Episode Summary
In this episode of The Expat Files, Johnny Mueller dives into the unique U.S. tax system that taxes worldwide income, contrasting it with Latin American tax policies. He highlights that the U.S. is the only country that taxes its citizens on worldwide income, even if they don't earn money within the U.S. This is a significant reason for many expats to consider leaving the U.S. as soon as possible. Johnny also references a recent article from 'International Man' about Panama's sudden and controversial tax law that taxed citizens on worldwide income, which was inserted into an innocuous bill without public debate. The law was passed in secrecy and faced immediate backlash, leading to its repeal within a day. Johnny suggests that this incident is a bellwether for future global tax policies, as governments may increasingly adopt similar measures to fund their operations.
The podcast segment also discusses the economic and political implications of Panama's new worldwide taxation law, highlighting the country's reliance on the Panama Canal for revenue. Johnny explains how the canal generates significant income for Panama, which is partially controlled by Chinese investors. He details the costs associated with passing through the canal for various types of ships, including container ships and cruise ships, and notes that the fees are passed on to consumers. He criticizes the corruption and excess among Panamanian officials, who benefit from the country's economic activities, and mentions the potential impact of a major shipping company, Maersk, moving its operations away from the Panama Canal due to rising costs.
The segment also touches on the impact of the Suez Canal on shipping costs for Merisk, a major shipping company, and the potential for a canal price war if a new canal is built in Nicaragua. It highlights recent changes in Cuba, where a new law allowed common citizens to buy cars without special permits, but this led to significantly higher prices, making car ownership unaffordable for most Cubans. Johnny comments on the economic implications of these changes, suggesting that the new law might have been influenced by a tax bill that was passed at the last minute. The segment also includes a reader's email about seeking first-world work overseas and a focus on self-improvement rather than starting a business in Latin America.
Finally, Johnny discusses the challenges and opportunities for expats seeking employment in Latin America. He emphasizes the importance of language skills, the need for recruitment from the United States, and the potential for earning first-world salaries in specific areas of major cities. He highlights the differences in cost of living and lifestyle between first-world enclaves and tourist areas, and mentions the role of international companies and NGOs in providing employment opportunities for expats.
Topics
Tax implications for US citizens living abroad, Comparison of tax systems between the US and Latin America, Foreign earned income tax exemption, Challenges faced by expats in the US tax system, U.S. tax system, Global taxation, Panama's tax law, Government transparency, Tax policy trends, Panama Canal Revenue, Corruption in Panama, Taxation and Economic Policy
Chapters
00:00:00 Opening 00:00:32 The US Tax System and Its Impact on Expats 00:01:22 Tax Differences Between the US and Latin America 00:03:33 Foreign Earned Income Tax Exemption 00:05:59 The Unique U.S. Tax System 00:07:21 The Panama Tax Law and Its Implications 00:11:32 Introduction to Panama's Taxation Law and Revenue Sources 00:11:41 Analysis of Panama's Government and Debt Levels 00:11:48 Panama's Revenue from the Panama Canal 00:12:27 Costs for Container Ships Using the Panama Canal 00:14:47 Panama's Annual Revenue from the Panama Canal 00:17:02 Rising Costs and Maersk's Decision to Leave the Panama Canal 00:17:09 Merisk's Cost Savings via Suez Canal 00:17:34 Potential Canal Price War in Nicaragua 00:18:01 Merisk's Decision on Panama Canal Expansion 00:18:31 Cuba's New Car Purchase Law 00:19:42 Cuban Car Prices and Affordability Crisis 00:20:53 Cuban Government's Role in Used Car Sales 00:21:49 Reader's Email on Work and Self-Improvement 00:22:52 Finding Work Overseas and Expat Experiences 00:23:18 Sure Things and the Risks of Expatriate Life 00:23:58 First-World Salaries in Latin America
Transcript
Automatically transcribed from the original recording; names and wording may contain errors.
