Purchasing Foreign CD's

[NYEXPAT]

I have had a few inquiries from friends who wish to invest in a 3 year Peruvian CD currently paying 9% interest (local currency). The problem is as foreigners on tourist visa's they can no longer open a bank account here. I am trying to develop a legal mechanism to overcome the problem and wonder if somebody could check my math?


I wire transfer $145,000 to a Peruvian bank :

1. The US bank withholds 30% (43,500) for 1 year until I file my US tax return (0% interest and 3.5% inflation).
2. Both banks charge $50 each for a round trip wire transfer. ($200.00)
3. Peru charges a .0015 financial tax on all bank transactions (of which there will be 2 in total $300.00)
4. Interest income is non taxable in Peru
5. For sake of argument no currency exchange fees apply as appreciation of the local currency should offset any exchange fee's.
6. $3000.00 management fee (1%) deducted from outset.


145,000.00 original WT
- 43,500.00 30% withholding
-3,000.00 management fee
- 300.00 ITF
- 200.00 Wire transfers

$98,000 invested in CD at 9% for 3 years = $28,912.00

$126,912.00 returned at end of 3 years

$25,412.00/101,500.00 (original wire transfer amount)= 8% return per year for 3 years

Have I calculated this right or should I also calculate the loss of use of the $43,500 for one year?

 

[MichaelB]

Interest income is taxable in the US. Currency risk cannot be assumed away. Banks will charge exchange fees each way, these should be included in the calculation. The withheld amount also needs to be added back to calculate total return, and the total after tax should be compared with a US alternative to see if the difference justifies the exchange risk.

 

[braumeister]

Currency risk cannot be assumed away.

Having lived in South America in the 1980s, I still have the picture in my mind of people in downtown Lima pouring out of their office buildings at lunchtime to spend their pay (they were paid in cash both before lunch and before quitting time) before their big stacks of currency lost all value. Inflation reached an incredible rate (thousands of percent) under Alan Garcia's regime.

OK, things are very different today, but still ...

 

[Gumby]

While they don't have them denominated in Peruvian Soles, Everbank does have CD's denominated in a variety of foreign currencies. The current highest yielding is is a Brazilian Real 3 month CD yielding 5%. I would do that instead; it is simple to do and FDIC guaranteed. (You still have currency risk)

https://www.everbank.com/personal/rates.aspx?tab=currencies

 

[NYEXPAT]

While they don't have them denominated in Peruvian Soles, Everbank does have CD's denominated in a variety of foreign currencies. The current highest yielding is is a Brazilian Real 3 month CD yielding 5%. I would do that instead; it is simple to do and FDIC guaranteed. (You still have currency risk)

https://www.everbank.com/personal/rates.aspx?tab=currencies

The problem there is twofold:
1. currency risk = although it can be hedged at some cost.
2. 3 month duration= You do not know what your average rate will be over 3 years and Brazil is in credit easing mode currently.

As Peru is a dual currency economy you could get 5.5% on a dollar account for 3 years with no currency risk (1% or so transaction fees) or you could take the 8% rate (after transaction fees) and hedge the currency risk, although most people (in today's economy) would want the additional currency kicker.

 

[Ed_The_Gypsy]

What about countries that use the US dollar as currency?
Turks & Caicos
Ecuador
Panama
Belize (more or less)

 

[NYEXPAT]

Interest income is taxable in the US. Currency risk cannot be assumed away. Banks will charge exchange fees each way, these should be included in the calculation. The withheld amount also needs to be added back to calculate total return, and the total after tax should be compared with a US alternative to see if the difference justifies the exchange risk.

Taxes are the responsibility of the individual, although I believe it is (still?) possible to borrow from a tax advantaged account and pay the interest and principal back to the same account and avoid taxes.

Currency risk can not be assumed away I agree although it can be hedged. The people that are currently investing in land/Condos/CD's/7 year treasuries are of the mindset that the Dollar is in a long term decline.

I need to throw exchange fees into the mix. Although I would avoid the banks to narrow the spread.

The 30% withholding. I agree that this should be factored in. Depending when the investment is made the IRS could withhold for 5-6 months to 18 months ( interest free) depending if you pay quarterly estimated taxes you may be able to negate that. I think if you factor in 1/3 of the withholding for a year, you should be pretty close.

 

[NYEXPAT]

What about countries that use the US dollar as currency?
Turks & Caicos
Ecuador
Panama
Belize (more or less)

It all depends what rates they are offering and how it compares to other insured deposits. The "EVERBANK" recommendation by Gumby is the only one that avoids the costs associated with withholding (in 2013 if not repealed) and has FDIC insurance. I do not know off hand what accounts are insured for in other countries.

