Term Paper on "Offshore Financial Centers"

Term Paper 10 pages (3707 words) Sources: 1+

[EXCERPT] . . . .

Offshore Financial Centers

Info: Definition

Offshore Financial Centers or OFCs are areas that choose reduced taxes or lenient financial controlling administration as a shield in case of overseas investors. (the future for offshore financial centers (OFCs))

IMF defines OFC as an area that fulfills the norms as stated below: it is a location marked by a large number of financial institutions, a majority of the business dealings are started in foreign shores, nearly all institutions are managed by non-residents, possesses assets and liabilities disproportionate to the internal economy; and has low or zero taxation, restrained or lax financial guidelines and privacy of banking business. The last norm is related to what is usually known as "tax haven." Nevertheless, whereas the description contains "tax havens" as well, it is not restricted to this category of country. (Canadian Direct Investment in 'Offshore Financial Centers) Offshore finance is, in its general meaning, the provision of financial services by banks and other representatives to non-residents. These services comprise of borrowing and lending of funds to non-residents. This can be in the shape of lending to companies and other financial institutions, financed by liabilities to the offices of the bank who is lending elsewhere, or to market participants. It can even take the shape of accepting deposits from individuals, and investing the profits in other financial markets. (Offshore Financial Centers: IMF Background Paper)

The explanation of an OFC is a little complicated. In its broadest term, an OFC can be described as any financial centre in which there is offshore transaction. This description would bring within its ambit all important financial centers across the globe. In these centers, the dividing line between on-shore and offshore business might be thin, indicating that a loan to a non-resident might be financed in the center's independent market, in which case the providers of monies might be resident or non-resident. In the same vein, a fund manager might not be able to tell apart between monies belonging to resident and non-resident customers. These centers viz. London, New York, and Tokyo could more conveniently be portrayed as "International Financial Centers" or IFCs. In several instances, viz, New York and Tokyo, part of this business, however through no methods, is done in institutions that are positively dealt for tax and other reasons, viz. The U.S. International Banking Facilities --IBFs and the Japanese Offshore Market -- JOM.

A more sensible meaning of an OFC is a centre wherein the majority of the financial sector activity is offshore on either side of the balance sheet, in which case the business dealings are started at other places, and in which case nearly all the institutions concerned are regulated by non-residents. Therefore OFCs are normally ascribed to as: areas which have comparatively huge numbers of financial institutions doing business mainly with non-residents; Financial systems having external assets and liabilities disproportionate to internal financial intermediation devised to extend financial support to domestic economies; and more prevalently centers that extend a part or the entire gamut of the following services: rock bottom or nil taxation; restrained or lenient financial rules; confidentiality in banking and maintaining of secrecy. Nevertheless, the difference is not in any way distinct. (Offshore Financial Centers: IMF Background Paper)

History

Certainly, the record of offshore financial centers shows the chronological development of the tax system of leading nations, especially the United States and United Kingdom. At the time when Lloyd George and his Treasury officials turned down the appeal of the Vesteys that taxation of UK should not be stretched to foreign proceeds in World War I, the Vestys determined on self-help. Their income coming from foreign lands ultimately went to the trustees of a settlement stationed in Paris during the period when France did not follow the practice of imposing taxes on overseas profits. Taking into account the present approach of France being an OECD member to offshore financial centers, it is crucial to observe that France was one of the foremost offshore financial centers. Post World War I, with the going up of tax rates in the United States and United Kingdom, the two nations wanted in the 1930s to come down heavily on transfer of assets overseas. (Harmful Tax Competition and the future of Offshore Financial Centers such as Vanuatu)

The United Kingdom made laws forbidding offshore pocketbook companies held by U.S. millionaires in the Bahamas. In case of the teeming millions of taxpayers in industrial economies, tax shelters did not evoke much attention. With onshore tax shelters like life insurance, pension or retirement funds available, exclusively the very affluent found much necessity to think about availing the benefits of offshore tax shelters. In the United Kingdom, the mix of affluent upper class coming under very high marginal tax rate bracket, a custom of foreign investment and the exclusive situation of offshore tax shelters inside the exchange control area at that time implied that the British leaders were in the development of tax shelter. To these were added following the Second World War, the multinational Corporations which found that the services of tax shelters were indispensable in surmounting the problems engineering by global business by incoherent tax agreements or double claims to income. (Harmful Tax Competition and the future of Offshore Financial Centers such as Vanuatu)

Where are they?

