CHAPTER 4 : Offshore Financial Centres (Introduction to Offshore Financial…
CHAPTER 4 : Offshore Financial Centres
Facilities Offered by Offshore Financial Centres
Offshore Saving Account : offshore saving account accept opening deposit of as little as USD 1 and should denominated in foreign currency. Besides, the charges for operating may be high.
Offshore Current Account : this account varied with one offered under the onshore current account, so the currency offered are normally in foreign or major currencies and the charges is free or zero. So, it can protect their money against currency fluctuations.
convert money for a property
making regular payment in foreign currency
moving to foreign country with the need to exchange money
making foreign currency payment at a specific time in the future
managing the client's overall foreign currency exposure
forwards contracts and spot transactions
managing currency risk
Two types which are structured notes and structured deposits
other attraction of the OFC's investment
no capital tax
no with holding tax on dividends or interest
no tax on tranfers
no corporation tax
no capital gains tax
no exchange controls
lights regulation and supervision
less straighten reporting requirements
less straighten trading restrictions
Types of Instutions under Offshore FInancial Centres
INTERNATIONAL INVESTMENT BANK
Deposits may not be subject to reserve requirements.
Bank transactions may be tax-exempt or treated under a favourable fiscal regime.
May be free of interest and exchange controls
Subject to a lesser form of regulatory scrutiny and information disclosure requirrments may not be rigorously applies
OFFSHORE CORPORATIONS OR INTERNATIONAL BUSINESS CORPORATIONS (IBCS)
Used to own and operate businesses
may be set up with one director only.
In some cases, residents of the OFC host country may act as nominee directors to conceal the identity of the true company directors.
In many OFC, the cost of setting up IBC are minimal and they are generally exempt from all taxes.
Popular vehicle for managing investment funds.
A commercial corporation establishes a captive insurance company in an OFC to manage risk and minimize taxes.
An onshore insurance company establishes a subsidiary in an OFC to reinsure certain risks.
An onshore reinsurance company incorporates a subsidiary in an OFC to reinsure catastrophic risks.
Location of countries
It has the largest value in terms of assets under management in offshore funds and is also the strongest presence in the US security market.
It is the most international of the british Crown dependencies, all of which can be counted as OFCs. Jersey has particularly strong banking and fund management sectors and a high concentration of professional adviser including lawyers and fund managers.
British Virgin Islands
It has the largest number of offshore companies in the world.
It is the market leader in undertakings for Collecty Investments in Transferable Securities (UCITS) and is believed to be the largest offshore Eurobond issuer, although no official statistics confirm on this information.
It is a market leader for captive insurance and also has a strong presence in offshore funds and aircraft registration.
It has recently risen and considered as a centre for wealth management and ranked fourth in the world in the 2009 Global Financial Centres Index (GFCI)
It remains as one of the top ten OFCs in the world due to many reasons including it has a tradition of confidentiality, privacy, anonymity and no direct taxation, which has been completed by considerable political stability, excello communication and its location as an advantage to trade in the New York, Toronto and London markets.
It envolved as a major hub for the arrangement, syndication and management of euro credits to borrowers from the Asia-Pacific area.
It has tge effective commercial and legal infrastructure required to support the development of a global network.
It is a significant international maritime centre. Although Panama (with Bermuda) was one of the earliest offshore corporate domiciles, Panama lost significance in the early 1990s.
It is considered as the most remote jurisdiction. It has the advantage of being a true primary justification with a tough but practical regulatory regime.
It remains one of the world’s most respected OFCs, providing a highly sophisticated range of the services for its select clientele.
Introduction to Offshore Financial Centres (OFC)
A more practical definition of an OFC is a centre where the bulk of financial sector activity is offshore on both sides of the balance sheet.
OFC offer significant tax and regulatory advantages as well as providing clients from other countries with international banking services.
Definition by Zorome (2007) - jurisdictions that provide financial services to non-residents on a scale that is excessive compared to the size and the financing of their domestic economies.
OFCs differ from "onshore" banking in a way that the financial services offered are mainly for non-resident clients.
Number of Considerations
Low or no taxes
Services are mainly for non-resident clients
Geographical proximity to a major economy
There are no or limited FOREX controls
A set of practice or procedure that supports bank secrecy
A high degree of political stability or personal safety
There are good communications and connectivity or networking
Reasons why someone associates with OFCs
Privacy for personal or family business or political reasons.
Try to keep funds separate from daily use in case of inheritance battles or divorce or personal bankruptcy
Keep funds in a secure bank in a secure country
Launder money from criminal activities
Common Reasons Why Countries Seek to Develop Themselves as OFCs
The particular country may have little land base and few opportunities to develop other types of economix activities because of :-
Limited energy supplies at high cost
Limited raw materials and other natural resources
Long distance from resources including raw material and energy sources
The country may possess natural characteristics that make it an ideal OFC
Close geographical proximity to wealthy countries
Well educated manpower
Some natural amenities that could attract a tourist attraction
A political willingness to pass bank secrecy laws and at the same time be prepared to invest in policing and security infrastructure to assure personal safety and to address the potential to attract unsavoury elements
OFCs play a significant role in mobilizing international capital flows. They have the ability to extract one's fund.
International banks play a dominant role in the OFC due to their structure or nature of business allows a variety of services offered to foreign clients.
2008 - it was reported that more that $6 tirllion dollars of portfolio investment invested across 49 OFCs, nerarly equal to the amount invested in the UK, Germany, and France combined.
Gonzalez & Schipke (2011) found that OFCs gain competitive advantage as compared to their competitors.
Based on the competitive advantage, it stands to reason that there are national level charateristics that will encourage investors in some countries to more utilizing OFCs than others.
Main Reasons for Low Income Tax Rates and often Zero Tax Rates
To attract foreign capital or investors or traders.
They also provide superior facilities for communication or networking.
Several countries and territories have been designated as the OFCs by three prominent institutions, namely, the International Monetary Fund (IMF), the Financial Secrecy (FSI) and the Organisation for Economic Co-operation and Development (OECD).