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Ways to Avoid/Reduce Paying Taxes
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Dec 16, 2010, 02:10 AM
 
Like many people today, I'm self-employed. Have a few businesses in the service industry. There was a seminar at Accenture in my recent area about tax havens and how to avoid paying taxes. I never made it but it got me thinking.

How much of being able to avoid taxes as a person and from a business perspective is fact and fiction?

Some things I have been made aware of:

-tax havens: setting up accounts and businesses in places devoid of income tax.
-transfer pricing? not sure about this one.
-expatriating yourself from your country.

One thing though, with tax havens, the problem I see is that countries have tax treaties with each other, and laws about citizens and place of doing business. So even if you have a business in a tax haven, as a citizen of say, the US or Canada, the IRS/CRA could still come after you for a percentage of your income from a business set up in a tax haven. In some cases, I've seen a 50% of income rule.

Another problem is doing business with people in, say, the US, who get billed with an address in Monte Carlo, even though your living in the US... a little funny. Then the idea is to set up a parent company offshore, that owns a subsidiary company in the US, where you bill people with the subsidiary company, but the money goes to the parent company.

It's all a bit confusing right now... looking for some good old MacNN insight.

Please no nerdy, snarky remarks. I'm wondering if anyone has any input on this with experience in this area.
     
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Dec 16, 2010, 03:49 AM
 
Originally Posted by freudling View Post
Please no nerdy, snarky remarks.
This is the MacNN Lounge you know.
     
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Dec 16, 2010, 08:07 AM
 
freudling, where are you and what country are you a national of?

If the answer to either of these is "United States", then forget about it.
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Dec 16, 2010, 09:36 AM
 
You're asking for tax advice and you want to avoid nerdiness? Oh boy.

(Sorry, that was snarky)

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Dec 16, 2010, 10:03 AM
 
The way my business is set up:
  • My business has issued 100 common shares.
  • 50 of these shares are owned by a Hold Co, a company which has issued another 100 shares.
  • The only legal purpose of the Hold Co is to own 50% of the main business. It has no other income and no outgoings. An additional benefit is that it provides me with another level of insulation between myself and liabilities the business might incur.
  • 51 of these shares are owned by myself, 49 by my wife.
  • My partner and I pay ourselves a low monthly income, to keep us out of the higher tax brackets.
  • At the end of the financial year we decide on a dividend, based on profits.
  • This dividend gets paid to the Hold Co, which owns the business that creates the profit that is now being shared. As the money has already been taxed once - this is profit after tax - it will not get taxed again at this stage.

Now it gets interesting. The money in the Hold Co is tax protected only for as long as it doesn't get moved out of the company's accounts. The second I pay this money into my own account, it counts as income, and is taxed as such. However, income from dividends, which this is, is taxed at a lower rate than regular run of the mill income. Also, we can tailor how we allocate the money being paid ut by Hold Co.

For example, my wife's income this year is very low, because she is on maternity leave. As a result, Hold Co will be paying a dividend to her, but not to me, taking advantage of her low earnings. The benefit is a lower tax bill, but you have to be disciplined with your money, as you'll be earning little in the way of a fixed income, then get a chunk of cash once a year. It works for us - we don't really need that much cash to be happy and we use the dividends to pay down the mortgage/fix the house/put into savings.

The above is pretty much standard for any small, privately held, business I've come across here in Ontario. Moving money nto 'tax havens' is a ticket for the fast train towards Pain City. You do not want to be audited, ever, if you can possibly help it.
( Last edited by Phileas; Dec 16, 2010 at 10:12 AM. )
     
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Dec 16, 2010, 10:14 AM
 
Originally Posted by Phileas View Post
For example, my wife's income this year is very low, because she is on maternity leave. As a result, Hold Co will be paying a dividend to her, but not to me
I didn't know that you could pay dividends to certain people only. I knew that you could for certain types of shares but if 2 people have the same type of share, then I would have thought that you couldn't descriminate. Of course I know nothing about Canadian or US tax/business laws.
     
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Dec 16, 2010, 10:47 AM
 
Phileas, isn't there an effective cap to dividend income? IOW if you pay yourself $20000 in dividends that's OK, but if you pay yourself $100000 in dividends, then you're going to be hit hard by Revenue Canada. Is that correct?

