago· 4 min read

In order to be prepared for this change, you need to know what exactly is coming quickly down the road for crypto exchanges and wallets, what kind of reporting will be required of you, and why it might not be a good idea to build those capabilities in-house.

us totalization agreements Is your crypto exchange prepared to issue 1099-Bs? Here’s how to do it easily

Cover art/illustration via CryptoSlate

Taxes are one of the few certainties in life, and big tax changes are coming for crypto exchanges and wallets very soon. Will you be ready for them?

While cryptocurrency owners have been required to report their crypto gains and losses on their income taxes for a few years now, crypto exchanges and wallets haven’t needed to provide information to the IRS on their customers and their transactions. But that’s all changing, as new federal regulations will require crypto exchanges and wallets to provide tax documents in the form of a 1099-B to their customers. And it’s not going to be an easy process.

In order to be prepared for this change, you need to know what exactly is coming quickly down the road for crypto exchanges and wallets, what kind of reporting will be required of you, and why it might not be a good idea to build those capabilities in-house.

Us totalization agreements  What’s on the Horizon for Tax Reporting

Despite cryptocurrency’s intention to be decentralized, federal tax regulations have caught up to crypto owners, who must report their crypto holdings as property and pay any capital gains taxes associated with it. However, unlike brokerage or barter exchanges, crypto exchanges and wallets haven’t had to report customer information, transactions, and gains or losses to the IRS, and issue a form to customers for their own tax purpose.

However, that has changed with the Infrastructure Investment and Jobs Act, also known as the Infrastructure Bill, on November 15, 2021. The Bill expands required tax reporting for crypto transactions and starting in 2023, crypto exchanges and wallets will be required by law to generate and issue 1099-B forms — or something like it — to their customers, the Federal government, and each state that requires reporting. And with nearly 600 crypto exchanges out there — with the largest one running a $15.9 billion volume — there’s a lot of work ahead of them.

A 1099-B — like other 1099 forms — is used to report non-W2 income earned over $600 and are records of freelance or gig work, interest received, dividend payouts, and more. Even certain purchases using crypto coins can trigger a taxable event applying to the $600 threshold. A 1099-B form is specifically issued by brokerage firms and barter exchanges and contains a record of all transactions made, the instrument used, gains or losses, and more. The message here is clear: The IRS is viewing your exchange like a brokerage firm or barter exchange. And as such, you have to track and provide a record of all crypto transactions per customer made on your platform. You may also have to report on existing tax obligations like backup withholdings as well.

Because this is required by law, you don’t have an option to do nothing — or you can and face the penalty. You need to build out your capability to handle this massive amount of data collection and tracking, so that come next year. But how will you do that?

Us totalization agreements How to Prepare Your Exchange

Crypto exchanges and wallets need to prepare for this new tax regulation end-to-end, from collecting customer information to tracking and attributing transactions to generating a form that complies with the tax law. What kind of information does a typical 1099-B contain? You can find a customer’s name, address, and social security number — and SSNs require their own process to collect and verify before 1099-B issuance can begin. It also contains a list of every transaction made, including what was sold, the date sold, the quantity, the gain or loss, and other important information.

It’s a lot of data to track and a lot of reporting to get correct. Your first thought may be to build these capabilities in-house, but you’ll be facing a number of hurdles to doing so, like:

  • Compliance: There are a number of challenges to building in-house. The first is compliance and making sure that how you’re gathering and reporting information adheres to this new tax law. And you can be sure that the IRS will keep an eye on crypto exchanges and wallets to ensure they’re getting it right.
  • Speed: Another challenge will be the speed at which you can design, develop, and deploy these new capabilities — especially when they need to be ready by the end of the year. Do you have the resources and budget to immediately turn your attention to solving this problem?
  • Cost: Cost is another challenge if you build in-house. Consider the research, design, sourcing, development, testing, and maintenance costs of building, running, and maintaining the backend infrastructure of this capability. Does your exchange have the engineering resources to prioritize this as well?
  • Maintenance: Finally, are you prepared to commit to the ongoing work to run this tax process year after year and maintain the underlying infrastructure? Who will be making the software updates to keep up with evolving tax laws? What team will own this?

