July 26, 2011

George Soros's Evado Tax Inc.

Last week, I pointed out how Microsoft had cut their tax rate on corporate profits from 25% in FY 2010 to 7% in 2011 by claiming to make most of its profits in places like Puerto Rico. A reader writes:
George Soros is another example of tax arbitrage. He has benefited from running his hedge fund in offshore jurisdictions while maintaining research offices in NYC.

Similar to MSFT - "we just research in NY, the money manages itself from overseas accounts." 
I'd guess there's something in dodd-frank about ending these loopholes.  
With soros, it's particularly egregious because he uses his excess wealth to argue for big government policies in the US.  
If Obama wants tax increases - how about retroactive taxes? 

I would be sympathetic to an investment firm that actually does its work on an island somewhere. I once expected that investment firms would relocate to Hawaii because it's paradise and for certain types of investing, being halfway between the Asian and American time zones might be convenient. But that really hasn't happened. 

My sneaking suspicion is that all this talk about the information superhighway and how you could be anywhere in the world and make above market returns just by looking at your computer screen is naive. To consistently make above market returns, it helps to have sources of inside information. And that depend heavily upon trust-building face to face contact and/or body language that can't be used to convict even if one party is wearing a wire. So, the high end investment business has not been spreading to many new locations. 

31 comments:

Lugash said...

I am Lugash.

Does anyone know what the denomination the tax-haven money is usually in? I suspect it's in Euros and a lot of companies are getting nervous that it's going to lose value.

Face to face is probably essential in the high end investment world. Email leaves an electronic trail that can be hacked or used as evidence.

I am Lugash.

Anonymous said...

A few years ago I read Niall Ferguson's two-volume biography of the Rothschilds. Their heyday was the century from 1815 to 1914. Why did they decline after WWI? Because that's when the center of the world economy moved from Europe to America. They were stuck in Europe. Why didn't they roll with the times then, why didn't they Americanize? Ferguson wrote that at numerous points during the 19th century the Rothschilds talked about sending a family member to New York, but that no one wanted to be the one to be sent there. They were used to the luxury of Vienna, Paris and London. Their wives wouldn't go. America was the sticks.

Perhaps this same dynamic still keeps the financial industry in London and New York. New York now has what it didn't have in the 19th century - an infrastructure for the super-rich experience. 5th Ave. retailers, $1000-a-night restaurants, high-end escort services, other rich people, whatever other stuff they need to feel rich. That hypothetical island in the Pacific wouldn't have most of those things.

TGGP said...

George Soros is actually closing his hedge fund to outsiders, as a result of Dodd-Frank regulation that would require it to disclose more information.

Dennis Mangan said...

James Simons has made way above-market returns for decades, all done with computers on Long Island.

Anonymous said...

Again, triple taxation.

I expect the truth, opposed, as it is, to your narrative, will be ignored again.

Anonymous said...

The Hawaii idea is interesting but I don't think face time or inside-information access explains why it hasn't happened. After all, rich alpha-male finance types love traveling (because airlines and hotels with their rewards programs always treat bigwigs like bigwigs), so there's no reason they couldn't live in paradise and hop in a comfy biz class seat whenever personal networking is necessary.

I suspect the more likely explanation is that these people are status-driven at least as much as they are wealth-driven, so it's necessary to live in a place not only conducive to the accumulation of money but populated with the kind of people who will be sufficiently awed and respectful of said accumulation. New York is such a place. Maybe Los Angeles is such a place too. Hawaii isn't. And what's the point of being a master of the universe if you aren't surrounded by people in awe of your power?

Tom said...

I read Ferguson's Rothschild book. If you had read it closely, you would remember that his access to their archives was limited to pre-1914. It's quite possible that they wanted it to seem as though their fortunes dissipated in the 20th century.

Harry Baldwin said...

If Obama wants tax increases - how about retroactive taxes?

I've wondered about this. Why is it that certain people who make money by fraud don't get to keep it when they're exposed, but others do?

For example, John Edwards founded his fortune by winning malpractice suits on the false premise that cerebral palsy was caused by the failure of obstetricians to perform caesarian sections quickly enough. This put a lot of obstetricians out of business, though Edwards' argument was later proved wrong. It would seem just that he should give back the money.

Similarly, those who collected gigantic salaries and bonuses while running Freddie Mac and Fannie Mae into the ground should surely be picked clean.

Other examples abound, but of course it''s silly to fantasize about this.

Anonymous said...