Also, what about corporate tax, gross up, dividend tax credit, as well as registered retirement savings plan eligibility? You can't get the tax free status for RRSPs with dividends.

And how much do you pay to manage your finances? Some I talked to said they're paying a few thousand a year to maintain their corporation's books, and more up front in the first year to register the corporation and pay the lawyer.

The reason I ask is because I'm currently an employee, but have the option of setting up a corporation to get paid through dividends. The drawback is that as an employee I'm a member of a very good pension plan, but if I set up a corporation that would impact the salary figure the pension plan uses to calculate my future benefits. (As of 2009, my pension plan is fully funded. In fact, they actually have a surplus. They weathered the economic meltdown pretty well. They lost 11% in 2008, but more than made up for it in 2009, and I suspect 2010 will be an excellent year for them too.)

Also, my understanding is that marginal tax rates for Ontario dividend income are going up.

I think I'm going to have to attend a session or something on incorporation.
     
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Dec 16, 2010, 11:59 AM
 
Originally Posted by Phileas View Post
The way my business is set up
This standard setup will likely not work in the future in the US.

The IRS is ramping up audits and lobbying for a change in the tax code that would make dividend income like this taxable like regular income.

-t
     
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Dec 16, 2010, 12:04 PM
 
Originally Posted by turtle777 View Post
This standard setup will likely not work in the future in the US.
I'll wager it won't be long before it doesn't work in Canuckistan either.
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Dec 16, 2010, 12:44 PM
 
Originally Posted by Doofy View Post
I'll wager it won't be long before it doesn't work in Canuckistan either.
Or the UK, for that matter.

On can expect that tghe IRSes of the world will band together much closer in the future.

-t
     
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Dec 16, 2010, 12:49 PM
 
Originally Posted by turtle777 View Post
Or the UK, for that matter.
I wouldn't know - I don't do it that way anyway.
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Dec 16, 2010, 12:58 PM
 
I've figured out a way to legally never have to pay taxes at all. It's super simple and brilliant. Unfortunately, I can't tell any of you how to do it. Sorry.

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Dec 16, 2010, 01:03 PM
 
The secret to not paying taxes is not working or making any income. No income = No taxes. Unfortunately that also means no life, but hey! No taxes!
     
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Dec 16, 2010, 01:04 PM
 
^^ And I'm out of here. Sorry freudling, you just lost an expert on tax havens due to ********ery from one of the usual suspects.
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Dec 16, 2010, 01:07 PM
 
I'm pretty sure that MacNN has a feature that lets you communicate privately and avoid public snark.

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Dec 16, 2010, 01:09 PM
 
I'm pretty sure the expert spent his first three posts proclaiming you were ****ed in NA anyway.
     
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Dec 16, 2010, 01:11 PM
 
Originally Posted by ort888 View Post
I've figured out a way to legally never have to pay taxes at all. It's super simple and brilliant. Unfortunately, I can't tell any of you how to do it. Sorry.
I know your secret. Death.

-t
     
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Dec 16, 2010, 01:14 PM
 
Originally Posted by Doofy View Post
^^ And I'm out of here. Sorry freudling, you just lost an expert on tax havens due to ********ery from one of the usual suspects.
Wah.

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Dec 16, 2010, 01:19 PM
 
Originally Posted by The Final Dakar View Post
I'm pretty sure the expert spent his first three posts proclaiming you were ****ed in NA anyway.
You're most definitely f'ed if you're attached to the US.
You're less f'ed if you're in Canuckistan (my methods actually use tax havens - as requested by the OP - not the kludge that Phil outlined).

Still, f the lot of you. Carry on getting rammed up the arse by your governments, you filthy little insects.
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Dec 16, 2010, 01:23 PM
 
The question I ask myself more and more: why play it legal with the IRS when a lot of what they do and what the politicians bring upon us is blatantly illegal in light of the Constitution.