Us totalization agreements Use Custom APIs

You don’t have to build your solution yourself. The best approach to get you up and running quickly and easily is to use APIs to track and generate your 1099-Bs. Instead of building all those capabilities in-house, APIs will integrate with your system and easily pull all that data to generate the forms you need. Plus, custom-built APIs from a knowledgeable vendor will ensure that you’re not only keeping compliant with tax law but that you’re keeping up with any changes and ongoing maintenance of the API. Ultimately, going with API integration will save you time, money, and resources and prepare you for the new laws to take effect.

Us totalization agreements Tax Changes for Crypto Exchanges

An old adage says that there are only two things certain in life, and one of them is taxes. Crypto exchanges and wallets are facing an inevitable future of compliance when it comes to transaction reporting to the IRS — and possibly even more expanded reporting, including the taxability of staking. However, another old adage says that a stitch in time saves nine, so if crypto exchanges and wallets begin to build out their capabilities today, they won’t be scrambling when the IRS comes calling.

Guest post by Trent Bigelow from Abound

Trent Bigelow is co-founder and CEO of Abound. The company’s APIs enable those serving or paying independent workers (1099ers) to quickly and effortlessly embed benefits into their products, automatically setting aside enough to cover taxes, retirement, healthcare, insurance, PTO, and more. Trent leads the company’s strategy to increase wealth and wellness for 68 million self-employed Americans, unlocking access to independent benefits in an easy, affordable, and compliant way that works for everyone.

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Democratic bill would mandate new IRS free tax-filing program

Democratic bill would mandate new IRS free tax-filing program

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Sen. Elizabeth Warren is leading fellow Democrats in renewing a push for the IRS to create its own free tax-filing services and move away from its current private partnership, whose services only a slim portion of taxpayers use.

Warren, D-Mass., put forward a bill that would mandate the IRS create its own free, online program for preparing and filing tax returns and expand taxpayers’ access to their own tax-related data held by the agency. California Democrats Brad Sherman and Katie Porter led introduction of a House version of the measure.

The legislation would direct the IRS to create software that would allow any taxpayer to prepare and file their individual income tax return beginning in tax year 2023. The agency would also have to allow taxpayers with fairly straightforward returns — those who don’t take any above-the-line deductions, itemize their deductions or receive income as a sole proprietor of business, for instance — to elect that Treasury prepares their tax return beginning in the 2023 tax year.

The IRS would have to create a program for taxpayers to securely download third-party-provided return information and IRS-held data related to their individual tax bills.

The bill would require a program by March 1, 2023, allowing taxpayers who don’t have to file tax returns to claim refundable tax credits. The provision aims to expand a sign-up tool for the child tax credit to nonfilers who can access other tax benefits like the earned income tax credit, which is open to low-income workers.

The measure would also bar the Treasury secretary from entering into any new agreements that would restrict the federal government’s right to provide services or software for preparing and filing taxes.

A fact sheet from the bill’s sponsors points to problems with the IRS Free File program, which currently aims to offer free tax preparation to 70 percent of taxpayers by partnering with private tax preparing firms. The lawmakers argued that program is underused, often confuses taxpayers into paying for services and fails to adequately protect taxpayer data. In the last two years, major online tax platforms H&R Block and Intuit’s TurboTax withdrew from the program.

Only 2.8 percent of all individual tax returns filed in fiscal 2021 were submitted through the Free File program, according to IRS data.

The bill picked up co-sponsors since its last introduction in 2019 and now has 22 Democratic senators signed on.

Warren has sought to tie the issue to Democrats’ push for a budget reconciliation bill. Senate Majority Leader Charles E. Schumer, D-N.Y., and Sen. Joe Manchin III, D-W.Va., are in talks in the hopes of agreeing to a package broadly including pieces to lower prescription drug costs, incentivize clean energy production and increase taxes on the wealthy and corporations.

The latest Senate version of the legislation included about $80 billion over a decade for the IRS largely intended to boost its ability to go after uncollected taxes and raise federal revenue in the process. It also included $15 million for the IRS to study the feasibility of creating a free, direct online tax return system.