Here is what I don't understand about the Microsoft tax thing. They lowered their tax rate from 25% last year to 7% this year. Everyone says how smart they are, how crooked, and so on. Fine. But, if they are so smart, how come they paid 25% only a year ago? You want to tell me they learned about tax havens just this year? There must be more to this story.

Anonymous said...

A lot of important business has to happen face to face. People are more comfortable making deals that way. There's a human element to business that long distance communication can't capture.

PV van der Byl said...

Soros has always been primarily offshore.

The original Quantum Fund was set up as a Netherlands Antilles Company in 1969 by a Swiss private bank which had raised $5 million in capital for Soros and his then junior partner Jimmy Rogers.

Despite being a tax haven, the Antilles then had an effective tax treaty with the US involving Dutch corporate intermediaries.

The legal manager of Quantum was (and still is) New York-based (and domiciled in the US for tax purposes) Soros Management.

In theory all investors in Quantum had to be both non-US citizens and non-US residents.

Nevertheless, Soros enjoyed tax advantages soon eliminated by Congress for subsequent US-managed funds (though Soros was and still is, protected by "grandfathering").

Soros Management in NYC would collect the "management fee" (typically the "2" in the "2% and 20%" fees levied on hedge fund assets and gains), respectively.

Soros would pay office and staff expenses, his own living expenses, and US income taxes on income relating to Soros Management in New York).

His share of the "performance fee"--that is the 20% share on Quantum returns legally remained in the fund in the Netherlands Antilles and these performance fees compounded tax-free over time.

Through this device, his personal effective income tax rate eventually dropped down to the low-single digits.

In theory, Soros would pay US capital gains taxes on these funds were he to repatriate them to the US from the Antilles. But he is not compelled to do so. He can, and does, use those funds to make his $ billions in "charitable" contributions.

Anonymous said...

To consistently make above market returns, it helps to have sources of inside information.

So much for "meritocracy" then. It turns out that the path to making money has not changed in thousands of years.

Anonymous said...

A lot of important business has to happen face to face. People are more comfortable making deals that way.

No record of your criminal activity that way.

Kimchi said...

LOL

DR said...

Yeah, a lot of firms make above market returns consistently without being anywhere near New York. The large majority of high frequency trading firms are located outside NYC, many in Chicago, but some in Texas, North Carolina, New Jersey, and Kansas City as well.

Douglas Knight said...

Geographical concentration of finance is just like geographical concentration of any other business. People who have money they want managed all go to NYC, so money managers have to have an office there. This includes the above-mentioned Jim Simons, whose quants are all out on Long Island.

Also, bankers get raises by threatening to quit. The threat is a lot more credible in NYC than in Boston.

Anonymous said...

Any links to this info?

bluto said...

Anon 7:15
One of the key reasons for corporate accounting is to constantly beat earnings estimates (that also need to grow), even though cookie jar type accounting rules are prohibited when they become widespread enough. So it's possible other methods of increasing earnings were becoming difficult enough to manage they had to use tax shelters.

Anonymous said...

liberals keep wanting to 'raise taxes on the rich' - the upper middle class. Yet we scarcely hear about this, and when we do, the big bold reforms usually have opt outs for democrat supporters as with obamacare.

Crawfurdmuir said...

George Soros became an American citizen in 1961, according to published accounts. Does anyone know if he holds dual citizenship?

The current IRS code imposes a rather complicated exit tax on high net-worth U.S. nationals who renounce their citizenship. Essentially it amounts to a pre-payment of the estate tax plus a forward estimate of tax on their global personal incomes for ten years. The intent is to provide an extreme disincentive to persons who might think of expatriating themselves to avoid U.S. taxation. However, how this might apply to a person holding dual citizenship is unclear. It occurs to me that such a person, especially were his assets already largely overseas, could simply decide to leave one day, and thumb his nose at the I.R.S.

It is obvious from his conduct that Soros has no loyalty to any nation, and is perfectly happy to subvert the economy of any country that suits him - then to flee its jurisdiction, as he did that of France.

Anonymous said...

I think your suspicion is probably right.

Remember, conversations aren't discoverable and can be misremembered. They are also usually pretty confusing to jurors even if they are recorded instead of transcribed. Written communication is dangerously coherent.

beowulf said...

