Declaratory Theory Cut Off • “After cut off point *for the date of reception of English law and elimination of pre-reception law], Caribbean judges should not be restricted to the common law as defined by the ex-colonialists. Rather, such definitions should merely be viewed as persuasive, albeit highly persuasive. This view, by implication, rejects the declaratory theory.” • Equity rules are “progressively refined and improved” so exempt from Declaratory Theory – But In Re Diplock: the court doubted the power of the courts to invent an equitable jurisdiction for the first time if not grounded in established precedent.
Commerce or Isolation The Decision to Trade
NONMARKET DEVELOPED ECONOMIES ECONOMIES (NME) Capitalism Communism DEVELOPING ECONOMIES Agrarianism
“By enabling farmers to generate food surpluses, found production permitted farming societies to support full-time craft specialists who did not grow their own food and who developed technologies.”
Tariff • A duty (or tax) levied upon goods transported from one customs area to another. Tariffs raise the prices of imported goods, thus making them less competitive within the market of the importing country. • Source: Glossary, Doc Supp, p. 15
Select Economic Definitions • Trade deficits: When a country is spending more on imports than it receives from exports. (e.g. after WW II, Europe and Japan bought more value of goods from the US than they sold to the US). • Hard currency: A currency widely accepted in foreign trade. Soft currency is uncertain and not widely accepted, thus more difficult to import goods and services to spur economic growth. • Central banks : institutions with oversight of a country’s banking system, managing international reserves, adjusting monetary conditions, short-term interests rates, to keep the economy on course. • Inflation: A rise in the general level of prices, usually because of the pursuit of too few goods by too much money. Normally, government combats it by raising interest rates to dampen demand relative to supply. • Interest rates: The cost of borrowing money. Rates rise when a central bank raises the rate on money it lends to banks, which banks in turn increase rates on loans to businesses. Central banks raise short-term rates to discourage borrowing, slow economic growth and hold inflation in check. Lowering short term rates spurs economic growth by encouraging business investment. • Free market system: Private producers and consumers, rather than the state, determine where investments will be made, what will be produced, what wages will be, and how much products will cost.
Tropica’s …gold reserves were diminishing. Trade was favoring Westia...[because there was] an exchange of surplus pellos in Westia for Tropician gold reserves. Tropica had what they called an unfavorable trade balance.
“Nation’s currencies which are either not exchangeable or …exchangeable but are continually depreciating and are not generally acceptable in international trade, are called ‘soft’ currencies. If foreign traders will not accept a nation’s currency because if is soft, that nation must obtain hard currency to engage in international trade. “
“When a company is selling goods to a foreign nation, if the currency of the foreign nation depreciates consumers must earn more to buy the foreign goods. But for the foreign investor who has shifted production to the foreign nation, a depreciating currency may mean lower real wages and lower costs of production. That means its goods sell for less abroad.”
How To Avoid Imbalance? • Create Products • Create Products Traders/Consumers Value – If not, use up your currency to buy better imports • Have Government that International Markets Trust (< corruption – Biz acumen) • Have Biz People Trust • Then Currency Retains Trade Value = Hard • Or Get tech transfer on FDI.
Transfer of Technology The movement of modern or scientific methods of production or distribution from one enterprise, institution or country to another, as through foreign investment, international trade licensing of patent rights, technical assistance or training.
ECONOMIC IMPACT OF EXPORTS GOOD OR BAD?
Exports = > Co. Profit = > FTE’s = > wages = > consumer spending = economic growth
The Actors The Nations and Institutions of International Trade
New International Economic Order?
Odious Debt “Odious debt is debt that resulted from loans to an illegitimate or dictatorial government that used the money to oppress the people or for personal purposes. Moreover, in cases where borrowed money was used in ways contrary to the people's interest, with the knowledge of the creditors, the creditors may be said to have committed a hostile act against the people. They cannot legitimately expect repayment of such debts.”
Debt and its Attached Strings • LDC Debt Interest Payments Beyond Repayment Capacity • New Loans = New Debt = No Surplus for Economic Development • Less Loans = More Opening of Markets for LDCs.