When Treasury Secretary Janet L. Yellen appeared before the Finance Committee in June, Warren pressed her for a commitment the IRS will go farther and build its own free filing system if Congress delivers the $80 billion cash infusion.

Yellen pointed to more pressing priorities like working through a massive backlog of tax returns, but agreed the IRS would take up the issue when it’s “adequately resourced.”

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Crypto trading volume drops in India as additional taxes hit investors

Crypto trading volume drops in India as additional taxes hit investors

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India’s government on July 1 implemented a 1% tax deducted at the source (TDS) on every cryptocurrency trade over 10,000 Indian rupees, or about $127. The law has only been in place a few days, but there’s already been a chilling effect on Indian digital asset marketplaces.

The levy is an addition to the 30% tax on all crypto-based incomes that began on April 1, which is double India’s 15% capital gains tax on short-term gains for traditional equities and shares.

The increasing taxation could serve as a further roadblock for citizens looking to trade crypto as the potential for financial gains dwindles.

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Conservatives, NDP call on CRA Commissioner to explain allegations of wrongdoing at global tax division

Conservatives, NDP call on CRA Commissioner to explain allegations of wrongdoing at global tax division

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The Conservative Party and the NDP are calling on Canada Revenue Agency Commissioner Bob Hamilton to testify before a Parliamentary committee after a massive disclosure of sensitive internal documents revealed numerous allegations of wrongdoing at a CRA division responsible for ensuring multinational companies pay appropriate levels of Canadian tax.

The government documents, which were submitted in a federal court case late last year, reveal the names of several whistleblowers who have made a wide range of allegations from within the agency, as well as the names of senior CRA officials who were subject to internal complaints. The documents also include a 2021 report by an outside team of psychological consultants that found half of the staff in the division said they had been victims of bullying, harassment or intimidation.

The documents suggest that at least some of the tension in the division was owing to a disagreement over the agency’s handling of a specific multimillion-dollar tax agreement reached with a multinational company. The identity of the company in question is repeatedly redacted in the documents.

Some division staff disagreed with the tax agreement because they saw it as a “sweetheart” deal for the company and opposed the way it was approved, the records show. Staff who felt the division was under inappropriate pressure to approve the agreement filed internal complaints.

The documents relate to turmoil inside the CRA’s Competent Authority Services Division, which is part of the agency’s international and large business directorate. The CASD works with international companies that operate in Canada to determine their Canadian tax obligations.

The now-former head of the division, Donna O’Connor, breached hiring rules and failed to set an appropriate leadership tone, according to the findings in a December, 2019, report produced by the CRA’s internal affairs and fraud control division and filed as part of the court case. The CRA report says Ms. O’Connor told a CRA investigator that her “division was corrupt,” but did not elaborate. Ms. O’Connor also said she was trying to clean up bad practices, according to the report.

Staff in Canada Revenue Agency unit complain of bullying and harassment, report finds

During a Monday meeting of the House of Commons Finance committee, Conservative MP Dan Albas provided notice of a motion calling on Mr. Hamilton to appear and explain the issues raised in the documents. The committee could vote on the matter as soon as Tuesday.

Mr. Albas told The Globe and Mail after the meeting that the Liberal government frequently boasts it is working hard on the world stage to ensure large companies pay their fair share of tax. But he noted the documents suggest some within the CRA disagree with how such files are handled.

“That’s one of the reasons why I’d like to have the commissioner come before committee, so that he can lay out his case as to what is occurring at CRA under his watch,” Mr. Albas said.

NDP finance critic Daniel Blaikie said he will support the Conservative motion calling for Mr. Hamilton to appear. He noted the CRA has long been accused by critics of doing a poor job of enforcing tax rules for wealthy people and large corporations.

“And so when you couple that with these stories about a broken culture that even people within the CRA are calling corrupt, it is very concerning,” he said.

Liberal and Bloc Québécois MPs did not say Monday whether they would vote for the motion, which would require the support of a majority of MPs on the committee for it to go ahead.

CRA spokesperson Etienne Biram said in a statement Monday that the allegations related to the specific tax deal were reviewed by the CRA’s internal fraud division and a third party expert in tax law.