-t
     
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Dec 16, 2010, 01:30 PM
 
Originally Posted by Doofy View Post
Still, f the lot of you. Carry on getting rammed up the arse by your governments, you filthy little insects.
A++, Would read again

Originally Posted by turtle777 View Post
The question I ask myself more and more: why play it legal with the IRS when a lot of what they do and what the politicians bring upon us is blatantly illegal in light of the Constitution.
Go for it
     
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Dec 16, 2010, 01:33 PM
 
Doofy, why so angry? Chill out by the fire.
     
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Dec 16, 2010, 01:45 PM
 
Originally Posted by andi*pandi View Post
Doofy, why so angry?
I'm not angry Andi. If I was angry, there'd be blood.
I've simply come to the realisation that a lot of people in this place are cretinous little insects who add nothing to any discussion and only serve to piss people off. Like Ort up there. What a tosser.

And you mods should be doing a better job. The OP asked for no snark, and the usual snarkmasters pop up and shit on the thread, exactly as expected. You do nothing. So what's the point?
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Dec 16, 2010, 01:53 PM
 
     
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Dec 16, 2010, 02:16 PM
 
Anyway... I apologize, he did ask for no snark and I'm being snarky.

In all seriousness... maybe you should see if there are any Galaxy Tab or Windows Phone 7 apps that could help you. Oh snap!

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Dec 16, 2010, 02:23 PM
 
Originally Posted by Doofy View Post
I'm not angry Andi. If I was angry, there'd be blood.
I've simply come to the realisation that a lot of people in this place are cretinous little insects who add nothing to any discussion and only serve to piss people off. Like Ort up there. What a tosser.

And you mods should be doing a better job. The OP asked for no snark, and the usual snarkmasters pop up and shit on the thread, exactly as expected. You do nothing. So what's the point?
Thanks for chiming in. It's just that, MacNN still has some punch. Several years ago it was much better though, before Apple got huge. I just wanted to start this thread off by stating that I wished for the people that like to take shots at other people, and contribute zero to the conversation, to stay out. This is a complicated topic.

Anyway, keep this advice coming, it's actually quite good. I'm in Canuckistan by the way.
     
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Dec 16, 2010, 04:06 PM
 
Ort888: could you please trim down your signature? It's 1 pixel too big.
     
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Dec 16, 2010, 04:18 PM
 
Originally Posted by freudling View Post
Thanks for chiming in. It's just that, MacNN still has some punch. Several years ago it was much better though, before Apple got huge.
FWIW, it was even better several years before that, too.

People always seem to forget that even in the Olden Days, it was invariably Better In the Olden Days.
     
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Dec 16, 2010, 04:22 PM
 
Well, it's harder to imagine be being any better than I already am in the olden days... Some things are like a fine bottle of scotch.
     
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Dec 16, 2010, 04:24 PM
 
I remember the old days of this forum were filled with more ludicrous nonsense than ever. People used to be able to joke around without getting a hair across their ass.
     
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Dec 16, 2010, 04:31 PM
 
I was totally into macnn before it was cool. I once saw macnn in a tiny club with only like 6 people there... I mean, they suck now, total sell outs and whatever, but I still like their early stuff.

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Dec 16, 2010, 04:36 PM
 
The place really went to shit after Dakarʒ.
     
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Dec 16, 2010, 05:01 PM
 
Buzz off! Seriously, stop this ridiculous banter. I just want to know about tax havens, I don't want more irrelevant noise that clogs the Internet for all it's worth.

Tax havens.

Tax havens.

Tax havens.

Little to zero taxes... personal income, business. The Bahamas is one tax haven hotspot.
     
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Dec 16, 2010, 05:09 PM
 
Is this another spammer honeypot thread?
     
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Dec 16, 2010, 05:42 PM
 
Originally Posted by Doofy View Post
I'm not angry Andi.

And you mods should be doing a better job.
Well, you seemed to be doing some shouting. Perhaps leave that to the OP. Your shouting was just as productive as Ort's wisecrack.

     
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Dec 16, 2010, 05:53 PM
 
Demanding the banter cease is annoying. It's part of the charm - deal with it.

The answer to your question is "spend some money and go have a meeting with a good tax lawyer." Seriously - paying, or not paying taxes is incredibly specific to the amount and type of income you make. If the prospect of shelling out several hundred dollars just to have that initial meeting is painful to you, then you're not making enough money to be pretentious about it in the first place.

