#252 – Navigating Business and Tax Challenges in Latin America

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 My thoughts ever straight Hi everybody I'm Johnny Mueller and you're listening to the expat files Living in Latin America the show that tells you what it's really like to live work play and or retire in Latin America I tell it just like it is so let's get started Now last week I never did get to finish my little spiel Directed at those of you want to come down to Latin America and buy a small business whether it's from a Latino or gringo Or European expat who's got a small business that you like that's for sale or here

[00:46] She's got an existing small business that you like so much. You're gonna make an offer that he just can't refuse So just to finish off on that let me just start out with the basic fact that if you're gonna buy a small business in Latin America, I'd say that 99% of the time the official books will be doctored there will be two or maybe even three sets of books Which makes it very difficult for you to figure out what the real numbers are because like I've said a million times before football their version of football which we call soccer and tax evasion are Latin America's two national sports and they're both practiced vigorously and you know, you've got to love it not the Football or soccer part because that's nothing but mind-numbing drivel, but the tax evasion part You gotta love it and why not the biggest thieves of all our politicians

[01:34] You ought to know that by living up in the States and down here politicians live like absolute kings off the tax receipts that combined with the skim they take from the donations of naive first-world do-gooders and Politicians down here don't hide it. They absolutely revel in it shoving that largess in the face of the little guy and the common man 24-7 so cheating on your taxes with impunity It's just one small way for the downtrodden little guy the public to get even with the bastards down here They get away with it, too And you know I've heard people say well at least when I pay my taxes up in Boston or Cleveland the streetlights are on and the cops are Out and doing their jobs and if you call the fire department, you can generally count on them, too

[02:19] Well, if you've been paying attention lately, that's not precisely the case up in the first world anymore Since cities especially big cities are rapidly Deteriorating with some big city areas in the states being a pretty good imitation of some of the bleaker areas in the third world And another thing where you live now you still might have pretty good first-world government services But even if your police show up in a reasonable amount of time in your streetlights work Remember up in Cleveland you're in at least a 50% tax bracket if you add all your multiple taxes and licensing fees up Whereas in Latin America the cops might not show up for four hours and half the streetlights might be burnt out But still I don't think I've ever met a native Latin at least in the 15 out of 20 Latin American countries that I

[03:04] Recommend as good places for expats in those Latin countries I don't think I've ever met an expat or a gringo who's paid more than 10% in personal taxes And I know even that's on the high side In fact, most people pay 5% or even less and that's only on income derived within the country You live in if your income sources come from outside the country you pay nothing So as far as government service goes in Latin America, you get what you pay for which in that case is almost nothing And that's why so many gringo and European expats prefer to live in a residential tower or gated community Because then you have your own homeowner or condo association that makes all the rules and regulations and they get carried out to the letter And that's why in every city in Latin America big and small there are

[03:51] Subdivisions and whole sections that look like nice high-end copies of the first world only in a tropical setting and that's where many of The upper middle class the wealthier class and a good percentage of us expats live so down here you get what you pay for in government and you get what you pay for where you work and where you live because You're not depending on the government for anything when you spend your own money and you leave the government out of it things get done The right way to whereas in the first world you never really did get what you paid for But you got something and face it whatever your government does. It's inefficient mediocre and way too expensive So anyway if down here most people are cheating on their taxes with impunity That means you have to be cautious when you have your eye on a small business that you might want to buy rent or lease

[04:37] That means if you're looking at one of these small businesses based on the books the official books that you're gonna see when you walk Into the accountants office or if you examine the books and the quarterly statements that every business has to hand into the tax authorities Well, if you're making your evaluation based on those books Then I guarantee you that close to a hundred percent of the time You're not getting a true picture of the value or health of that business Now the local tax officials are only interested in collecting that Eva that VAT tax Which is generally depending on the country 12 to 16 percent which is added to every single purchase you make down here So quarterly all small businesses are supposed to turn over that VAT tax They've collected to the government and they do but only some of it now some months ago