Developed Nation Push Back “The idea of a new international order was not shared by…the developed world, if it meant a convergence of the quality of life by a lessening of living standards in the developed sphere in order to improve the standards in the less developed sector.”
INTERNATIONAL MONETARY FUND
These imbalances arise in nations that do not receive enough foreign currency from exports of goods and services and from tourism to pay for their purchases from other countries.
Conditionality Examples: Policy Changes in… • Government expenditures • Interest rate • Exchange rates • Price deregulation • Consumer subsidies • Trade barriers • money supply (avoid intentional deflation thru more currency = less valuable = better exports) • Privatization of state owned enterprises • Increased funding for social safety nets, health care and education • Strengthening banks and bank supervision • Corruption reduction • Adoption of free trade measures
IMF Loans and Balance of Payments A nation that exports more than it imports generates a surplus current account while a nation that imports more than it exports generates a deficit current account. A country with a deficit current account does not earn enough foreign currency from its exports to pay for what it buys from other nations. In that case, the deficit is financed either by spending the reserves of foreign currency the nation has accumulated in the past, or by borrowing from other countries [or borrow from the IMF].
Most borrowers of conditional loans are economically worse off than before the loan.
IMF Technical Assistance = Clue for Caribbean ? • Fiscal and monetary policies • Institution building, such as central banks, treasuries, tax and customs departments, and statistical services, and • Economic and financial legislation, • Financial analysis and policy • Balance of payment methods
CURRENT CURRENCY ISSUES AND IMPLICATION OF THE GLOBAL FINANCIAL CRISIS
The most important factor affecting the value of a nation’s currency is the international demand for the goods and services it produces. One nation’s currency is simply a commodity in other countries, so that its price (exchange rate) depends upon the demand and supply of the currency on the foreign exchange market. If Americans buy more items from foreign countries (imports) than they sell abroad (exports), eventually the supply of U.S. dollars will exceed the international demand and the exchange rate for the dollar will go down.
A decrease in the exchange rate of the peso from 5.00 to 4.00 per dollar results in a 25% increase in the cost to import Chilean wine. A bottle of wine priced at 20 pesos previously cost four dollars (20/5), but now costs five dollars (20/4). When the dollar price of a foreign curr3ency increases, the dollar is said to depreciate and the other currency is deemed to appreciate.
As a result, Chilean goods become more expensive in the U.S. and U.S. products become cheaper in Chile. Absent other factors affecting prices, the lower cost for U.S. goods should increase demand for them in Chile, increasing the demand for dollars, which in turn will cause the dollar to again appreciate against the Peso.
Regulation of International Financial Transactions and the Impact of the 2008 Global Financial Crisis
A dollar-denominated bond issued by a U.S. company that is sold to a Brazilian bank on a London exchange raises regulatory issues in all three countries… Competition…however, required relaxation of those rules and most countries now permit firms to offer comprehensive financial services that include banking, securities and insurance components.
The diversification of the financial industry means that many banks now engage in financial transactions and incur risks that are not subject to supervision by regulators, and that non- banking firms, including securities and insurance companies, now conduct transactions formerly limited to regulated banks… [As a result} they can sustain enormous losses that upset international capital markets and endanger the global financial system.”
THE URBAN CARIBBEAN: TRANSITION TO THE NEW GLOBAL ECONOMY The Informal Economy: Industrial Districts And Microenterprises
Historically, [smaller Caribbean countries] have been economically dependent on the export of primary products. They are geographically close to the United States, and, with the partial exception of Jamaica, the US is their primary market both for exports and for international migration.
In the new export-oriented regimes, cheap imports of basic goods threaten the viability of the small informal enterprise whose prices cannot match those of the mass-produced footwear, garments, and other basic goods imported from Asia. At the same time, the lessening of worker protection in the large enterprises through deregulation lessens the advantages that small firms once derived from avoiding state regulation.
