Dateline: Porto, Portugal
I have received a lot of questions from readers over the years.
Just the other day I had a guy write in asking one of the most relevant questions I’ve gotten: What are the costs of going offshore?
As you can imagine, my answer to this particular question is going to be a little bit more than a sentence or two. In fact, after ten years of doing this stuff, among other lessons I have shared with you and the importance of having a story, I have found that there are four main costs you should consider when deciding if and how to go offshore.
And, not to spoil the big surprise, but it is possible that when you consider all four of these costs together, it could be better for you not to go offshore.
But to really know that, we’ve got to dig in and look at the true costs of going offshore.
In general, when you ask what something costs, it is difficult to answer because there is such a range of options when it comes to costs and quality.
Think about it, what does a car cost?
The other day I walked past a Maserati dealership and then, after walking a bit farther down the street, I walked by a Kia dealership. It’s pretty obvious that your costs will be very different if you choose to buy the Maserati over the Kia. But both are cars. Both serve a purpose.
The price you choose to pay will depend on what you need and expect from a car. How smooth do you want it to drive? How much power do you want in the engine? What level of service do you want from the dealership?
So, how much does a car cost? It depends.
Going offshore is no different. It all depends on your desires and preferences. However, here are the four main costs you should pay attention to when assessing exactly what you want and whether or not it’s worth it for you to go offshore:
1. Opportunity Costs
Everyone should think about opportunity cost. Some people do. Most don’t. But everybody needs to consider their opportunity cost of going offshore.
The best way to calculate your opportunity cost is to ask yourself one simple questions What is it costing me right now to keep doing what I am doing?
I recently spoke to a guy who is paying about $30,000 a month in taxes – roughly one-third or more of his business profits every month. Every year, this guy is spending $360,000 just in taxes.
I then asked him what he would do with that money if he didn’t have to turn it over to Uncle Sam. He has a cash flow business so he responded that he wouldn’t need to reinvest. Instead, he would take the $360,000 and put it into real estate or invest it into things that would grow.
From that response, we figured out that he is losing about an extra ten percent a year on the $360,000 that he could be earning with real estate. That means that he will lose about $400,000 this year alone, $440,000 next year, then $480,000 the year after that, ad nauseam.
That, right there, is his opportunity cost.
For some folks, the opportunity cost isn’t that great. Occasionally, someone will ask me on a forum whether it’s worth it for them to go offshore to save on $6,000 in taxes. My response usually comes in the form of another question: “Is the pain of doing it greater than the pain of not doing it?”
If the answer is yes – if it’s more difficult to do the work and pay for the right services –then just keep doing what you are doing. Sometimes paying a little bit of tax is not the worst thing in the world.
So, take into consideration how much money you are losing in taxes each year and how much it is going to cost for someone to fix that problem. That is the cost to you if you keep doing what you are doing. It’s up to you to decide if it is worth it to change.
2. Service Costs
This second cost is pretty straightforward. What is it going to cost you to go offshore?
As with the Maserati scenario, you can choose the Maserati or the Kia. You can choose whichever price tag you want. Just know that the difference in cost will always be reflected in the quality you get in return.
For me, it’s worth it to pay to fix the problem. But that’s why opportunity cost is the first cost to consider. If you don’t know how much you’re losing by doing nothing, it’s difficult to know what it’s worth to spend on fixing the problem.
As an example, if I am losing $396,000 this year in taxes and someone can solve that problem for me for $10,000 or $30,000 or even $50,000, that is a great deal to me.
Heck, even if they charged me the equivalent of six months of my business profits, it would be worth it to me if they fixed the problem forever so that I would never have to pay that $396,000 again.
But it’s up to you to decide.
Determine what type of service you need and how much you need to pay for it. If it fixes the problem, then the actual cost of the service is negligible in the long run.
3. Time and Stress Costs
The second cost is the one that I think most people worry about when going offshore, but it is the third and fourth costs that I have learned from my ten years of research and experience that come with the greatest price tag.
The third cost of going offshore is the time cost. When you are figuring out the various tactics of internationalizing your life, you are going to spend a lot of time on it.
Another individual I spoke to recently set up three or four different companies in three different jurisdictions before he came to me.
The first company he started was in the Seychelles because his friend had told him to do it. If you have been reading our blog, you may know that Seychelles is on the list of countries that I advise to be very careful with nowadays for your offshore company jurisdiction.
The fact that he took advice from his friend is most unfortunate because he is American and his friend is British. They don’t have anything in common in terms of their tax obligations or their ability to open up a bank account. Despite all of that, he took his friend’s advice and opened up a Seychelles company. And, guess what, he could never get a bank account for it.
Then he decided to open up another company in another jurisdiction and that plan didn’t plan out either. From there, he went to Estonia and opened up another business. Why? Because that’s where all the ”cool kids” are doing now.
When that didn’t work out either, he finally went to Hong Kong. He was able to get a bank account for his business in Hong Kong after a great deal of effort, but then he couldn’t accept credit cards.
After spending over six months opening up all of these companies, he still hadn’t figured things out.
I can’t quote you his exact costs, but he had used cheap providers all along the way to set stuff up. He figured he knew what he was doing and basically told others to let him handle most of the process.
His opportunity cost was rather high from the start, his actual cost of execution was rather low at first, but his time cost was through the roof by the end because he spent six months setting up one company after another after another.