[05:26] I went into great detail explaining just how small businesses especially evade taxes So I'm not gonna go into that again But I will say that the only businesses whose books are relatively Uncooked are those first world franchises that have landed down here like Starbucks and Wendy's since because they are a franchise They have to follow the exact protocol Profit and loss and inventory and fiscal control that the franchises do up north in the first world now There are ways even for these franchises to scam the tax man down here And a lot of them have figured out how to do it But we're not gonna go into that right now since in my experience It's very unlikely that an expat will come down here and buy an existing franchise one that's down here already Since normally expats will start up their own businesses from scratch or they'll buy an existing one-off mom-and-pop

[06:17] Business like a restaurant bed-and-breakfast or a hardware store something that's you know, just chugging along But they have an idea they can really make it fly So anyway, if you find an existing business you want to buy don't ever assume that you can review the books with your own accountant And come up with anything near the real business operation numbers, and I'm not saying that's a bad thing In fact when you go over the books yourself or your Latin American accountant does because obviously the books will be in Spanish Anyway, if you have an accountant do it with just one quick look He's gonna know full well how much or how little has been kept off the books Because in actuality it is a two-way street a good Latin American accountant knows all the tricks himself In fact, you can bet he's certainly not paying his so-called fair share of taxes either

[07:03] So he should be able to tell you just how much it can push it how much you could safely manage to keep off The books yourself whether you buy a business or start one up from scratch and how much is too much I mean You don't want to raise any red flags, right? And by the way, a lot of green expats come down and start businesses and play the straight and narrow with the tax man And that's great That's okay, too If you want to do that which goes to show how much they've been intimidated by the IRS up north And I just want to say for the record there ain't no such animal down here That's for sure But i'm not gonna tell you whether you should play the straight and narrow or play the game the local businessmen play All i'm doing is giving you information here Of course latins do have their share of tax codes, you know But get this most books on latin american tax code are only a hundred pages or so. You can pick it up with two fingers

[07:55] Generally the whole damn thing's no bigger than a small textbook Whereas it would take a good sized fork truck to lift the 70 000 page irs tax code And drop it in an oversized dumpster where it belongs And note that down here in latin america as far as Enforcement of those tax codes go like i've said so many times before in latin america Enforcement in just so many areas of government does not exist or it's so spotty and chaotic It's just laughable. Like for example, let's say you haven't paid your property taxes in 15 years what would happen to you up in the states? Well down here That's pretty common. And of course, they slap some interest in penalties on you But when you're only paying one or two or three hundred dollars a year for property taxes, it'll hardly break the bank

[08:43] In fact, i'd say about 95 of the laws down here are just rarely or barely enforced at all For example, you could sit yourself down on any busy street corner in any large city in latin america And you'll often see a uniform traffic cop waving his arm blowing his whistle and moving traffic along or not And you'll notice as the traffic flows by him every minute or so someone's breaking the law yet He won't do a single thing about it. In fact, he won't even notice it But you will you'll see motorcycles jumping lanes like madmen and even passing on the right and jumping sidewalk curbs to do it And violating helmet laws, of course, that's a given and yes, they have those down here, too But as usual no one's enforcing them not to mention everyone and I mean every driver is gabbing away on his cell phone

[09:33] He even stopped at a red light not two feet away from a cop and yes, that's against the law down here, too Yep, and that's a violation down here, too But you can just bet that no one's ever gotten a ticket for it And yes people will indiscriminately run red lights all the time, especially motorcycles taxis and yes Chicken buses and of course that's all happening right in front of the traffic cop and he does nothing And you'll see cars and trucks drive on by so overloaded that their rear ends are scraping the pavement and their axles so bent They look like they're going to snap and every few minutes You'll see cars and trucks go by without any license plates on them at all Not to mention motorcycles whipping by with three four and even five passengers on them and get this if there's a couple of cute kids

[10:21] Sandwiched between the adults on that bike the cop will occasionally crack a smile and wave since everyone's so damn happy down here Then again when the odd motorcycle cop passes by he won't be wearing a helmet either which is a violation, too Yet nothing happens. No one gets a ticket much less arrested and that my friends is how most laws are enforced in latin america However, let me caution you here though. The words third world perfectly explains how most laws are enforced When it comes to government taxation and collecting of taxes down here Many countries have graduated to second world status and countries like costa rica and panama and argentina are pushing Rather hard to be first world about it And some of these countries even have what kind of amounts to an 800 number hotline where you can report or snitch