[00:00] South of the border down Mexico way That's where I fell in love when the stars above came up to play and now as I wonder Hello there all you expat wannabes I'm Johnny Mueller and you're listening to the expat files living in Latin America the show that tells you just what it's like to live Work play and or retire down here in Latin America It's a mix of the good the bad the ugly and the great and it's all right here. So let's get started Now I'm sure most of you know that the USA is basically the only country in the world that imposes a tax on worldwide income Not just income produced within the country and that means even if you were born in a US hospital and your parents were
[00:45] 100% foreign then when you get old enough to get a job You will technically get taxed by the US for all your worldwide income and that's no matter where you choose to live You will always owe the US tax man his 30 pieces of silver though I'm sure it's up to 30 40 50 maybe even a hundred pieces of silver by now, huh? Anyway, as usual for captive US citizens The tax man is gonna give it to you right up the keister And by the way, did you know that the average fee that tax preparers charge in the states is between 200 and 400 bucks for a person who doesn't own his own business You know the average working-class Joe or Jane and that even includes nameless faceless tax preparers Like you see at H&R block and here's what's sadly funny about that down here in Latin America Nine out of ten gringos and expats don't even pay 200 to 400 bucks a year for the actual tax bill
[01:35] And by the way, not too far from the subject the average person down here who owns a house or a condo Rarely pays over 500 bucks a year in property taxes And of course, I'm talking off the gringo tourist trail forget about Panama, Argentina Costa Rica and Chile since every year they're jacking up the property taxes more and more trying to achieve first-world parity Of course the idiots and what do you get for it? Nothing? anyway I know many many gringos and expats off the tourist trail that have houses that would be three or even $400,000 in the states and not one of them pays over 500 bucks a year in property taxes, which is reason 2426 why you should definitely get the hell out of the US or was it 2427 I forget. Where was it? Oh, yeah, don't think that foreigners giving birth on US soil doesn't occasionally happen
[02:27] In fact last year over 20,000 foreigners had babies that way in the states And I'm not just talking about pregnant Latinas trying to slip in to give birth just to claim that US Citizenship and all those future benefits like food stamps and welfare that it entails Though that does happen a lot more than we like to believe There are also some completely innocent cases where foreigners give birth in the states For example if your mother was from England or France or Ireland on vacation and you or your brother or your sister just happened to Pop out that would mean that your brother's sisters Are you are technically US citizens and are required to report and pay taxes on your worldwide income forever? Isn't that nice even if you never ever in your whole life return back to the United States for one day?
[03:14] Now you probably also know that you're much better off living outside the US if you're a US citizen For a lot of reasons not the least of which is how US citizens living outside the states are treated Tax-wise by their own government the IRS and Uncle Sam you might recall that living more than 330 days a year outside the US Allows you to get that special foreign earned income tax exemption of ninety nine thousand two hundred dollars That's for the latest tax year of 2013 which by the way is up from ninety five thousand five hundred last year So I repeat if in 2013 you made more than ninety nine thousand two hundred dollars And you lived outside the US for more than three hundred and thirty days And you made that money outside of the US you have to report and pay taxes on any amount over that and by the way
[04:03] That includes your FICA and Social Security portion too though believe me there are legal ways around that too But it gets a little complicated, so I won't go into it right now now for some of us 99,500 bucks tax-free is a pretty big number now I admit I've been down here a long time And I don't know very many expats at all who make that kind of money after all down here if you're off the tourist Trail to live like a person making a hundred grand a year you only have to earn about a quarter of that And that's why a lot of laid-back expats. I know don't care to push themselves that hard Why should they when you get down here yourself? You'll know what I mean though many of them could jump right back on that first world treadmill down here in Latin America and make six Figures, they just don't care to they hardly feel like jumping back on the treadmill after they liquidated practically everything up north
[04:51] Just to get the hell off and about that three hundred and thirty days out of the US bit in order to qualify for that near 400 grand for an earned income exception well because that whole calculation can be quite detailed I'm kind of simplifying it here Just know that it's not always true that you have to be 330 days or more outside the US to get that exemption there are other ways to legally qualify and still Remain in the US for most of the year But it's too much to go into right now if you want more detailed info on that I talk a lot about that on my new five flags course which you can get at expat wisdom calm And I talk a lot about that at my expat wisdom seminar, too Anyway, just remember you don't have to be out of the United States more than three hundred thirty days a year to get that Big ninety nine thousand five hundred dollar foreign earned income tax exemption
