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Offshore Financial Centres (chapter 4) (Introduction (Reasons someone…
Offshore Financial Centres (chapter 4)
Introduction
1) Provided financial services
non-residents on a scale that is excessive compared to the size & the financial of their domestic economies.
2) Offer significant tax & regulatory
advantages as well as providing clients from other countries with international banking services.
Definition
Any financial centre where offshore activity takes place.
A centre where the bulk of financial sector activity is offshore on both sides of the balance sheet.
Reasons someone associates with OFCs
Legitimate purposes
Privacy
To keep funds separate from daily use
Keep funds in a secure bank in a secure country
Illegitimate purposes
Launder money from criminal activities
Evade taxes
Common reasons countries seek to develop themselves as OFCs
May have little land base & few opportunities to develop other types of economic activities
limited energy supplies
limited raw materials & other natural resources
far from resources including material & energy resources
Possess natural features that make it an ideal OFC
close geographically proximity to wealth countries
well educated manpower & some natural amenities that could attract tourist
a political willingness to pass bank secrecy laws & prepare to invest in policing & security infrastructure
Locations that considered as the major destinations
Bahamas
Bermuda
Singapore
Hong kong
Switzerland
Functions
Jurisdiction provider that has relatively large number of financial institutions
Entities to manage financial systems with external assets and liabilities
International centres - low/zero tax, moderate /light financial regulation, banking secrecy & anonymity
Maintain extensive legislation & to take measure to reduce criminally related activities
Must have/maintain necessary structure for providing the varied services required by global clientele
Facilities offered by OFCs
1) Offshore savings account
most people thought requires millions to open a savings account at offshore banking
some offshore accept opening deposits of as little as USD1 & someone may have to invest minimum USD5000/USD10,000
operating charges is HIGH
2) Offshore current account
vary with onshore current account because it's offer are normally in foreign / major currencies
depositors can use debit card to withdraw money
ease of movement between accounts
3) Forex services
converting money for a property
making regular payments in a FC
moving to a foreign country
making a foreign currency payment
managing currency risk
4) Offshore investments
i. Types of services offered:
structured notes
structured deposits
ii. Attractions of OFCs investment services:
no capital tax
no capital gain tax
no tax on transfer
no corporation tax
no exchange controls
Types of institutions under OFCs
1) International investment bank
deposits may not subject to reserve requirements
bank transactions may be tax exempted
may be free of interest & exchange controls
2) Offshore banks.
subject to lesser form of regulatory scrutiny
information disclosure requirements may not be rigorously applied
3) Offshore corporations / international business corporations (IBCs)
used to own & operate businesses
may be set up with one director only
in many OFCs, the cost of setting up IBCs are minimal & generally exempt from all taxes
popular vehicle for managing investment funds
4) Insurance companies
a commercial corporation establishes a captive insurance company in an OFC to manage risk & minimize taxes
an onshore insurance company establishes a subsidiary in an OFC to reinsure certain risks
an onshore insurance company incorporates a subsidiary in an OFC to reinsure catastrophic risks