[The countries referenced are Costa Rica, Haiti, Guatemala, the Dominican Republic, and Jamaica.] The study of these countries is designed to weigh the economic, political, and geographical factors that lead to declining primacy in one country and not in another… The specific focus…was the extent to which informal entrepreneurs [microenterprises] possessed sufficient skills and capital and were integrated into strong cooperative networks indicative of a potential for autonomous development.”
…urban social policy needs to take account of the limitations and possibilities that face the contemporary urban community as a source of informal care and as a unit of political participation. The local residential community is, after all, the place that determines the quality of access to many social rights, whether those of health care, education, or an adequate environment… It is an open question whether the urban community continues to function in these ways, given contemporary changes in the structure of urban economies, urban spatial organization, and migration patterns. The case studies…make clear that the urban neighborhood remains the preferred basis of political participation.
Re: Jamaica “It may simply be too early to discern whether the restructuring process will bring net gains to the mass of urban Jamaicans or will intensify an already unequal distribution of economic privilege.” Re: The Caribbean Basin “ So far, nothing like the “ industrial districts ” of cooperative small enterprises in central Italy and other European locations have been uncovered anywhere in the region.”
The Informal Economy, Microenterprises, and Industrial Districts
The linkages between international subcontractors and the garment producers of San Pedro Sacatepequez infused a new dynamism to the economy of that village. Employment has increased and new machines were introduced with credit provided by North American buyers.”
CASE STUDY: BARBADOS AND JAMAICA • Factors to Lure Foreign Investment to Caribbean • Incentive Issues and Sources
THE IMPACT OF ELIMINATION OF TAX CREDITS FOR US MULTINATIONALS ON THE ECONOMY OF FOREIGN COUNTRIES On Jan. 1, 2006, a 10-year phase-out of Internal Revenue Code Sections (IRC) 936 and 30A will come to end, with U.S. multinationals losing a federal tax credit created in 1954 as Section 931 and revised in 1976 against taxes for income derived by a corporation from the active conduct of a trade or business in a possession and on qualified possessions source investment income (Section 936) or on wage compensation (Section 30A). When the elimination of Sections 936 and 30A was announced in 1995, public- and private sector members panicked, believing this was the end of big business, such as the manufacturing industry's pharmaceutical sector in Puerto Rico, reports Caribbean Business (Nov. 29, 2005): Puerto Rico's manufacturing industry has benefited greatly from 51 years of federal tax incentives. The original federal tax-incentive Section 931 attracted large multinational corporations from the U.S. and other countries to establish their operations on the island. The U.S. General Accountability Office (GAO) estimates that by 1996, tax incentives provided US$11.3 billion, or 63% of Puerto Rico's US$18 billion payroll, of which US$3.6 billion came from the pharmaceutical sector alone. Corporate tax-exempt earnings invested in Puerto Rico's banks reached more than $14 billion; The elimination and initial phase-out of Section 936 accelerated the departure of labor-intensive companies which already had started to leave the island since the mid 1970s. It eventually caused the almost total disappearance of the apparel, textile, and electrical/electronic sectors to countries that could offer them lower wages and better cost-effective operations. But Puerto Rico's pharmaceutical industry remains a healthy today, generating approximately 30,000 direct jobs or 25% of the island's 120,000 manufacturing industry jobs and representing 26% of the island's Gross Domestic Product; "Pharmaceutical and medical-devices manufacturing companies found Internal Revenue Code Section 901 (tax credits as a controlled foreign corporation) which they could adopt," said Puerto Rico Manufacturers Association (PRMA) Exec. VP William Riefkohl. "Even though it didn't have as many tax incentives, it allowed the pharmaceutical sector to remain in Puerto Rico. Not all manufacturing sectors were able to do so since pharmaceutical companies have major international investments and presence and protection of their intellectual property." Pharmaceutical manufacturing plants decreased 10%, from 69 in fiscal 1995 to 62 plants in fiscal 2005, but jobs continued to increase from 23,616 jobs in fiscal 1995 to 27,884 jobs in fiscal 2005, an 18% rise. Most important, in 2004, 17 of the top 20 prescribed medications sold in the U.S. were manufactured in Puerto Rico.