Meanwhile, he couldn’t move any part of his business from his domestic company to an offshore jurisdiction because he didn’t have one properly set up. He didn’t have anywhere to transfer the company and he had nowhere to put his money.
He didn’t have a strategy.
As a result, his opportunity cost kept getting bigger and bigger every month, but he wasn’t doing anything to actually solve the problem.
On top of the time cost, however, this guy was losing thousands and thousands of dollars of his time. I looked at this man running a successful business and asked him, “What is your time worth per hour?”
“When I can actually focus on my business,” he responded, “I can make a couple hundred an hour.”
“Well,” I said, “You’ve spent about six months working on this. A conservative estimate would be that you’ve dedicated ten hours a week contacting various people in Estonia and Hong Kong and everywhere else where they speak varying levels of English. If you added up all of the time you’ve spent trying to figure this out on your own, how much earning potential did you lose over those six months?”
He wasn’t sure.
We did a quick calculation together. I took the 26 weeks he’d wasted, multiplied them by the 10 hours he spent running in circles each week, and then factored that by the $200 he could have been earning per hour working on his business.
The cost? $52,000.
This, of course, was a lot more than what he had paid to set up the structures that never served his business to begin with. He was depriving his business tens of thousands of dollars in revenue that he could have brought in if he hadn’t been focusing his time on scrambling around trying to figure everything out himself, talking to guys who speak Chinese to set up offshore companies that eventually never worked.
That is why I always recommend to ask yourself these 8 questions before you set up your offshore company.
His cost wasn’t just the $9,000 he’d spent to set all these different structures up. His cost was the opportunity cost, plus the $9,000, plus the time he wasted not dedicating himself to his business.
The other time cost is the stress that comes with wasting your time trying to figure out the complexities of going offshore.
The stress cost can come into play at any time in any part of a business. That is why I delegate a lot of stuff at Nomad Capitalist. I don’t want to figure out QuickBooks to handle our accounting. That would stress me out.
Even though it may only take an hour to do, the stress of that hour may decrease my productivity for the next four hours. That means I will be losing valuable productive time that I could have been putting into my business.
You may not be able to put an exact number on it, but it all adds up. If you’re not careful, the cost of time and stress can be your biggest expense.
4. Risk Costs
The last cost that most people don’t take into account when deciding to go offshore is the risk cost. This is the cost that comes when you choose to work with offshore service providers that don’t understand your tax situation.
If you are American and you hire some guy in Hong Kong to set up your business, they will tell you that there is no tax there. They do not understand the tax picture in the US.
For example, maybe you are a U.S. citizen living in France. They won’t understand the US citizenship picture, nor will they understand the French residence picture. This means that there are other things they won’t understand and then the puzzle never works together.
I have seen a couple scenarios where someone will go with an offshore company and find out six months later that they have been doing it wrong and owe a bunch of taxes.
One guy from London I talked to recently, again, listened to his friend’s advice and ended up doubling his tax bill. Rather than cutting it, he doubled it! And all because he didn’t understand the structure. It took him six months to realize that. The wasted time and the increased taxes were the cost of taking bad advice.
That is the risk cost.
Other cases of risk cost are the issues that arise when anything offshore is done improperly. What happens if the provider sets up your business license and a year later when you have to renew it, they aren’t around? What is the risk of that?
You can also look at risk cost on an actuarial basis. Let’s say I give my maid $100 to pay my electric bill. There is a five percent chance that she will never come back, which means that whether she pays the bill or not, I just lost $5. That’s the risk cost.
People don’t really look at that. They don’t look at the risk that some guy in Hong Kong who just churns out 1000 companies a day could mess things up for your specific situation and generate unneeded costs. They don’t factor in the costs you will accrue by taking advice from the guy in Nevis who just avoids questions about US tax regulations and lands you in a load of legal trouble.
For me, it’s worth it to pay for the best offshore service providers because I may have a high tolerance for risk when it comes to investing, but I’m certainly not willing to risk the very foundations of my offshore tax structure.
The Right Choice for You
In summary, those are the four costs of going offshore.
First, what is your opportunity cost? Is it even worth pursuing? If you’re paying $6000 a year in taxes, my opinion is that it’s not worth it for you to go offshore because of all the other costs that follow. If you’re paying $600,000 in taxes, on the other hand, chances are that going offshore is probably a good solution for you.
Second, the actual cost of the service is rather negligible in my opinion. The time and stress cost of setting everything up on your own and having that deplete your productivity is the bigger cost.
And then there’s the risk cost – the cost that there could be a problem later with your structure because it wasn’t done properly to begin with or you took bad advice and got into trouble.
These are all the elements. After ten years of doing this, I’ve worked with some of the cheaper people and it’s funny how when you “buy a Kia” it tends to drive like a Kia. That doesn’t necessarily mean that the Maserati is the most amazing car ever, but you get what you pay for.
In some cases, the best thing that someone can do who’s looking out for your best interests is to tell you that you don’t need to move your business offshore, you don’t need a second passport, or that you may even want to keep investing where you’re from.
Going offshore is not the be all and end all for everyone’s situation. But if you keep these four costs in mind, you’ll get a lot of clarity about whether or not you need to go offshore and the best way to go about doing it.