 

[Ed_The_Gypsy]

Insurance is a big unknown. And would it be any good?

 

[NYEXPAT]

Insurance is a big unknown. And would it be any good?

It is only as good as the country backing it. (Fitch rating) Peru is one of the few countries in LAM whose debt is investment grade (BBB- to BBB a few months ago) and another upgrade expected in the near term!

 

[james7]

Taxes are the responsibility of the individual, although I believe it is (still?) possible to borrow from a tax advantaged account and pay the interest and principal back to the same account and avoid taxes.

Currency risk can not be assumed away I agree although it can be hedged. The people that are currently investing in land/Condos/CD's/7 year treasuries are of the mindset that the Dollar is in a long term decline.

I need to throw exchange fees into the mix. Although I would avoid the banks to narrow the spread.

The 30% withholding. I agree that this should be factored in. Depending when the investment is made the IRS could withhold for 5-6 months to 18 months ( interest free) depending if you pay quarterly estimated taxes you may be able to negate that. I think if you factor in 1/3 of the withholding for a year, you should be pretty close.

About taxes, if I am understanding you correctly, you seem to think that money can be borrowed from a tax deferred plan such as an IRA, invested and paid back to the IRA with interest, and no taxes are due on the investment gain. What really matters is if the invested money was in a tax deferred plan when the profit was made. If the invested mnoey was outside the plan, taxes are due on any profit.

About currency risk, good luck trying to predict that. The forex market is very tough to play, tougher than day trading stocks.

About exchange fees, most big international banks in Europe do not charge exchange fees; instead the fees are built into the exchange rate. So the principal amount will be diminished slightly when the currency is exchanged, but you will hardly notice because big banks are able to give you a very good exchange rate.

A couple of other questions/comments. 1) Does this Peruvian bank accept American accountholders? I ask because a large European bank closed a friend of mine's account because now they refuse to do business with Americans because of required compliance with new American IRS rules. 2) Why is the bank witholding 30% of the wire transfer?

I am not trying to give you a hard time here, just making you think it through so that you won't be making a bad move.

 

[NYEXPAT]

About taxes, if I am understanding you correctly, you seem to think that money can be borrowed from a tax deferred plan such as an IRA, invested and paid back to the IRA with interest, and no taxes are due on the investment gain. What really matters is if the invested money was in a tax deferred plan when the profit was made. If the invested mnoey was outside the plan, taxes are due on any profit.

About currency risk, good luck trying to predict that. The forex market is very tough to play, tougher than day trading stocks.

About exchange fees, most big international banks in Europe do not charge exchange fees; instead the fees are built into the exchange rate. So the principal amount will be diminished slightly when the currency is exchanged, but you will hardly notice because big banks are able to give you a very good exchange rate.

A couple of other questions/comments. 1) Does this Peruvian bank accept American accountholders? I ask because a large European bank closed a friend of mine's account because now they refuse to do business with Americans because of required compliance with new American IRS rules. 2) Why is the bank witholding 30% of the wire transfer?

I am not trying to give you a hard time here, just making you think it through so that you won't be making a bad move.

I welcome yours (and all members)thoughts and productive comments as it is a brainstorming exercise for me and may be an idea for somebody else.

I already have been in CD's for many years here going back to when we were getting 11% (mortgage rates were 14%).

I am not current on US tax law so you may be right regarding borrowing from an IRA and paying yourself interest?

I agree exchange fee's are not a big issue as the money can be converted "street rate" which is the official rate ( better than a bank rate) and the spread is 5% when you convert back to Dollars which will most likely be covered by 3 years of a declining dollar.

Currency risk- everybody's risk profile is different and after reading comments here currency risk seems to be an important and valid concern. If I was risk adverse, I would due a hybrid CD (50 % Dollars and 50% Soles) which would eliminate risk and reduce return from 9% to 7.25% (before transaction fees).

A couple of other questions/comments. 1) Does this Peruvian bank accept American accountholders? I ask because a large European bank closed a friend of mine's account because now they refuse to do business with Americans because of required compliance with new American IRS rules. 2) Why is the bank witholding 30% of the wire transfer?

1. No without residency (in most countries ) you can no longer open up new accounts and in the future they might close existing accounts, YMMV.

2. you can google FATCHA, but basically the IRS is requiring all banks to withhold 30% on Foreign wire transfers. This has also been discussed on a few threads here.

I stated in my first post that a "legal mechanism" must be created to facilitate such transactions and that is where my true interest lies. I imagine there are others out there that see the need and are probably working on a solution for their own countries as well.