[11:09] On neighborhood businesses that aren't handing out receipts and handing out those receipts is the only way the government knows When you file your quarterly taxes just how much eva or vat tax you're supposed to hand over to them Because you see those receipts are in triplicate one for you one for the person who bought something from you and one for the government Yep, they still love paper down here and carbon copies so much for preserving the rainforest You know and by the way people generally only call those snitch hotlines to get revenge on a neighbor That's doing better than they are Kind of like a reverse schadenfreude thing for you germans out there Which would be the act of being pissed off at someone else's good fortune For example being pissed off at the owner of the booming restaurant right across the street from your failing one

[11:55] Anyway, so what's a good example of a small businessman beating up the tax man? Well, for example, if you own a restaurant and you skip giving the customer a receipt an official one like restaurant owners often Conveniently forget to do when a gringo or foreigner comes in since foreigners and gringos have no use for receipts And wouldn't know a real one from a fake one anyway That's how an owner can realize an extra 12 percent or more on each sale he makes And i'm sure some of you guys are thinking right now that you could get away with a hell of a lot of that If you're in a tourist area since foreigners are coming into restaurants bars and hardware stores and bed and breakfasts all the time They don't care if they get a receipt or not because when they get back to cleveland They can't write off dinners or discos or strip clubs only first world politicians on goodwill missions get reimbursed for that stuff

[12:47] So in a way if you have a business on the tourist trail like in costa rica You're correct thinking it's a lot easier to beat the tax man. What with so many tourists But you see on the tourist trail the high cost of taxes in general on everything has pushed up the cost of living Dramatically anyway, so in order to even survive as a businessman in that climate You have to do everything and anything you can to beat the tax man And of course technically it's illegal, but practically everyone does it to one degree or another And occasionally businesses do get caught and you'll see that once in a while When you're walking through a commercial center or a business district and you see a once thriving business boarded up by the tax Men and that only happens when someone's really been flagrant about ripping off the tax guy And it's always about not issuing those official receipts

[13:35] And how'd they get caught well not usually by that snitch hotline In fact they get caught because latin governments have spies that come around and buy your products Just to see if you hand out an official receipt or not Oh, and by the way on those snitch hotlines half the time the hotline's not even working Which is par for the course in latin america, right? You gotta love it Oh, and if you get caught red-handed not giving a receipt or giving a false one It could still be business as usual for you. That is if you've got cash on hand for a bribe I mean you are dealing with government workers in latin america. Don't you know? And remember I said if you're on the tourist trailer You could get away with this for years and years because all those tourists and foreigners coming in They don't really care about a receipt and wouldn't know a real one from a fake one. Anyway

[14:24] Well, it turns out the businessmen that get caught are the ones that are indiscriminate in handing out those fake receipts They get greedy and just don't limit that game to gringos and other foreigners Now i'm not advising if you should or shouldn't do this. All i'm saying is that Practically everyone does so there are people who know how to play that game forever and ever They limit those fake receipts to foreigners and tourists So when you think about it, maybe those other idiots deserve to get caught who knows? So that's just a little bit of what it's like on the mom and pop business level now A guy that owns a chain of restaurants like expat eddie He plays it strictly on the up and up when it comes to the receipts and the factura thing Since his sales and his ordering and his inventory and his payroll and everything are on computers

[15:09] Which of course is the only way to go once you've expanded beyond the single mom and pop store But like eddie says there are other ways a ton of other ways to scam the tax man But we won't be giving out eddie's secrets on the air Except to say that you have to remember that latin america is the land of pirated goods and gray market inventory That sometimes shows up at midnight by the truckload and i'm not talking about stolen merchandise here I'm talking about merchandise that didn't exactly hit the market through official channels So anyway, like I said if you're planning on buying an existing mom and pop business It's going to be awful hard to figure out the real profit and loss statements by looking over the so-called official books And the funny thing is once you sit down with the owner and start talking about things if he sees that you're serious

[15:57] He's gonna spill the beans and say hey look come on You know how we do things here in salvador honduras guadamala peru or anywhere in latin america These are the numbers we give the government Now let me tell you what the real numbers are and that's where you have to be skeptical too because well If he's scamming the government like they all do how much will he or she be willing to exaggerate on the other side? To make you think that the business is bigger and better than it really is Now when I say that there's another set of books around somewhere It'll be more like in order to prove the point a latin owner might drag out a few old shoe boxes full of receipts And if you're not convinced he's pulling out a lot of unreported cash He'll tell you about all the vacations He takes to cancun in costa rica and that he just bought a new plasma tv whoopee, huh?