As a Canadian resident you're taxed on all worldwide income - our tax act is fairly restrictive. You could always become a resident of the Bahamas instead - but if you maintain your business in Canada you'll pay the same graduated tax on profits (unless you're an artist relying on royalties). You'll also probably get hit with exit taxes if you decide to leave.

The general anti-avoidance rule in the tax act also legislates against "tax avoidance" (you can't have tax avoidance as the primary purpose), and denies the resulting tax benefit. It applies if you're reasonably found to "misuse or abuse," indirectly or directly, tax legislation provisions.

I think Phileas has it right here. But again, it depends on what you're doing.

greg
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Dec 16, 2010, 06:24 PM
 
Corporate "profits" tax rate here is 16.5%, so you only pay taxes if you are actually making a profit.

No profit, no tax.
     
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Dec 16, 2010, 06:49 PM
 
The OP made it very clear that he did not wish for this thread to become a bantering thread—so let’s not let it. I’m not going to delete what’s here already, but just stick to the topic of the thread, all right?

Also, tax evasion definitely falls under the category of politics, so I’m moving this to the PWL.
     
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Dec 16, 2010, 06:52 PM
 
Originally Posted by Oisín View Post
Also, tax evasion definitely falls under the category of politics, so I’m moving this to the PWL.
What if I evade taxes to buy a MBP ?

Should this then go into the Mac Notebooks Forum ?

-t
     
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Dec 16, 2010, 06:56 PM
 
Originally Posted by Oisín View Post
Also, tax evasion definitely falls under the category of politics, so I’m moving this to the PWL.
The thread's about tax avoidance, not evasion. So it's not political.
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Dec 16, 2010, 07:03 PM
 
Originally Posted by Doofy View Post
The thread's about tax avoidance, not evasion. So it's not political.
And constitutes someone in Canada getting ****ed, as noted above.

But you're still right - this shouldn't be political in the slightest. Oysheen getting a little trigger happy on this one.

greg
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Dec 16, 2010, 07:06 PM
 
Originally Posted by ShortcutToMoncton View Post
And constitutes someone in Canada getting ****ed, as noted above.
Don't worry - I've PMed the OP with all the info he needs to know. Links to the proper experts for the job, etc..

Originally Posted by ShortcutToMoncton View Post
But you're still right - this shouldn't be political in the slightest. Oysheen getting a little trigger happy on this one.
A little trigger happy with the infractions, too.
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Dec 16, 2010, 07:15 PM
 
Originally Posted by Doofy View Post
Don't worry - I've PMed the OP with all the info he needs to know. Links to the proper experts for the job, etc..
Then cc me on that one too.
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Dec 16, 2010, 08:54 PM
 
Originally Posted by ShortcutToMoncton View Post
Demanding the banter cease is annoying. It's part of the charm - deal with it.

The answer to your question is "spend some money and go have a meeting with a good tax lawyer." Seriously - paying, or not paying taxes is incredibly specific to the amount and type of income you make. If the prospect of shelling out several hundred dollars just to have that initial meeting is painful to you, then you're not making enough money to be pretentious about it in the first place.

As a Canadian resident you're taxed on all worldwide income - our tax act is fairly restrictive. You could always become a resident of the Bahamas instead - but if you maintain your business in Canada you'll pay the same graduated tax on profits (unless you're an artist relying on royalties). You'll also probably get hit with exit taxes if you decide to leave.

The general anti-avoidance rule in the tax act also legislates against "tax avoidance" (you can't have tax avoidance as the primary purpose), and denies the resulting tax benefit. It applies if you're reasonably found to "misuse or abuse," indirectly or directly, tax legislation provisions.

I think Phileas has it right here. But again, it depends on what you're doing.

greg
No it's not annoying. What's annoying is how topics get so easily derailed by childish nonsense.

And no, I'm not pretentious, and yes, the business in question is profitable. Also, yes, I will spend money to get a tax lawyer and get advised on this. But of course, we live in an information age if you haven't been paying attention, which means it's easy, appropriate, etc. to garner important information from people about topics, and things... which is what I'm doing.

If you're not interested in the topic, move along...

Anyway, tax havens...