Again, thanks for your comments (all) It has been very beneficial!

 

[MichaelB]

Having lived in South America in the 1980s, I still have the picture in my mind of people in downtown Lima pouring out of their office buildings at lunchtime to spend their pay (they were paid in cash both before lunch and before quitting time) before their big stacks of currency lost all value. Inflation reached an incredible rate (thousands of percent) under Alan Garcia's regime.

OK, things are very different today, but still ...

Hi braumeister. I have a very vivid recollection of the sensation I felt when Venezuela imposed exchange controls and devalued the currency. Being paid in local currency and having all of my (modest) savings in the local pension fund, it was gut-wrenching terrible. It happened to us twice in Venezuela ('80's, '90's). Peru was both worse and longer. Same for Brazil, and I still have worthless currencies from those countries (anybody guess why they call it a "nuevo sol")

Also Mexico and Argentina, although Mexico wasn't so bad. Is it different now? Perhaps, but there is speculation in Brazil right now that chronic inflation is making a reappearance. One lesson I learned back then is when banks pay high rates, there is a reason, and it is not easy money. caveat emptor

 

[REWahoo]

One lesson I learned back then is when banks pay high rates, there is a reason, and it is not easy money.

No hay tal cosa como un almuerzo gratis (TANSTAAFL).

 

[braumeister]

there is speculation in Brazil right now that chronic inflation is making a reappearance. One lesson I learned back then is when banks pay high rates, there is a reason, and it is not easy money. caveat emptor

So true.
I was living in Brazil in those days, and remember seeing them occasionally lop off three or four zeroes from the currency denominations. There were times when the smallest bill in my wallet was a 5,000 (cruzeiro? cruzado?) note, and it took several of them for a taxi ride of a few miles.

Even with that going on in Brazil, it boggled my mind to see the rate of hyperinflation in Peru at the time.

But of course, nobody in the early 1970s would have believed the inflation the US was about to experience in the following decade.

 

[MichaelB]

So true.
I was living in Brazil in those days, and remember seeing them occasionally lop off three or four zeroes from the currency denominations. There were times when the smallest bill in my wallet was a 5,000 (cruzeiro? cruzado?) note, and it took several of them for a taxi ride of a few miles.

Even with that going on in Brazil, it boggled my mind to see the rate of hyperinflation in Peru at the time.

But of course, nobody in the early 1970s would have believed the inflation the US was about to experience in the following decade.

The hotels in Rio where you exchanged $$ at black market rates at the bell hop desk, walked across the lobby, and paid the hotel billl in cash. I remember a trip to Brazil where a co-worker stopped by a bank and exchanged some money, getting lots of coins and bills. We thought he was crazy. His response: he played poker with friends every friday night, the Brazilian currency was cheaper than poker chips and because it was real money, made betting more fun.

It is fun to recollect and easy to joke about now, but there were some some dark moments and many sleepless nights. Watching the pension fund lose all its value...

 

[haha]

Mexico has had some whopper devaluations. Lot's of gringos got caught in the 1994 devaluation. Mexican banks were paying high interest on peso accounts, and the peso was pegged to the dollar, so unsophisticated Estadounidenses flocked down there to get much higher interest rates than were available in the US.

But as usual, stuff happened, including a protracted uprising in Chiapas and the assassination of a favored presidential candidate.

Before the dust had settled, the peso had lost half it's value against the dollar, and many yield-seeking gringos were hurt.

Ha

 

[Ed_The_Gypsy]

No hay tal cosa como un almuerzo gratis (TANSTAAFL).

(I bet you know what STOBOR are, too! )

 

[Ed_The_Gypsy]

Mexico has had some whopper devaluations. Lot's of gringos got caught in the 1994 devaluation. Mexican banks were paying high interest on peso accounts, and the peso was pegged to the dollar, so unsophisticated Estadounidenses flocked down there to get much higher interest rates than were available in the US.

But as usual, stuff happened, including a protracted uprising in Chiapas and the assassination of a favored presidential candidate.

Before the dust had settled, the peso had lost half it's value against the dollar, and many yield-seeking gringos were hurt.

Ha

Yes. Does anyone remember the late Harry Browne, the famous gold bug? In his book, he recommended Mexican deposits for high interest rates. Then the peso collapsed.

 

[MichaelB]

The Mexico peso collapse affected everyone, not just US people with peso CD's. Businesses, Mexicans, students abroad. It was a crisis that everyone expected, yet most were caught unprepared. US expats in Mexico suffered badly, though.