[16:43] Now if you want to cut through all that crap and see what's really happening with the business offer to pay the guy out over Let's say a year in quarterly payments instead of cash upfront And if he doesn't go for it, it could be because he's not been completely honest with you Anyway after a couple of months you'd find out soon enough, wouldn't you? But generally I've found that if you offer a payment plan Even if you have plenty of cash to pay him with one lump sum that gives you at least a little wiggle room Then if things do go south because of some misinformation You won't be stuck for the whole lot of cash But then generally when you buy an existing business being a gringo or a european with first world standards and great new ideas You're going to give that place a big overhaul anyway So chances are if you're not a complete idiot or have a spell of really bad luck

[17:30] The place will more than likely do quite well under the new gringo management And speaking of bad luck that can happen to anyone look at the europeans and gringos that invested in venezuela before shaves came in then he comes in like gangbusters and suddenly There's 35 year over year inflation Plus that big push to nationalize a lot of foreign industries which killed foreign investment and tourism And that was a terrible dose of bad luck for all those expats who bought on margarita island It really was a very safe and low-cost tropical paradise bc before shaves In fact margarita island used to be the very safest place in all of venezuela And now forget about it all the tourists and expats there are targets for the mass of petty thieves that have come in from the

[18:19] Mainland because you see venezuela now has a huge financial and social crisis You know, they've just had new elections and there's riots on the streets and voter fraud and people getting killed You've seen the news, you know that often happens when a hard-nosed dictator type Takes over elected or not. He fills the top spots with his pals his cronies His college drinking buddies and his family members who have no real training for the job. They're in It's all cronyism and who knows if I wasn't a dictator. I wouldn't do the same thing Maybe make expat eddie the minister of defense and why not he's got every jackie chan and bruce lee movie Oh, and here's another thing to look out for if you're buying an existing business Usually there are at least a few employees that are paid in cash and they'll tell you from day one that they want cash

[19:08] No checks, please Even though it's well understood that if you pay someone in cash They're not officially on the books and are not enrolled in the country's failed Social security or the totally pathetic national health care system either They prefer the cash to having two or three percent of their wages withheld for those two failed systems So anyway, remember if you're buying a mom-and-pop business be sure to ask how many employees are being paid cash because that's just one expense That'll never show up on the books and that'll go for many of the improvements or repairs You might do to the place too. Most if not all of those contractors will want cash And remember this most of these guys will give you two prices a cheaper one for cash and maybe five percent more If you write them a check and remember down here in latin america when you're dealing with contractors

[19:57] Everything's negotiable But what about receipts for that stuff so you could get a write-off? Well down here in latin america There are no such things as w-9 forms for one thing You know the form an independent contractor gets as a one-time payout for a service But that's only required up in the states. Well, you see in latin america the tax authorities do not have a sophisticated Stranglehold over the people not yet. Anyway, in fact, they're about 30 or 40 years behind the first world And at the risk of being super redundant. Let me just say one more time, which is even more redundant But worth repeating there I go again You gotta love it You gotta love it and that's why so many independent contractors whether they're plumbers or electricians or cement contractors

[20:44] They don't pay any taxes at all since there's no government forms floating around as proof That they ever got paid for anything. Oh, and here's another thing i've never talked about before You know how in the states they always advise against writing a check out to cash though We've all done it because then if that check is ever lost or stolen It's like a bearer instrument whoever has it. Well, it's theirs That's why these days up in the states Very few checks are written to cash and banks look at your funny if you bring one in But down here in latin america, it's a completely different story In fact, a very high percentage of checks are written to the portador Technically the bearer of the check now. I can't tell you how many times i've seen checks like that in latin america It's just so so common and it seems unlike north americans

[21:34] The vast majority of latin's over 40 years old have a deep distrust of government banks and big institutions in general And they'd rather not have their names and addresses and telephone numbers written on government documents and official instruments like checks Since practically every latin person over 40 has witnessed catastrophic financial and social upheavals in his own country Even his own neighborhood specifically bank failures coup d'etat's massive inflation Price controls and currency devaluations and government land grabs as we've seen recently in venezuela and argentina And i'm not saying that most latin countries are unstable chaotic and teetering on the brink of chaos Though there are a few that are hanging on the edge