The White House has announced three new measures to stimulate growth: 100% up-front depreciation of capital investments; a permanent and slightly expanded research and experimentation (R&E) tax credit; and $50bn in infrastructure spending. While potentially helpful, we do not expect these proposals to have a large effect on growth for three reasons: (1) we are skeptical that temporary expensing of capital investments will alter corporate behavior, particularly in 2010 or early 2011; (2) the expanded R&E tax credit, while positive, is too small to have much effect on growth; and (3) additional infrastructure spending, which could have a more significant growth effect, seems the least likely to become law. To the extent that these proposals become law and do have an effect on growth, we would expect the effect to be concentrated later in 2011. The Senate may consider the bonus depreciation provision next week during debate on pending small business legislation. That measure, along with the R&E credit, may also be considered as part of legislation to extend many of the expiring 2001 and 2003 tax cut provisions, which is likely to be debated in late September, though enactment may not come until after the election. The president’s infrastructure spending proposal seems unlikely to be considered until after the election, and the likelihood of enactment seems fairly low.
CARIBBEAN TAX HAVENS, MONEY LAUNDERING AND THE PUSH BACK FROM THE US
Money Laundering is about illusion – making ‘dirty’ money seem ‘clean’. Quite simply, it is the process by which money with an illegitimate heritage is made to appear to have lawful roots, and for this purpose the money is immersed into the legitimate financial system.
“Since it is the aim of the launderer ‘to obscure the source and, thus, the nature of the wealth in question…the modus operandi will inevitably involve transactions, real or imagined…designed to confuse the onlooker and confound the inquirer. The plethora of financial transactions is devised solely to bewilder investigators… The Bahamas and the Cayman Islands..are established offshore financial centers and have a classification[by the US State Department] as jurisdictions of primary money laundering concern….Antigua & Barbuda, Dominica, Grenada, and St. Vincent & the Grenadines *are also on the US list+.”
Offshore Banking Successes • Bahamas: Offshore banking sector = over 15% percent of Gross Domestic Product (GDP) – generated over $500 million dollars in foreign exchange earnings – employed over 3,500 locals. • Bermuda: the offshore financial sector = over 20% of GDP – the world's largest captive insurance centre. – In 1994, for example, mutual funds registered in Bermuda had over $8 billion in net assets.
Bahamas Disconnect with the US on Tax Avoidance or Evasion • No taxes on personal income, capital gains, corporate earnings, dividends, or sales – Inadequate taxpayer information • No bilateral tax treaty with the U S • “Although tax havens are not a new phenomenon, they have grown recently because financial deregulation and globalization promote the international transfer of capital.”
US Pressure on Subsidiaries of US Companies …many *US+ courts will hold the U.S. subsidiary*acting as a trustee of the settlor’s assets in the foreign jurisdiction] of a [US] financial institution liable for the refusal of their branch in a foreign jurisdiction to comply with a court order. The financial institution is therefore faced with the unappealing dilemma of either complying with a U.S. court order regarding the disposition of a foreign trust, or violating the trust laws of where the trust is located. If the financial institution has a significant presence in the United States then the scales may tip in favor of complying with a U.S. court order because the financial institution may have more to lose.
US Court Extraterritorial Jurisdiction • If a significant part of the illegal conduct in question takes place in the United States, – Is Foreign bank using US currency conduct in US? • the illegal activity takes place outside U.S. borders but has consequences within the United States. – Violate sovereignty of foreign jurisdictions?
Expanded Interpretations under US Anti-Money Laundering Laws • Broadened to those concealing the “proceeds” of bankruptcy fraud in offshore accounts. • “willful blindness” is sufficient intent • “lawyer who establishes such a trust is now under a duty to investigate the origins of money deposited therein in order to ensure that the money was gained through legitimate means” • Balancing settlor privacy and government interests in combating crime • contempt of court and incarceration for failing to comply with court order to turn over records regarding the trust. • Illegitimate purpose now includes trust used by a husband to shield assets from his wife before an impending divorce proceeding.