With soros, it's particularly egregious because he uses his excess wealth to argue for big government policies in the US.
He's a US citizen, so he owes taxes on money he earns worldwide. He's not a govt contractor and I have no doubt he's paid more in taxes than he's received in public benefits since long before he was a citizen. So he doesn't personally benefit from "big government policies" and by supporting politicians who want to "tax the rich" he's taking a political position against his financial self-interest. I disagree with him about all sorts of things, but I think that makes him more civic-minded than, say, T. Boone Pickens advocating tax breaks for, well, T. Boone Pickens. The Koch Brothers are on a tear about that now, actually.
"An increasingly bitter personal rift between billionaires T. Boone Pickens and Charles and David Koch has morphed into an expensive political battle that is testing the commitment of House Republicans to the tea party principles many of them have publicly embraced.
The fight centers on legislation backed by Pickens that would grant tax breaks to the natural gas industry...

http://www.politico.com/news/stories/0711/59618.html

If Obama wants tax increases - how about retroactive taxes?
The word for that is "estate tax"

Anonymous said...

From national newsman to local radio boy. Gee, I wonder why that happened.

http://www.sun-sentinel.com/sports/college/fiu/sfl-rick-sanchez-072711,0,6281263.story

Anonymous said...

I don't know why this is a shocker to so many readers. Transfer pricing and 'tax planning' have been multi-billion dollar businesses for international accounting firms like Ernst & Young, Deloitte, PWC and KPMG (and the erstwhile Andersen) for several decades now.

http://www.ey.com/US/en/Services/Tax/International-Tax/Transfer-Pricing-and-Tax-Effective-Supply-Chain-Management

PV van der Byl said...

@Crawfurdmuir

.......The current IRS code imposes a rather complicated exit tax on high net-worth U.S. nationals who renounce their citizenship………….
However, how this might apply to a person holding dual citizenship is unclear. It occurs to me that such a person, especially were his assets already largely overseas, could simply decide to leave one day, and thumb his nose at the I.R.S.

You raise an interesting question that would probably have to be settled by an actual case. Given that that vast majority of Soros’ net worth has been offshore for forty years, he could indeed thumb his nose at the IRS.

@Beowulf

.....He's [Soros] a US citizen, so he owes taxes on money he earns worldwide.

No, Soros’ grandfathered tax status (see above) means that retained earnings in his offshore funds (by far the largest part of his real economic income) is not counted as “earnings” by the IRS.

.....by supporting politicians who want to "tax the rich" he's taking a political position against his financial self-interest.

Not really—for the reasons mentioned above. His financial self-interest lies beyond the reach of the IRS.

Jack Aubrey said...

"Written communication is dangerously coherent."

Indeed. Every single post by Whiskey reads: "I can't get laid. I can't get laid. I can't get laid. Israel = unsinkable aicraft carrier. I can't get laid. I can't get laid." In spoken form you might just might miss it.

Anonymous said...

{Soros} doesn't personally benefit from "big government policies" and by supporting politicians who want to "tax the rich"

Damn, you're naive.

The "tax the rich" policies promoted by Soros and other super-rich people (Warren Buffet comes to mind) are policies aimed at people below them in wealth.

Soros does not support any polices which would tax him any more than at present. If he supported that sort of tax change he'd be pushing Congress to tax him for his off-shore accounts. You may have noticed that he's not doing that.

When Soros and other super-rich lefties urge a higher top income tax rate in the US, they do so secure in the knowledge that they are not the ones who will pay it.

Svigor said...

So he doesn't personally benefit from "big government policies" and by supporting politicians who want to "tax the rich" he's taking a political position against his financial self-interest.

Ah, but there's more to life than financial self-interest. Actually, there's more to financial self-interest than financial self-interest, too. Live to earn another day, and all that.

Svigor said...

Quantum of Soros.

DC Handgun Info said...

Mr. Soros is featured in a book exposing liberal hypocrisy (sorry for the redundancy): Do As I Say (Not As I Do) by Peter Schwietzer from Hoover Institute: http://www.amazon.com/Do-As-Say-Not-Hypocrisy/dp/0385513496#_
Featuring famous current leftists minimizing their taxes, including Michael Moore, Nader, the Clintons, etc. I'm not affluent but many can capitalize on some of the estate planning tips: foundations, charitable lead trusts, etc.

Scott Locklin said...

I know some guys in Bermuda who are the real offshore deal. They were Chicago Futures traders. Now, Bermudans. Research offices and trading floor are on the island. Computers sit in Chicago and make the trades. The compound returns on their tax liability is pretty serious business. 30% extra returns a year on market making activity is no joke. Soros, of course, is human refuse.