[22:20] argentina for one again But the fact is most of those bad times I was talking about the coup d'etat's and the currency devaluations and all that That stuff all happened a generation or two ago Towards the end of the cold war when carter and reagan were in office And back then a great many latin american presidents and vice presidents were ex-military Generals and such who knew a lot about killing and genocide But knew next to nothing about finance and economics and budgets and how to keep their populations happy Healthy and working productive jobs and thankfully for the most part Those guys are on their way out or gone already But even so in the minds of the people over 40 years old There are still memories of the bad old days people over 40 just do not trust their government to do anything

[23:11] Right though down here in every country You could still buy a ton of votes with a sack of rice now ain't that nice? But as usual i'm getting off this subject again Now I also get a lot of emails asking me about bank financing for houses and property and business startups and buyouts Well, I can tell you right now that that can be very difficult if not impossible except under special circumstances Now if you are a gringo or a foreigner like I said before there are so many housing developments in the bubble down here That the owners are now offering very cheap financing Some with no money down because you know, the banks are not stupid. They want 30 percent down and a co-signer But when it comes to business loans, especially small business loans in order to get a bank loan down here for that

[23:58] You're going to need some substantial collateral like your house And I don't ever recommend putting up your own personal property like a house as collateral for a business loan And that goes for the first world or latin america So don't buy in this space even if it's cheap You can always rent with an option to buy and you know one thing that's very cool about dealing with latins who own properties Is that they're very flexible when it comes to gringos. Yep. It's that gringo advantage again Generally, they'll rent to you with very flexible and reasonable conditions as opposed to the standard terms They'd give a local latin and another thing I found that latin landlords are glad to write options for a lease Normally without any increase in rent at all In fact expat eddie will tell you that with many of the restaurant spaces that he's rented over the years in some cases

[24:48] It turned out that the owner had never even seen an option clause before and eddie had to do the explaining And normally like eddie said since it's a gringo running the space and you show him the green cash for like six months in advance They're very willing to write you a two three five or even ten year option Because for them you're a gringo a very stable and steady client And like eddie said those options can turn out to be a very valuable piece of paper And like eddie says in an option always try to slip a sublet clause in there if you can Now if any of you guys out there are considering buying an existing business from a latin You do well to go on the internet and search out your standard option on a lease legal form Then go over that document with your bilingual lawyer then add in some track points as you wish

[25:35] Then he'll just translate that legal ease back into spanish and you're on your way And by the way, every latin lawyer has in his files a standard option form too But you'll really want to pattern your option agreement based off the standard english forms Oh, and by the way, just a little word of warning here All this talk was about you as an expat coming down and buying an existing mom and pop business from either a latin or another gringo Now let me warn you about the reverse if a latin person approaches you to buy your little mom and pop business down here in latin America, well, why not if the price is right, but look out It's only the rare latin that can offer you cash up front on the barrel That is unless you're dealing with old money families or narcos and that means that perhaps 90% of the time a prospective latin buyer of your business will offer you a six months one year or five year payment plan

[26:27] And all i've got to say about that is don't do it Let him go out and get a bank loan if he can and pay your cash. Oh and another thing Oftentimes latin buyers will try to trade you something for a down payment too like a car or they'll put up their house Or a piece of land or their wife. Just kidding because they just don't have the money up front Well, don't do that either because this is latin america And if you do have a mortgage on their house or a piece of land Guess what the way the court system slogs along you just might not get clean title to it for five or ten years Not to mention a dozen or so wasted appearances in court by you and your lawyer So try to avoid that situation at all costs Don't take a lien on a car or a house or a property tell him to go to the bank and get a loan on that stuff

[27:13] First and then you take the cash. Oh and one more thing don't forget about my latin american seminar It's six full days from june 23rd to the 28th Just go to expat wisdom.com and click on the seminar link. It's more than half filled now. So time's a-wasting south of the border down mexico way You've been listening to the expat files living in latin america coming to you each week from somewhere south of the border And don't forget you can email me on anything at all about latin america the expat files at gmail.com See you next time most famous Ah