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
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
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.