An offshore centre, more commonly known as Offshore Financial Centre (OFC), is a country or jurisdiction that provides financial services to non-residents on a scale that is incommensurate with the size and the financing of its economy. The more nebulous term ‘’tax haven’’ is often applied to OFCs, leading to confusion between the two concepts. It has led to promoting the generally accepted view that they facilitate tax avoidance or tax evasion by individuals and corporations.
In this regard, one needs to distinguish between tax avoidance and tax evasion, the former being a legitimate means of tax mitigation whereas the latter is illegal and criminal.
OFCs are there to provide a service that is recognised by several developed countries including the USA. Its proponents suggest that reputable financial centres play a legitimate role in international trade and finance and often point to the tacit support of these centres by the governments of the United States (which promotes OFCs by the continuing use of the Foreign Sales Corporation) and the United Kingdom (which actively promotes offshore finance in Caribbean dependent territories to help diversify their economies and facilitate the British Eurobond market).
It has been said that US external aid to underdeveloped countries ‘cannot take place without the formation of offshore entities’. OFCs act as conduits for global trade and ease international capital flows. Indeed The Economist has concluded that ‘well-run jurisdictions of all sorts, whether nominally on- or off-shore, are good for the global financial system’.
In recent years increased interest in OFCs has led to regulations being introduced in order to persuade them to become compliant therewith. The Financial Action Task on Money Laundering put forward its ‘40+9’ recommendations in the fight against money laundering and criminal activities globally. Following recognition of OFCS by the International Monetary Fund (IMF), the USA Tax Justice Network (FSI), the Organisation for Economic Cooperation and Development (OECD) and others, investors prefer to utilise better regulated offshore jurisdictions than more poorly regulated ones. Shell companies are more easily set up in many OECD member countries than in other countries. Low-tax financial centres are becoming increasingly important as conduits for investment into emerging markets.
Many OFCs also provide registration for ships, aircrafts and captive insurance services. For example Pakistan International Airlines re-registered its entire fleet in the Cayman Islands in order to obtain financing of its purchase of 8 new Boeing 777s.
Legitimate reasons for forming offshore structures include asset holding and asset protection, the avoidance of forced heir-ship provisions, collective investment vehicles, trading in derivatives, exchange control trading vehicles, joint ventures, market listings and trade finance.
Illegitimate reasons include creditor avoidance, market manipulation and tax evasion.
Thus tax avoidance is not the main driver in setting up an OFC. Commercial considerations far outweigh tax avoidance as the main reason for setting up an offshore structure. Tax avoidance thus becomes a necessary by-product of offshore structuring.
There are currently over 90 OFCS worldwide of which 55 are recognised by the IMF, 72 by the FSI and 71 by the OECD and include well-known OFCS such as the BVIs, the Cayman Islands, Jersey, Guernsey and Gibraltar. The top 5 OFCs are:
- Cayman Islands
- British Virgin Islands
At Farrow & Farrow, our consultants are available to advise on the suitability of setting up an offshore structure and recommend suitable OFCs to our clients. We also advise on offshore trusts and will assist the client throughout the whole process.
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