February 19, 2014
By: Bobby Casey, Managing Director
You may have read Kelly’s recent article, “Money Grabbin’” talking about how Italy is now imposing a 20% withholding tax on ALL incoming wires.
If you haven’t read that article, click the link above and read it. This really happened. Not only did it happen this week, they made it retroactive for all wires from February 1st.
Now imagine you are an Italian businessman with clients from all over the world. You do about 1,000,000eur per year in revenue with about 80% of that coming from outside of Italy. You run your business completely “above board” with proper account and tax reporting, but due to all the bureaucracy you earn a 10% net profit.
“Wait a second”, you may say – “If I earn 100,000 in net profit, and Italy is going to take 160,000 (1,000,000 x 80% x 20%) right off the top, I am losing money now every year”.
What would you do as a rational Italian businessman?
Simple. Stop banking in Italy. Problem solved.
However, the issue now is that you will see a massive outflow of Italian capital. Every economy in the world needs capital to not only grow, but survive.
Imagine if all the Italian businessmen open bank accounts in other parts of Europe or even offshore to manage their businesses so they don’t have an automatic 20% withholding. Now all the Italian banks have significantly less on deposit, which also means they have significantly less capital to loan out to businesses for growth, investment, and infrastructure needs.
Sounds like a downward spiral to me. Not good.
If you have been to Italy in the past couple of years you can see the effects of their already idiotic capital controls like limiting cash withdrawals.
I was in Italy for a couple of weeks last fall. On more than one occasion I had to visit 3-4 petrol stations to find one that would accept a credit card.
By my estimation, 75% of all restaurants would not accept credit cards.
I was offered a 30% discount at a hotel for paying in cash.
The reason? Simple.
Italians don’t trust their government and thus don’t want to keep cash in the banking system.
Can you blame them?
Many business owners have gone all, or nearly all, cash for their transactions. Like I said before, they are currently limited to the amount of cash they can withdrawal from the bank and now they will have a 20% withholding for any incoming wires.
This will have dire effects on the Italian economy.
Now, with that said, I am hugely optimistic with this news. This means the economy is going to fall even further. Restaurants will get cheaper. Italian products will get cheaper. Real estate will get cheaper.
It’s inevitable. It is Econ 101. With less capital in the country (reduced supply), people will have less money domestically. If they have less money, they will spend less (reduced demand). Less money equals lower prices.
Hurray!! Italy just went on sale.
If you’ve never been to the Italian countryside, you don’t know what you are missing. I’m not a huge fan of the cities personally, but the countryside is beautiful. Amazing and fresh food in every restaurant. Great wine. Very nice people.
For me, this news brings opportunity. I can see a couple of ways to take advantage of this situation:
Visit Italy and start shopping for real estate. On my last visit I looked at some very nice country villas for under 50,000euros.
Get your own money diversified offshore now. Italy is a large country with 60M people and the 9th largest economy in the world. They won’t be the last country to start imposing automatic withholding.
Get a 2nd citizenship and 2nd passport. Ironically Italy is one of the easiest 2nd passports in the world to obtain and regardless of their economic issues it is an excellent option (We have a partner in GWP Insiders who helps our clients obtain Italian citizenship through ancestry in 12-18 months).
Until next time, live well.
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