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What is "Offshore"?

The term offshore was used originally to refer to the tax havens off the shores of the United Kingdom and the United States, and by extension to any company or trust located in a tax haven or a country where tax can be kept low. It is being used more and more in connection with financial transactions.

The offshore scene is currently undergoing some important changes.

The main new development is the amount of money offshore (estimated at 60% of the world’s money). It is considered that half the world’s financial transactions measured in money take place offshore. There are now almost 60 offshore financial centres in the world, many within the jurisdiction of major economic powers with ostensibly high levels of taxation. Wealth, like any other commodity, tends to gravitate to where it will earn its greatest return (in economic terms, of course, after-tax return is the only really relevant statistic). As a result of this phenomenon, huge amounts of funds have been transferred to offshore locations over the last 30 years.

Another very significant feature is the vast increase in the number of persons participating in offshore activities. Never before have so many offshore companies and trusts been set up or have so many expatriates changed residence for purely fiscal reasons.

Then there is the increase in the number of countries offering tax haven or finance centre possibilities. In particular, the seeming high tax jurisdictions are actively seeking new “offshore” business.

Another important recent development in the offshore area is to be found in the widened scope of offshore transactions and operations. The esoteric is becoming more and more commonplace, and there is an ongoing merging of onshore and offshore. This has led to a major counter-attack by the high tax jurisdictions, which have experienced a whittling away of their tax bases, not only by the offshore jurisdictions, but also through harmful tax competition by other high tax jurisdictions.

The term international offshore financial centre, or IOFC, is an alternative term for a “tax haven.” The OECD has redefined the term in its Harmful Tax Competition Report and has established criteria that have permitted the creation of a list of jurisdictions classified as tax havens.

The classical tax havens generally have a common denominator of no or low taxes on income and capital, bank and commercial secrecy, no exchange controls (at least for offshore), an active banking sector, good communications, an appearance of political and economic stability, a favourable disposition toward foreign capital, and adequate professional advisors.

Another group of little countries have captured a large slice of the tax haven industry by offering reduced rates, special tax exemptions, incentives, and privileges, as well as excellent financial and professional infrastructures. The insecurities that threatened Panama caused a major move of offshore companies in favour of the British Virgin Islands, which is now developing into a major new financial centre with more new company incorporations than any other tax haven.

The number of tax havens and the variety of types of tax havens and offshore situations are multiplying all the time. This is a fascinating and proliferating species. Just the past few years have seen the arrival of active newcomers such as Mauritius, Samoa, Nevis, and Aruba.

There is so much offshore business around that it is not particularly surprising that the major countries don’t want to waste it all on the palm-tree economies, and they are making a strong bid for their share of the action. Many of them offer very tempting packages.

There are probably nearly as many offshore possibilities as there are countries. Their offshore products have unusual features, and they are usually styled financial centres rather than tax havens.

In the 1960s, financial institutions and banks were mostly interchangeable words for the same entity. The term financial institution began to pull away from the traditional legal entity of the bank as international finance projects and international tax planning strategies became more sophisticated. Yet the single most important factor in the development of offshore centres was the development of communications technology.

The ability to communicate with foreign subsidiaries quickly and effectively opened up the real possibility of firms maintaining funds offshore in relatively unsophisticated consumer market surroundings, such as on an island. Financial institutions on the (comparatively) unregulated islands were free to enter different types of business forbidden to banks in high tax jurisdictions. These types of business included provision of insurance, equity ownership in companies, organization of new structures to protect corporate income from taxation, and the creation of new financial vehicles and methods tailored to the customers’ needs.

Newly semi-independent jurisdictions, mainly former British colonies, in pursuit of potential financial centre fees and jobs, emerged as competitors for the business of financial institution incorporations. The islands used the new fee revenue to set up communications infrastructures and build financial districts. The islands’ parliaments passed modern corporate legislation based on their common law traditions, and enacted laws insuring capitalist stability based on the English heritage.

Offshore jurisdictions also include seemingly high tax jurisdictions that allow their tax treaties to be used for treaty conduit purposes.
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