“While complaints in the Federal Court documents claim a ‘sweetheart deal’ was struck in 2019, the investigation determined that the terms of the [agreement] were in fact favourable to the CRA and did not provide any form of preferential treatment,” Mr. Biram said in an e-mail. He also said allegations that the deal was granted with no analysis and that employees were forced from their positions were all deemed to be unfounded.

Mr. Biram said the CRA takes allegations of misconduct seriously, but he added that it is difficult for the agency to respond to allegations that are before the Federal Court. He also noted that the Federal Court case is about two other allegations that are not related to the tax deal.

The Federal Court case began in September, 2021, when two CRA employees asked the court to review a decision by Public Sector Integrity Commissioner Joe Friday to stop investigating their allegations of wrongdoing at the CRA. The commissioner explained in letters to the employees that he felt his office did not need to investigate because the agency was already dealing with the matter.

Documents related to the commissioner’s investigation, which began in 2020, were submitted to the court, making them publicly available.

The commissioner’s office told The Globe last week that it was approached on April 12 by the Attorney-General, on behalf of the CRA, and made aware that some of the documents contain sensitive information. On April 19, the commissioner’s office wrote to the Federal Court, saying it intended to replace its court filings with new versions of the documents that will redact “irrelevant” third-party information, including the names of people who made allegations and the names of those against whom the allegations were made.

The Conservative Party asked Privacy Commissioner Daniel Therrien to launch an investigation into the release of “sensitive whistle-blower information” after the website Blacklock’s Reporter wrote about the case last month.

The court documents show the Integrity Commissioner’s office investigated a wide range of allegations put forward by the two CRA employees and determined that some warranted further review and others did not.

In a July 21, 2020 letter from Mr. Friday to one of the employees, the commissioner said he would be investigating some but not all of the allegations. Mr. Friday agreed to investigate concerns over travel expenses in the division and the possibility that it had a “toxic” work environment.

But Mr. Friday’s letter said he would not be investigating an allegation related to the specific tax deal, in part because his office is not authorized to review information that is subject to solicitor-client privilege.

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It Happened in South Dakota

It Happened in South Dakota

It Happened in South Dakota

Karma Martell 2019

Karma Martell

Karma Martell,  Founder of  KarmaCom, is a seasoned professional business commentator, writer, and marketer, and serves as virtual CMO for International Wealth Tax Advisors. 

Contact IWTA

To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

Pandora Papers Thrusts South Dakota into

Tax Haven Spotlight

 

The Pandora Papers, a recent reveal of pervasive cross-border financial crime and elaborately-crafted tax dodging structures, as reported by a global network of investigative journalists, has already shaken up governments and elections, upended tax authorities and initiated criminal investigations.

Although the global sting reaches far and wide, from celebrities and sports figures to world leaders, dictators, captains of industry and oil tycoons, what is especially cringeworthy is that the structures designed for the ultimate in tax-dodging and wealth-hiding were set up by blue-chip U.S. legal and investment firms.

Perhaps the most intriguing revelation of all from a stateside perspective was the emergence of South Dakota as a preferred tax haven of the rich and famous.

While Bermuda, the British Virgin Islands and the Cayman Islands positively glow with the patina of privilege and preference, what makes South Dakota, recently dubbed “the Mount Rushmore of tax havens,” a territory for the titans of too-much-is-never-enough?

 

The Wild West of Bank and Finance Laws

Do you get a lot of credit card offers in the mail from banks you’ve never heard of? Chances are, the bank’s HQ is in, you guessed it, South Dakota. Flip over a few credit cards in your wallet and read the fine print. Why set up an issuing bank in South Dakota? In 1981, the state abolished laws limiting the interest rate on credit cards. South Dakota is home to the big sky, (sorry, Montana) and the sky’s the limit when it comes to interest rates on your Visa or Mastercard.

In 1983, South Dakota was the first state to establish perpetual trusts. In a nutshell, perpetual trusts allow monies to remain in place for generations, with no one having to pay inheritance taxes.