Cooperation and Push Back from Caribbean Countries to US Court Expansion Caribbean Cooperation Caribbean Push Back • ‘Statement Regarding Drug • Inapplicability of Commitment Letters to tax Cooperation and avoidance/evasion or shielding Commitment Letters among assets from creditors the US, the Cayman Islands • Proceeds of Criminal Conduct and UK compel production Law limited to “indictable of bank documents in offense” in Caymans specified drug cases. • Higher burden of proof of • Monetary Authority illegality – Bahamian 2-year Statue of Created Limitations • Proceeds of Criminal – Nevis definition of “fraudulent Intent” Conduct Law
[Re; the Bahamian two-year statute of limitations on the commencement of proceedings alleging a fraudulent conveyance into a trust] (1) Creditor has burden to establish settlor's fraudulent intent in order to set aside the transfer. (2) “Since litigation in the US often takes years, by the time [creditors] realize the assets they seek are in a Bahamian asset preservation trust, it is too late to file suit in the Bahamas.”
US Government Treaty and Multilateral Agreement Pressure on the Foreign Government But what happens when there is no domestic branch of a financial institution to hold responsible and the structure of an asset preservation trusts nullifies any pressure a court can exert over a settlor? The U.S. court must then seek to have its judgment enforced by a Caribbean court. [I]n order for a court's judgment to be enforced, it must first be recognized. Because most Caribbean jurisdictions do not recognize U.S. judgments as a matter of comity, enforcement of U.S. judgments takes place under a patchwork of treaties that provide incomplete coverage.
This effort [for regional anti-crime agreements] is in part, due to the recognition that if uniform standards are not maintained throughout the region, some countries may seek to achieve an unfair advantage in their trust legislation, which would work to the detriment of the overall goal of fighting the illegitimate use of these offshore financial centers.
STOP TAX HAVEN ABUSE ACT “To restrict the use of offshore tax havens and abusive tax shelters to inappropriately avoid Federal taxation”
“Offshore Secrecy Jurisdictions” = “*those with+ corporate, business bank or tax secrecy rules and practices which…unreasonably restrict the ability of the US to obtain information relevant to the [collection of taxes from US residents or citizens +”
OFFSHORE SECRECTY JURISDICTIONS • Antigua and Barbuda • Dominica • Aruba • Grenada • Bahamas • Panama • Barbados • St. Kitts and Nevis • Belize • St. Lucia • Bermuda • St. Vincent & Grenadines • British Virgin Islands • Turks and Caicos • Cayman Islands
Presumption of Control of Offshore Entity by US Citizen • “For purposes ..to determine or collect tax, there shall be a rebuttable presumption that a United States person…who directly or indirectly formed, transferred assets to, was a beneficiary of, had a beneficial interest in, or received money or property or other use thereof from an entity…formed, domiciled, or operating in an offshore secrecy jurisdiction… [is presumed to have] exercised control over such entity.”
Presumption of Income “There shall be a rebuttable presumption that any account with a financial institution formed, domiciled, or operating in an offshore secrecy jurisdiction…contains funds in an amount that is at least sufficient to require a report prescribed by the regulations under this section.”
Treated by US law as a “Domestic Corporation” • “If the management and control of the *offshore+ corporation occurs, directly or indirectly, primarily within the United States…then…the corporation shall be treated as a domestic corporation… and if: • Regularly traded on an established securities market or • Aggregate gross assets of $50 M or > in a year, or • If a non-US corporation has a common parent with “substantial assets…held for *active business in the US”
Required Filing of Tax Returns • Anyone with “control, receipt, custody, disposal” of foreign entity gross income deemed to be from US sources • “shall make a return according to the forms or regulations… • Return contents: – Amount of gross income US sourced – “known facts” about the “relationship of US beneficial owner to the foreign entity and account”
Returns by Financial Institutions with an account in an OSJ • If an account is established in an OSJ, or • forms or owns a entity that regularly trades on an established securities market • MUST file a return showing: – Name and TIN of the US person – Financial account information
Penalties • Under SEC of 1934: up to $1 M per violation per person for – Failure to disclose a transaction of equity or debt involving a foreign entity controlled directly or indirectly by that person. • Same under Investment Company Act • Same under Investment Advisors Act • Aiding and Abetting up to 150% of the Gross Income derived from advice given.