OFCs included under the description might differ considerably. Taking for instance, Switzerland and the Cayman Islands cannot be regarded on similar foothold as regards legal provisions, taxes or value additions consequential from the business dealings undertaken. OFCs vary from centers like Hong Kong and Singapore, having a streamlined financial market and infrastructure, wherein a significant quantity of value addition to the business dealings is done in case of non-residents to regions having lesser populations, like for instance some of the Caribbean regions, where value additions is restricted to the provision of professional infrastructure. (Offshore Financial Centers: IMF Background Paper) in its researches, the International Monetary Fund spots 42 areas wherein important offshore businesses are performed. (Canadian Direct Investment in 'Offshore Financial Centers) Every important financial centre comprising London, New York and Frankfurt undertakes Offshore Financial Services, and London is frequently referred to as the world's biggest Offshore Financial Centre. (the Changing Shape of Offshore Jurisdictions)

In case of several small centers, where the financial institution's physical is small or nil, the value addition might be restricted to just recording of the business dealing. However, in every center, specific dealings might be roughly like an "offshore" nature. Meaning, in every areas, there are chances to locate business dealings where just the "recording" has been done in the OFC, while simultaneously business concerning much more value addition may happen. Apart from Banking business, additional services extended by the offshore centers comprise of fund management, insurance, trust business, taxation planning, and IBC operations. Figures are meager- but ideas are of speedier growth in a lot of these regions in current years, as against to some abatement in banking. (Offshore Financial Centers: IMF Background Paper) Normally the very tiny nations or provinces, OFCs might be the islands similar to the Bahamas or the Caymans; however, they might also be continentally-based provinces like Monaco or Liechtenstein. Organizationally, they might be independent states like Barbados, colonial provinces like Dutch Antilles or constituent of the national province of a bigger state that benefits from limited autonomy similar to Isle of Man or the Channel Islands, both of them part of the UK. (the future for offshore financial centers (OFCs))

The Role

OFCs can be employed for legal causes, enjoying the benefit of reduced explicit taxation and therefore enhanced post-tax profit, uncomplicated prudential rigid structures which lower implicit taxation, least official procedures for setting up of the company; the presence of ample legal structures which protect the reliability of the relationship between the principal and agent; the closeness to leading economies, or to nations drawing capital inflows, the standing of particular OFCs, and the professional services extended, liberty from exchange controls, and a way for safeguarding assets from the influence of lawsuit and so on. They can even be employed for questionable reasons, like tax avoidance and money laundering, through taking the benefit of a higher potential for less obvious functional settings, comprising an increased stage of secrecy to hide from the eyes of the legal enforcement authorities in the "home" nation of the beneficial possessor of the monies. (Offshore Financial Centers: IMF Background Paper)

Offshore financial centers give abundant services to draw capital from overseas. Apart from getting involved in conventional banking operations, OFCs clients might take over banking licenses, constitute offshore corporations, launch inland insurance companies, and take benefit of offshore warehousing and supportive tax policies, among other provisions. These services facilitate individuals and corporations to evade taxes, rules, attachment of assets or criminal prosecutions in their native countries. Offshore banks are among the most familiar implementation of OFC, as substantiated by the mushrooming banking sectors in many OFCs like the Cayman Islands. Many diverse types of users are drawn to offshore banking. For instance, a multinational company… READ MORE

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