[05:38] No matter what lawyers and tax accountants might have told you that three hundred thirty day rule is not strictly true There are other ways to qualify But you see if you happen to live in the US full-time and none of that applies you get no such tax break on foreign income You get taxed on all your income even if you don't earn a single dime from a US source And here's the thing up to now It's been the US government that spend the only one that taxes you on your worldwide income Which is reason one thousand two hundred and seventy six Why you should get the hell out of the US as soon as you can though. It could be reason one thousand two hundred seventy seven I forget Anyway, don't think that all other foreign government tax authorities don't know this and aren't just chomping at the bit to get a piece of Action and that is tax the crap out of their citizens by hitting them with attacks on a worldwide income
[06:26] Not just what's earned within the country itself. Just like the states Well, I know for a fact that a lot of countries Especially european countries have given some lip service to passing a bill like that But no other country till now has had the balls to do it since most politicians believe it would be the kiss of death For reelection for anyone who supported a bill like that But you see since politicians are ruthless cunning and power hungry not to mention ass wiped thieving scumbags too and i'm being kind Anyway, if there was a way to get a law like that shoved through congress in a closed session without debate Hidden somewhere within an innocuous bill that no one seemed to care about anyway In other words with no transparency that just might be the way you see a law like that pop up one day out of thin air without any individual congressman or party member taking the heat for it
[07:15] That's about the only way a gluttonous government could pull something like that off and there's precedent for it Since the us government does it all the time now on that note. I'd like to read you something. That's pretty devastating It comes from a publication. I like a lot called international man And i'm going to paraphrase and read a few excerpts of it for you And this by the way is very current just came out a few days ago In fact on january 3rd and it starts out by saying on the 31st of december 2013 only hours after the panamanian government gazetted a new law Shock waves went through panama's business community the outcry generated demands that the law be instantly amended or repealed Immediately now the primary subject of law number 120 of 2013
[08:01] Had absolutely nothing to do with income taxes at all But somehow deep within the amendment two articles had been inserted to amend the long-standing Panamanian tax code and let me quote this part of the brand new law every natural citizen or resident Juridical foreign or domestic who receives any taxable income within or outside? Panamanian territory must pay taxes on that income Unquote then the article goes on to say the meaning was clear those who pay taxes in panama Must now and in the future pay taxes based on their worldwide income Instead of just their panamanian sourced income just like the very same tax law in guess where big brotherland the united states
[08:48] Then it says this law was passed in total darkness There had been no public debate yet It was signed into law by president ricardo martinelli on the very last day of the 2013 congressional session December 30th now I ask you how convenient was that and the article goes on to say This was obviously done with the intent to hide it and have no one notice it until it was fait accompli There was no previous discussion of this anywhere Nobody at all saw it coming said high placed financial industry and banking experts in the panamanian business sector Now the next day when the news unfolded and the president was called to question on his twitter page He first tried to defend the law saying that if the law needs to be defined or repealed
[09:36] We must have ample debate Yeah, right Let's have a debate after we slipped it into an innocuous bill that no one cared about Once the business community finds out and gets totally up in arms about it. Yep That's what I call clean effective transparent government. Hmm sound familiar. Now. This is interesting It says here the panamanian government grossly underestimated the outrage this would generate with the public Officials and the president first tried to dismiss this in a business as usual manner Then they had to backpedal One of the things that made them retrench their position Was the fact that some heavy hitting businessmen and powerful industrial big shots made some irate phone calls to the very top As soon as they found out and as a result the very next day on december 31st
[10:22] The government announced that the law will be repealed right away on the new year Then the article poses these questions. Are we back to normal in panama? Can we just dismiss this as a bizarre episode then things go right back to business as usual Well to that the author says I wish Unfortunately the damage to the country's credibility is already done I don't know how grave it will be in the long run, but after this Nobody can be blamed for having second thoughts on panama as an investment or retirement destination Then the author adds certainly the world is awash with debt and many rulers are finding that they are running out of options By which to keep themselves and their governments afloat We shall therefore see ever more drastic measures like this being taken by leaders of the world