What I have been seeing is that laws become very thorny and cloudy. For example, there are some countries that are tax havens, in addition to being non-cooperative. That means they won't disclose anything about the businesses and accounts to other countries, and they are not involved in any tax treaties.

Thus, even if the IRS or CRA wanted to pull records from x place, they wouldn't get very far. And even though they may have some entitlement to collecting tax from your income derived from offshore business, they wouldn't have the legal ground to obtain any company records whatever.

I'm not saying to break the law. We should all be claiming personal income. I'm just pointing out how tax havens can create legally challenging situations for countries in different jurisdictions.

And the moral argument about setting up offshore companies with profits... which is completely legal... if our governments wouldn't waste so much money; if they weren't so corrupt and absurd; if things like capital gain tax rates were sane... maybe less people would be compelled to set up shop in tax havens.

By definition, tax havens create tax competition between countries, and that's a good thing. Countries like Canada and the US can gripe all they want, this is fair market competition.

Interesting point from Wiki on Google (not sure how accurate this statement is):

"In 2010 it was reported that Google uses techniques called the "Double Irish" and "Dutch Sandwich" to reduce its corporate income tax to 2.4%, by funnelling its corporate income through Ireland and from there to a shell in the Netherlands where it can be transferred to Bermuda, which has no corporate income tax."

http://www.businessweek.com/magazine...1043146825.htm
     
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Dec 16, 2010, 09:10 PM
 
Originally Posted by freudling View Post
Interesting point from Wiki on Google (not sure how accurate this statement is):
It is accurate. There was a whole article in the WSJ recently.

The problem is that those tax "maneuvers" are quite involved and often don't pay off for a small business. You need to be of a certain size and critical mass to be able to pull this off.

Plus, count on having to use an armada of tax lawyers to defend your model to the IRS. They're not just going to take your word for it.

-t
     
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Dec 16, 2010, 09:18 PM
 
Originally Posted by turtle777 View Post
It is accurate. There was a whole article in the WSJ recently.

The problem is that those tax "maneuvers" are quite involved and often don't pay off for a small business. You need to be of a certain size and critical mass to be able to pull this off.

Plus, count on having to use an armada of tax lawyers to defend your model to the IRS. They're not just going to take your word for it.

-t
The way it looks, I don't think we'll need to do anything this complicated. It's more about being an employee and paying yourself an income from an offshore company. We'll claim all the income we get, and pay taxes on that to our own governments. However, the profits from the company will not be taxed.
     
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Dec 16, 2010, 09:23 PM
 
Are you trying to avoid Personal Income Tax or Business Income Tax or both?

There are so many loop holes on personal/business income tax as it is, I've seen people who make more then me cuz the taxable income down to almost zero
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Dec 16, 2010, 09:51 PM
 
Originally Posted by Athens View Post
Are you trying to avoid Personal Income Tax or Business Income Tax or both?

There are so many loop holes on personal/business income tax as it is, I've seen people who make more then me cuz the taxable income down to almost zero
I guess both.
     
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Dec 16, 2010, 09:58 PM
 
Originally Posted by turtle777 View Post
The problem is that those tax "maneuvers" are quite involved and often don't pay off for a small business. You need to be of a certain size and critical mass to be able to pull this off.
This is why I said it's a nightmare for US entities (citizens, green card holders). To get away with it in the US, you have to be huge and pull all sorts of trickery.
However, people from elsewhere in the western world (i.e. those states without the governmental "ownership" attitude towards their citizens) can pull it off with no problems in a couple of weeks and for around $1,500 - as long as their business is relocatable (i.e. will run in a remote location without their physical presence) and they have a word with the right people. And it's a much easier setup than that described above by Phil.

Some folks around here might think I've had it in for the US on baseless grounds, but the US really is one of the least free countries in the civilised world, especially when it comes to things like this - the only way for US citizens to be able to do something like this is to give up their US citizenship.
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Dec 16, 2010, 11:33 PM
 
I'm not exactly sure how the US making it harder to use complicated tax shelters and various workarounds to game the system is taking away freedom.

I mean, I get that everyone wants to pay less taxes... but as members of a civilized society you are expected to do your share. At some point it stops being ethical. Setting up fake businesses overseas is definitely walking that line.

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