COUNTERTRADE “Throughout much of human history, trade did not involve money or currency but occurred through barter; the direct exchange of goods and services. Even today, international barter, called countertrade , is an important segment of global commerce, particularly for countries that lack a widely acceptable currency.”
In a countertrade transaction, one party accepts goods or services as payment for its products instead of currency. Typically, a countertrade transaction involves commercial parties from two different countries. Countertrade is often used in transactions where credit or convertible currency is unavailable. It may be a resourceful way to arrange the sale of a product into a country that cannot provide payment in hard currency. The lack of foreign exchange may be specific to the buyer or may stem from the country’s limited reserves.
Counterpurchase • A more common form of contemporary countertrade…In this transaction, an exporter purchases goods from a country in exchange for that country’s purchase of an equivalent valued amount of the exporter’s product. • [It] may also be conducted through separate parallel trade transactions that are contractually linked.
US COMPUTER MANUFACTURER JAMACIA RICE PRODUCER US CEREAL PRODUCER
CASH AND VOUCHERS US MCS EXPORTER GOODS /SERVICES STORE, INSURE AND SHIP (CIF TERMS) TITLE AND RISK OF LOSS NEW MARKET
CASH AND VOUCHERS US MCS EXPORTER GOODS /SERVICES VOUCHER SWAPS VOUCHER EXCHANGE NETWORK OF NEW MARKET OFFSHORE FIRMS
US - STATE VOUCHER MATCH CASH AND VOUCHERS US MCS EXPORTER GOODS /SERVICES TITLE AND RISK OF LOSS STORE, INSURE AND SHIP (CIF TERMS) NEW MARKET
ECONOMIC WARFARE WITH OIL RATHER THAN GUNS OR ALL IS FAIR IN TRADE?
Barbados Bartering Agricultural Commodities For Oil The Venezuelan government will accept sugar from Barbados and bananas from St. Lucia in exchange for oil, which could represent a possible saving of the Barbados sugar industry. In the PetroCaribe Oil Agreement, Venezuela has pledged “to take our oil reserves and use them to ensure that all of our neighbors are not held hostage by the international capitalist class that is pushing up world oil prices and (thus causing us to) fall victim to the subversion of their economies because of high fuel prices.” The PetroCaribe agreement had been designed to come to the rescue of countries facing the shock of losing their preferential markets as well as higher international tariffs for their sugar and bananas.
Web of Interrelated Needs Country Rich Poor A (LDC) Oil Health care equipment and services; chemicals for fresh fruit; health care costs too high B (Moderate Chemicals A needs Oil consumptive economy but LDC) C (Developed Heath Care Oil Country) High Oil (Entrepreneurs – Consumption Tech Transfer Potential) D (chemical Chemicals for A Cash (Near bankruptcy) Manufacturer in C)
Buy Back Transactions “A major application of countertrade… a contractual agreement whereby foreign contractors accept as full or partial repayment goods derived from the plant or machinery they supplied… [or a variation where] the project financing relies instead mainly on contractual recourse to the project’s revenue streams.”
WHAT CAN THE CARIBBEAN LEARN FROM AFRICA?
Risks for Investing in Africa and Amelioration of Risk • Outside comfort zone • Civil Wars • Unreliable judiciary – Contractual uncertainty – Too long a process • But improved governance – more democratic – Elections = US opportunity to back a candidate • Europe extraction of valuable minerals and metals to develop European industries
African Interdependence & Internal Governance Model – Kenya) • Africa trade within itself + infrastructure = < dependence and affect from global crisis • Social Pillar – Food production – Food security – Health care – Education – Shelter – Water and sanitation – Infrastructure • Political Pillar – corruption very costly – Kenya new constitution August 2010 – Due process & stability necessary for business confidence – New structures to encourage business in the constitution
“Just the ability to transfer money from the people who have the money to the people who do not – most of whom are a rural, poor population who, of course, didn’t have banking.”
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