[11:11] So we should look at this episode in panama as a bellwether Okay, and of course, there's a lot more to that article, but those are the highlights now for what it's worth Here's my take on it since I actually lived in panama a while and have been back and forth in the last couple years Maybe 10 or 15 times. I know that country and I also know costa rica and argentina And I can tell you this they've all had that idea of taxing their citizens and residents on their worldwide incomes But none of them had the balls to be first until now Those three latin countries in particular have very top heavy governments and are carrying extreme unsustainable debt levels Now what's surprising about panama is that the government has tremendous tax revenues from the canal Now this is going to shock you and i'm sure you've never heard this before
[11:58] First let me start out by saying it seems like a lot of people have a romantic dream of going through the panama canal Especially people who take personal pleasure cruises with ocean going sailboats and such In fact, I know a half a dozen gringos and expats who've sailed through it as a part of a personal goal on a sailing trip Well, I hate to shatter your own dreams, but here's the reality of trying to do that But first let's talk about the main use of the panama canal getting those big container ships through Listen to this if a cargo ship goes through the panama canal The canal authority bills them at 82 dollars per full container and 74 dollars for an empty container So you really don't want to have a lot of empties because that's dead weight not making you any money now
[12:44] Let's take a typical container ship with let's say 3,800 containers and here's a typical billing schedule In this case the canal authority charged for this one container ship 321,446 for the containers and 11,500 for the work of the seven tugboats it took to get through the canal 5,000 for the ground assistance helping it along and 3,600 for the ground wires and ropes So when your average container ship exits the other side of the canal that transit alone Will have added a third of a million bucks to the cost of the goods on the ship So think about it if you've bought a bicycle from china or a drill from korea
[13:29] If you're a businessman buying those things wholesale in cleveland a third of the cost of that product Was charged up on that 50 mile trip through the panama canal And by the way the occasional luxury cruise ship goes through the panama canal too Oh, and I forgot to tell you that 50 mile cruise times about eight to ten hours Anyway, get this when a cruise ship goes through the panama canal those ships are levied a fee of 150 Dollars per bed again just for that 50 mile trip and you've paid for that in the price of the cruise So I hope it's worth it So then what about that poor guy trying to live his lifelong dream of sailing around the world in his own personal sailboat? When he gets to the panama canal, what's his bill going to be? Well in that case it definitely pays to go small because they charge you by the length of your boat Small ships of less than 50 feet will pay about a thousand bucks for the transit a boat from 50 to 80 foot in length
[14:21] Goes for about 1500 bucks 80 to 100 feet 2500 and above that if it's not a commercial sailing ship you pay 3500 bucks So the big question is how much does little panama make a year from the canal authority? And of course the canal authority is owned by the chinese So they get at least half of that money But no one really knows the extent of the deal they have with the government of panama Even though it's been estimated that panama itself rakes in from three to four billion dollars a year That's billion with a b from the canal fees alone And remember panama's only got about three and a half million people to give you an idea That's about the population of the greater chicago area and think about this Panama is one of the handful of latin american countries with comparatively high property and personal taxes, too
[15:06] So you might ask where's all that money going to which I answer you haven't seen how panamanian elected officials and politicians live And the size of their houses and vacation homes and entourages and of course their battalions of bodyguards Not to mention the limousines and the helicopters. They're like pigs in a trough and they still want more In fact, they just can never get enough. That's exactly why they try to slip in that little worldwide taxation law And that goes for costa rica argentina and chili too for them It's like one last big move on a chess board and they're chopping on the bit to do it And they're all standing in the wings with baited breath to see what's going to happen with panama in the new year Because remember the president said they're going to repeal that law right away or at least have a debate Well, we'll see remember this is latin america and the term right away when it comes to government
[15:57] Anyway, it means maybe maybe not or perhaps never now I understand that the mayors and the presidents and the big politicians all get a nice big fat kickback Every time they approve another commercial project or giant skyscraper and right now there's over 150 such projects going up right now in panama In fact a couple of months ago when I was in panama just looking out my hotel window I counted over 35 industrial cranes dotting the skyline all brand new projects under construction All brand new projects that had to pay bribes to get those building permits. I'm sure That's how latin america works. Not just panama except Panama is one shining example of extreme excess in corruption and everything else. Oh, and here's something I forgot to mention the world's largest container shipping company is merisk
