The Rise of International Finance Centres
The stereotype associated with the words 'offshore tax haven' is depicted with many negative connotations, many of which are often exaggerated depictions and plagued with erroneous associations.
Accompanying imagery brings up tropical Caribbean destinations in which greased whiten linen suit wearing mafioso types hand over briefcases full of unmarked currency to a local attorney who launders the money through an intricate series of offshore transfers.
The exaggerations, largely conjured up through Hollywood blockbusters, fills the head with such conceptualizations by exploiting the publics craving for tabloid-like headlines. As if often the case, the reality is a far cry from the romanticized picture captured by the camera.
The offshore industry is largely a result of the increasingly globalized nature of the world's financial and commercial systems that have all but demolished territorial boundaries. This opening gave way for the utilization of local resources for global demand opening up once localized areas of commerce to an international market.
As a result, companies with business and financial transactions that were mostly trans-national, became aware of the purposelessness of paying taxes in high-tax jurisdictions. Like any self-fulfilling liberal economy, wherever there is a demand, a supplier is never far behind - and offshore tax-efficient structures filled that gap.
The inherent nature of a liberalizing global financial system is that it brings forth innovation by continuing to reinvent itself both from within and in response to the continually shifting global climatic forces.
Far from how it is often characterized, the offshore industry grew as a natural and viable response to the changing global economic landscape.
It is not surprising, therefore, that the offshore industry has had to reimagine itself, given the current stigmatization and in response to the tightening regulations executed by global financial authorities such as FATF and OECD.
Hegemonic governments have co-opted many of the multilateral institutions and have made them their mouthpiece for disseminating their own political agenda.
Consequently, smaller nation-states, and targeted offshore jurisdictions, are forced to adopt such agreements due to economic and political pressure. Offshore Financial Centre (OFC) have come under fire due to their preferential treatment of non-resident offshore companies and their low tax environments that attract foreign investors.
Offshore Financial Centres work by first offering capital a place to exist without being continuously taxed. Low tax opportunities are given to capital that remains outside the borders in which the entity is incorporated.
For instance, while the entity may exist in Panama, if all revenue is abroad and is used in any business transactions within the country then the entity is free from capital gains, dividends taxes, corporate taxes etc.
Foreign capital and investment entities naturally seek to find environments that are most advantageous. Offshore Finance Centres are environments that have been established corporate policies giving corporate non-resident entities a space to exist within the economic landscape.
Often finance centres are located in smaller underdeveloped territories. As a way to remain competitive, they create certain advantages to attract foreign investments. Not being able to compete with the more established modem finance centers, they offer:
By offering benefits in return are able to charge registration and yearly incorporating fees to companies and individuals who incorporate. Financial centers, such as the Cayman Islands and the BVI, generate more than half of their country's GDP through offshore finance.
Due to the prevailing liberal economic order, it is important to see how much of today's capital defies geographical boundaries. It is within every individual's self-interest to seek out natural advantages and is compelled to do what is within its own self-interest.
Because offshore finance centers offer conditions that can not be found in many economic landscapes, it should be of no surprise that such havens for capital exist.
They are popular because they offer:
The irony of this is many of the same corporate structures and tax practices found in what are traditional offshore financial centers are not just found in small remote islands but can be found in major traditional finance centers. Places like Hong Kong and Singapore and even the US, UK, Ireland and Netherlands all have elements of secrecy, minimal regulations and tax benefits for non-resident companies.
Tax Havens around the world have been persecuted because of their perceived unfair tax environment; resulting in a backlash from high tax countries in their attempt to keep tax revenue from leaving their shores.
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In a Financial Secrecy Index, put forward by the Tax Justice Network (TJN), found that the top countries in the greatest financial secrecy were.
1. Cayman Islands
2. United States
The fact that the TJN rated the US amongst the world's most secretive financial center is even more ironic seeing that it was the American Federal government that came down hard against tax havens following the 2008 financial crises.
In their witch hunt against tax havens, countries that did not abide by the US and by extension the OECD were put on the nefarious "blacklist".
The "blacklist" accuses countries for failing to address amongst other things:
1. Tax evasion
2. Lack of transparency
3. Insufficient regulations; and
4. Undermine other high-tax jurisdictions.
By their very own definitions, the US has made itself a part of the very group that it has sought to delegitimize as tax havens. Furthermore, the US's unwillingness to sign the CRS, instead of forcing other countries to agree to their version, the FATCA explicitly shows the one-sided implementation of tax reform.
Offshore Financial Centers will continue to be part of the world's economic makeup, due to the prevailing liberal global economy that will likely see the further reduction of trade barriers, growth of online transactions between consumers and businesses, and the increase in movement of capital between nations.
While regulations must be used to ensure the legality of business and finance, it must ensure policies are implemented uniformly and not merely done to serve the interest of those countries that control transnational institutions.
Written by: Moshes Law a law firm based out of NYC
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*Note for U.S. citizens: US citizens are limited in their tax reduction possibilities due to FATCA and CFC laws. Opening an offshore company can increase privacy and asset protection, but you can not eliminate your taxes without giving up your citizenship. If you are a US citizen you are obligated to pay taxes on all worldwide income. Read more here about FATCA and CFC laws.
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