Trusts are wealth structures favored by high-net-worth families and individuals, and South Dakota has a history of legislating highly favorable laws for settlors and trustees. The sweet green icing on the money layer cake is no income tax, no capital gains tax and no inheritance tax. The cherry on top are laws that ensure the investor of extreme privacy and secrecy from any blue and brown suits that may try to penetrate their personal Fort Knox.  Assets held in South Dakota trusts have increased from 57 billion to $360 billion in the last 10 years.

According to the Pandora Papers, among South Dakota’s wealthy foreign opt-ins are Ecuador’s President Guillermo Lasso, Chinese real estate billionaire Sun Hongbin, and Guatemalan industrial products titan Federico Kong Vielman.

IWTA founder Jack Brister weighs in: “Though it is true that South Dakota, along with Wyoming, have strong state-level asset privacy laws, it should be known that these laws don’t allow U.S. or international persons a means of U.S. tax avoidance.  

U.S. persons are always subject to U.S. tax no matter where they reside or where their assets are located.  Trustees are held liable for the appropriate tax reporting and payment of tax due and no state law can remove these federally-mandated responsibilities. 

 The skinny on the matter is that the U.S.-legislated law in which the premise is a trust, even those established under U.S. law, are foreign trusts unless specific criteria are met. The purpose for enacting such a broad definition of what a foreign trust is was to cast a wide net to ensure U.S. persons could not use such structures to avoid their tax responsibilities without facing severe penalties.  In doing so, the U.S. limited its ability to tax trusts established in the U.S. by foreign persons where the trust had no U.S. assets or income and the beneficiaries were not residing in the U.S. 

 This is because the U.S. has no authority to tax foreign persons if they are not deemed to be U.S. residents and have no U.S. assets or income. Reminder: capital gains and most interest income are tax-exempt. Business income and real property gains are subject to taxation.   

These rules apply equally to aforeign trust.  Therefore, whena trust is established under state law where the primary fiduciary responsibilities are with a foreign person and not the U.S. trustee (generally a U.S. trust company), and the trust has no U.S.- sourced income, the trust treated as a foreign person, which means there is insufficient nexus to the U.S., resulting in the U.S. having no legal taxing authority.” 

Which U.S. States Have the Most Trusts According to the Pandora Papers?

According to Axios, trusts held in the states listed below account for about 1 trillion dollars in secretly-held assets. According to Bloomberg, South Dakota state data alone show one half trillion dollars of wealth in trusts.

How the U.S. Treasury Views Americans’ Reporting of Foreign Assets

The U.S. Bank Secrecy Act demands that foreign banks disclose assets and accounts held by U.S citizens, and that U.S. citizens report those accounts or face a penalty, with $10,000 being the threshold of compliance. FBAR, the Foreign Bank Account Report, is the most-commonly filed disclosure form, while those with assets over $200,000 if living abroad and $50,000 if living stateside, are required to file FATCA (Foreign Account Tax Compliance Act) form 8938. For more on FATCA filing rules, see our blog post. For more on FBAR rules and compliance see the IWTA FBAR primer. 

FATCA and the Banking Secrecy Act (BSA) are under the jurisdiction of FinCen, the Financial Crimes Enforcement Network of the U.S. Treasury. FinCen investigations take place worldwide, supporting partner countries in combating money laundering, terrorist financing and other financial crimes. 

One might assume that the U.S. would bring the same level of scrutiny to those transferring foreign wealth to U.S. financial institutions and shell companies, but that is not the case because the U.S. has no legal jurisdiction to assert taxing authority.

Why the U.S. is Becoming a Favored Foreign Tax Haven

Although the USA supports the OECD’s global tax effort, they have refused to sign on to the Common Reporting Standard (CRS) which pledges inter-country cooperation in reporting financial assets and accounts to outside jurisdictions. The CES was formed in 2014, per the request of the G20. 112 countries currently participate in the CRS.

The power and autonomy of individual state governance makes it possible for U.S. states to create what amount to independent tax havens under the umbrella of the USA. According to Axios quoting a study by Israeli academic Adam Hofri-Winogradow, 17 of the world’s 20 least-restrictive jurisdictions for trusts were American states.

Will Congress and The Fed Intervene?