[16:46] You'll remember that shipping line merisk if you watch that movie captain phillips with tom hanks You know the one where he gets kidnapped by somali pirates Anyway in a press release merisk has said that after april 7th They will no longer be using the panama canal at all due to costs It turns out the panama canal authorities have raised their fees on canal transits three times in the last three years And now it's actually cheaper for merisk to send its container ships through the suez canal, which is a longer voyage But they save five to six percent on canal charges And even though right now the panama canal is undergoing a five point two five billion dollar expansion to handle bigger ships Still merisk is not taking the bait not to mention There's a lot of talk and some action about putting a canal through
[17:34] Nicaragua and if that happens you can bet there'll be a canal price war which is good for everybody except the panama politicians Merisk says it will only use the new expanded panama canal if the numbers work out and right now they don't So with that i'm sure you can see what's happening the instantaneous loss of big revenue From the world's largest shipping company merisk You think that might have something to do with the way that tax bill got buried in some other bill at the last minute And signed into law by the president on the last day of the year Hmm. I wonder. No, I guess I don't wonder So the next question is what will be the next latin country that tries to kill the goose that laid the golden egg I'll bet you a bitcoin. It's costa rica Okay, enough about that Now did you happen to see that little article about cuba that came across in news services and the internet blurbs like yahoo news, etc
[18:25] Just in the last few days Well just to refresh your memory and if you haven't seen it to fill you in last friday A brand new law went into effect in cuba allowing the common man That is the common cuban resident to finally buy a new or used car in that country without obtaining a special permit A permit that had always in the past been a bureaucratic nightmare that could take years to get approved But the happiness was short lived as the people who ran down to the dealerships on friday found out that the average cost for a car Was no longer 100 percent more than you could obtain one up in the first world or even in nearby latin mainland countries like mexico and honduras As of friday, they found out they could buy a car all right and get it that very day Which in cuba was unheard of unless of course, you were a high placed bureaucrat
[19:12] But they also found out that now cars were suddenly 400 more costly than the price you'd pay if you were up in the first world or If you'd purchased one from an adjacent latin country on the mainland now, don't get me wrong Before friday when cars only had a 100 markup people were actually long accustomed to that and would save up a lifetime Just to buy a car for their old age generally a used car Suddenly there's that 400 markup and all that lifetime savings for a car is now out the window In most cases now that won't be enough since the average cuban still only makes about 20 to 30 bucks a month In the old days, it wasn't unusual for a cuban to save up 5000 bucks in about 20 years because remember about 15 to 25 percent of all cubans
[19:58] Get some extra money monthly or quarterly from relatives up in the states The latins call those gift payments from people in the states remissas remember and before friday 5000 bucks was enough to buy a junker. That was a decent runner now cars like that are more like 15 grand Now you might be thinking under the old permit system where there was a hundred percent markup on cars That was pretty terrible in itself But you know hundred percent markups like that are pretty much standard practice in island countries like cuba Dominican republic nevus saint kits the virgin islands haruba, etc, etc Nearly all small island countries have oppressive import taxes Since most large manufactured products like cars washing machines dryers, etc And all consumer electronic products like televisions and computers have to be imported
[20:47] It's always more expensive to live on an island That's when governments really have you by the short hairs Oh, and I bet you didn't know that the cuban government actually owns used car dealerships And if on friday you would have surveyed some of those government used car lots you'd find the cheapest car for around 15 000 bucks for example on one used car lot. There was a 1997 bmw with over 200 000 kilometers on it for that rock bottom 15 grand price Now if you walked over to the Havana new hyunde and kia dealership You'll find a brand new kia rio hatchback starts for around 42 000 bucks The same one that you can get in the states for 13 grand Now just one last thing about this Like I said in cuba the used car dealerships are owned and operated by the government
[21:34] Now as you well know used car dealers are not a well-loved species of man Now in cuba, it just so happens that they have a double whammy. They're also government workers Now if you can think of anything lower than that, let me know because I can't Moving on now. I must say I do get a lot of emails I really do try to answer everyone at least with a little blurb And some of them deserve to be read and answered on the show like this one And this one in particular comes from one of my new friends that came down to one of my seminars about a year or so ago And as usual i'll paraphrase a bit here He starts out by saying johnny you sent a recent question out from your website asking about whether people wanted to start a business In latin america find a job or what their focus was speaking for myself Failing is something i've done enough of and I want to live well
