Years ago, British expatriates (or "expats") to British colonies in India, Hong Kong, Australia, New Zealand, etc., were given special tax concessions in return for their agreeing to live overseas and populate the colonies. These special concessions included the dividends and interest from money market funds, certificates of deposits, capital gains from the sale of stock holdings, among other things. The British government naturally preferred these expats to keep reporting income, and it required special tax benefits to entice them.
Writes Laurence Patterson, editor of Criminal Politics magazine (www.criminalpolitics.com): "Decades ago, it became clear that secret agreements would have to be negotiated between the U.S. Treasury Dept. and the British government. Otherwise, American citizens could take advantage of these special tax breaks offered to 'expats. Those living outside of the British Isles today can still get substantial tax benefits from this historical situation affecting the British. Since there is no law against Americans investing in England, anyone who searches out such a British institution is not violating an American law and is free to do so if you have the proper counseling and information to accomplish it."
Exchange controls are adopted typically by nations with very sick currencies and even sicker economies. The adoption of such frightful legislation has been the custom of dictatorships such as Stalinist Russia and other regimes. The adoptions of such laws by the U.S. Treasury would simply be unthinkable and would send frightful signals around the world as to some kind of a serious problem for the value of the U.S. dollar. Such an aura of negativity around the dollar simply made no sense. Therefore, they had to report to secret agreements.
These agreements are: that the British financial industry may not advertise in the United States and solicit your business through marketing methods such as direct mail, telephone solicitation, etc. Therefore, you do not get, for example, solicitations from British banks and credit card offers. As a matter of fact, you will not be likely to get them from even Canadian banks.
The same applies to a panoply of financial services, including money market funds and mutual funds, which could be extremely convenient for those wishing to diversify outside the dollar and to take advantage of the far superior "expat" tax regulations that affect the mutual fund industry in England. Patterson adds, "The reason why British mutual funds cannot be marketed to Americans is simple: The U.S. tax laws make U.S. mutual funds highly undesirable compared to those in England."
In a recent article appearing in the Wall Street Journal, Jonathan Clements pointed out that the reason U.S. funds are undesirable as investment vehicles compared to other alternatives is that the gross amount of capital gains taking inside of mutual funds must be distributed to the shareholders each December. In the past 10 years, this has amounted to enormous sums of money in the billions of dollars for the entire U.S. mutual fund industry. The recipient fund owner must declare the gains received on a pro rata basis in the next April 15 tax return, then turn around and re-deploy the balance of the distribution in whatever way he sees fit.
In one year alone, 1998, the U.S. Treasury collected from American mutual fund shareholders the amazing total of $39 billion in capital gains taxes! Few realize the important source of revenue derived from U.S. fund shareholders.
The WSJ also pointed out that U.S. fund managers report in their advertising and marketing materials the returns on the mutual funds without considering the tax expenses. This means that any return quoted by a U.S. mutual fund is clearly overstated by a certain amount based on the capital gains tax losses each year. Writes Patterson, "Suffice it to say that British mutual funds are not required to make these annual gains distributions in December to the shareholders of the British funds. A tax law change here in the U.S. would result in tens of billions of dollars in lost capital gains revenue on an annual basis, and the Treasury Dept. is not even willing to consider any major change in that law. Therefore, we have found great interest in [overseas] mutual funds for that reason alone.
One final point to consider in the analysis of mutual funds with respect to taxes is that annual sales charges and management fees can weigh heavily against fund returns. The term "no load mutual fund" is a misnomer and not at all true. Sales charges have to be paid to someone, and if there is no up-front charge the same amount of money will be charged to a marketing account called a 12B-1 fee. These charges can amount to 2% a year for every year you own the fund (not to mention other management expenses on top of it). As Criminal Politics has pointed out, "Those funds that advertise as being "no load" are simply lying to their shareholders."
So how to find a (legal) British or offshore investment trust that isn't subject to the heavy-handed practices of U.S. fund managers and with no taxation? By carefully searching the best of such offerings we were able to find one company specializing in untaxed funds, including a round-the-year gold mutual fund which guarantees returns regardless of the underlying asset's price performance. Power Capital Ltd. (www.power-capital.com) is one such offshore, open-ended holding company which offers a range of separate sub-funds, each dedicated to a different investment sector. Domiciled offshore, Power Capital Ltd. is free of the taxation which minimizes returns.
The company's Gold Edge Fund is an actively managed fund that uses gold's frequent price movements to profit, even if gold does not increase in value.
We advise checking with your investment advisor or do an Internet search to find the offshore, tax-free mutual fund or gold fund that's right for you.
April 18, 2002
Clif Droke is the editor of the weekly Bear Market Report, a combined forecast and analysis of U.S. stocks and indices and international precious metals stocks, and is the author of numerous books on trading and technical analysis (most recently Gann Simplified, published by Traders Library). For a FREE COPY of the Bear Market Report send e-mail to: firstname.lastname@example.org or write: The Bear Market Report, Clif Droke, P.O. Box 3401, Topsail Beach, N.C. 28445-9831.