On October 6th, 2021, members of congress introduced “The Enabler’s Act.” The Act would expand the 1970-era Bank Secrecy Act to legislating accountability to parties typical in aiding and abetting money laundering and tax evasion, such as accountants, lawyers, investment advisors, and even public relations professionals and art dealers.

The new provisions would in effect expand FinCen’s 2020 Anti-Money Laundering Act. According to The Hill, not only will the Enabler’s Act improve the chances of catching violators, it would close a loophole in the securities laws that currently exempts investment advisers from the same reporting and procedures that are required of broker-dealers, — in at least some circumstances.

The law does not call out registered investment advisers per se, but its definition of investment professionals is broad and could close the loop. Thus, a new set of whistleblowers may come forward with new insights and information regarding the shadowy world of dark money.

West May Still be Best

It should be noted that unless the Treasury Department revises the definition of a foreign trust for tax purposes, The Enabler’s Act, if passed, is not likely to impact the ability of foreign persons to use the U.S. as a place to establish wealth structures which may avoid their home country tax laws.

 

International Tax Guru Jack Brister, founder of International Wealth Tax Advisors, to Appear as Anchor Panelist in Upcoming Webinar on Foreign Trust Tax Reporting

International Tax Guru Jack Brister, founder of International Wealth Tax Advisors, to Appear as Anchor Panelist in Upcoming Webinar on Foreign Trust Tax Reporting

International Tax Guru Jack Brister, founder of International Wealth Tax Advisors, to Appear as Anchor Panelist in Upcoming Webinar on Foreign Trust Tax Reporting

Jack Brister s p 500

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA  founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

Even the seasoned accounting professional can get stymied by foreign trust reporting and the correct filing of Form 3520. Foreign trust and cross-border tax expert Jack Brister joins legal experts in a live webinar detailing the quirks and specificities of foreign trust compliance.

New York, NY, October 5, 2021             Industry-renown international tax and foreign trust expert Jack Brister, EA, MBA, TEP, will lend his expertise at a live, CPE-eligible webinar for finance and legal industry educator Strafford entitled, “Form 3520: Reporting Foreign Trust Activities on U.S. Beneficiaries’ Income Tax Returns.” The immersive webinar will cover the identification of filing obligations, how to complete form 3520, DNI planning after mid disallowance, and avoiding throwback tax. Interested professionals can sign up for the webinar directly on the Strafford website.

Even the seasoned accounting professional can get stymied by foreign trust reporting and the correct filing of Form 3520. Says Jack Brister, “Any information not provided or incorrectly presented can mean significant tax penalties ranging from 25% of the value of the trust to 35% of a distribution received. “

Join Jack Brister and a leading panel of legal and financial experts as they take a deep dive into the quirks and specificities of foreign trust compliance and the infamous IRS Form 3520.

When:  Monday, October 19, 2021, 1PM – 2:50 PM, EDT

Where: Livestreamed by Strafford. See https://b.link/strafford1021 for details.

What:  Topics covered will include but not be limited to:

  • Determining owners and responsible parties
  • What “reportable events” trigger a Form 3520 filing requirement?
  • DNI calculations and distribution strategies
  • Completing Form 3520
  • What are the penalties and relief provisions for failure to file a Form 3520 or Form 3520-A?
  • What is the overlap between Form 3520 and other foreign information reporting requirements such as Forms 5471, 8865, 8621, and Schedule B?
  • Throwback tax
  • IRC Section 6677 penalties for failure to file and relief provisions
  • What are the filing requirements for the U.S. beneficiary of a foreign non-grantor trust?
  • What are the processes for establishing a reasonable cause exception for penalty abatement?

 

About International Wealth Tax Advisors

International Wealth Tax Advisors (IWTA) specializes in mitigating U.S. taxes and solving highly-sophisticated cross-border tax issues.  Working with clients’ offshore and domestic wealth structures, we strategically pinpoint the intricacies and weaknesses of U.S. and foreign tax systems to minimize loss of wealth and profits.  

 

Follow Jack Brister for Insights and Updates on International Tax Compliance

 IWTA founder Jack Brister is a regular contributor to business intelligence publication J.D. Supra. His news updated can also be found on the IWTA blog, and daily on Twitter, handle @IWTAJack.