[22:22] So currently i'm looking for how I can find first world work overseas I'm too young to retire and i'm looking for sure things now So as far as being a small business person down there, my heart just isn't focused on that I feel you have to be all in to make a business work And if anything, I just want to read more and pursue self-improvement activities being smarter reading more etc I get focused on learning and don't want to stop I don't want to go on and on here But just to help on your end this potential expat would love to hear more about finding work overseas and not just limited To latin america even you yourself have had to have run into plenty of expats with experience with this type of employment What i'm doing is elaborating a little more about that question you asked about business and job focus for future expats
[23:13] And he signs off regards mr. P. Okay, then mr. P. Let's discuss this a little bit first Let's talk about sure things Well, like expat eddie says not even winning the lottery is a sure thing You could get killed walking across the street to pick up your check Especially like eddie says if you've been celebrating and buying rounds for everyone for the past four or five days But as many long-term expats I know down here will tell you even if you start a business here and do it half ass The odds are still with you that it's going to be a success as long as your competition in business Are the latins or other third world competition and not gringos or first worlders? And that's why it can be an unfortunate mistake to locate a business in a high volume gringo tourist area But it is true I have run across a lot of gringos and expats who do work down here for first world companies
[23:58] As executives and middle management for 3m and bayer and nesley walmart sears and yes, believe it or not They make first world salaries too, which means down here. They're living like royalty provided Of course, they're not living in the so-called zona viva or zona rosa And here i'm talking about the sections in big city latin america where all the international business and banking takes place And where you have your hiltons and radisons your convention centers in the first world restaurants and hotels Because you see if you choose to work and play in those areas of the big city You'll be paying first world prices because you see in every medium and large sized latin american city There's a first world style enclave with a lot of first world shopping including hotels restaurants entertainment and such And that by the way is where all the embassies are too and where all the embassy personnel hang out
[24:46] So businesses and restaurants and such located there can get first world prices because they're catering to first world people Like embassy folks and conventioneers who make first world salaries not to mention that's where all the scumbag politicians Hang out too to show off their power and spend the money that they swindled from the masses Makes sense, right and personally I keep my distance from those people in places I left the first world to get away from that kind of stuff So bottom line if you make a first world salary and choose to work and play and live In the so-called zona rosa or zona viva areas you'd live quite nicely But not like a king or queen as you would living off the tourist trail away from the main business and hotel district And again speaking of expats who earn first world salaries I know some expats in management positions in big international mining companies down here with home offices in the uk and canada
[25:39] So how did they get those jobs? Well, they were either recruited when up in the states Or they answered ads in the back of business magazines like forbs business week and the economist And there are also foreign placement one ads in various professional magazines like for example I triple e magazine which is a nerdy engineering rag that I used to get and of course if you are a professional Whether you're a chemist or a geologist, whatever you can look up your specialty rag on the internet and check out the one ads there, too And don't forget those overseas job ads in big newspapers like the chicago tribune La times new york times and that funky orange uk newspaper the financial times They've all got sections for foreign placement job ads But I will tell you one thing you'll almost never get the job if you don't speak the language in the country
[26:28] They're going to place you in and I just don't mean being able to understand spanish portuguese or indonesian soap operas I mean being able to read write and speak in a business sense because you see you can't come to a third world country latin Or otherwise and impart your special gringo skills if you can't communicate it to the locals and the people you're working with In their language and if you're thinking of getting a job with an international ngo in latin america For example, they do advertise those jobs in the papers down here in english But again, one of the job requisites is that you're going to have to know spanish and by the way these ngo's which are Ong's in english, you know those do-gooder organizations. I always talk about Anyway, if you get a job with them You'll make about half of the first world salary you'd make if you were up in the first world For example, if they hire you as an accountant You might get 40 grand a year instead of 80 and on that you'll be living like royalty if you follow my advice
[27:17] So bottom line if you're coming to the third world and looking for a job that pays first world salary working for the man That is you'll have to know the language and get recruited from up in the states If you think you'll get a job like that coming down and beating on doors yourself, that's not gonna happen You've been listening to the expat files living in latin america coming to you twice a week from somewhere south of the border Email me the expat files at gmail.com And don't forget to check out expatwisdom.com to sign up for your free reports on latin america See you next time. Nos vemos He knows