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OFFSHORE BANKING
INTRODUCTION
WHAT IS AN OFFSHORE BANK
An offshore bank is a bank located outside the country of residence
of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial
and legal advantages. These advantages typically include some or all of
* strong privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking
Act)
* less restrictive legal regulation
* low or no taxation (i.e. tax havens)
* easy access to deposits (at least in terms of regulation)
* protection against local political or financial instability
While the term originates from the Channel Islands "offshore" from Britain, and mostoffshore banks are located in island nations to this day, the term is used figuratively to
refer to such banks regardless of location (Switzerland, Luxembourg and Andorra in
particular are landlocked).
Offshore banking has often been associated with the underground economy and
organized crime, via tax evasion and money laundering; however, legally, offshore
banking does not prevent assets from being subject to personal income tax on interest.
Except for certain persons who meet fairly complex requirements[1], the personal income
tax of many countries[2] makes no distinction between interest earned in local banks and
those earned abroad. Persons subject to US income tax, for example, are required to
declare on penalty of perjury, any offshore bank accountswhich may or may not be
numbered bank accountsthey may have. Although offshore banks may decide not to
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report income to other tax authorities, and have no legal obligation to do so as they are
protected by bank secrecy, this does not make the non-declaration of the income by the
tax-payer or the evasion of the tax on that income legal. Following September 11, 2001,
there have been many calls for more regulation on international finance, in particular
concerning offshore banks, tax havens and clearing houses such as Clearstream, based in
Luxembourg, being accused of being a crossroads for major illegal money flows
Defenders of offshore banking have criticised these attempts at regulation. They claim
the process is prompted, not by security and financial concerns, but by the desire of
domestic banks and tax agencies to access the money held in offshore accounts. They
argue that offshore banking offers a competitive threat to the banking and taxation
systems in developed countries, and that OECD countries are trying to stamp out
competition.
Offshore banking unit
A financial institution carrying out offshore trades.offshore banking has been regarded as
an alternative to opening up a localmarket to foreignbanks. In effect, offshore bankingenables an institution to engage in banking and foreign-exchange activities free of the
regulations of the host country, and many offshore banking centres offertax concessions
to foreign companies operating within their borders as a way of attracting lucrative
foreign-exchange business. The first offshore banking unit was the euromarket; others
include Singapore, Hong Kong, Luxembourg, Bahrain, the Cayman Islands, the Channel
Islands and the Netherlands Antilles. Australia's taxation regime has been historically
unfavourable to the operation of offshore banking business. In the early 1990s, the
commonwealth and state governments (particularly New South Wales) relaxed some tax
provisions in an attempt to make Australia more competitive as an international financial
centre.
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Nature of Offshore Banking
Offshore banking denotes carrying on banking activity which is insulated from the
monetary regulations of the host country. Very often, such banking centres are set up
deliberately to attract international banking business of dealing in non-resident foreign
currency denominated assets and liabilities by exempting, reducing or eliminating
restrictions upon banking operations as well as lowering tax and/ or other levies.
International banks may also choose to set up branches or offices at centres abroad
including offshore centres with a view to avoid conformity to stringent domestic
monetary policy regulations. The basic characteristic of offshore banking is its
segregation from the banking system of the host country. In a sense, the banking centres
remain offshore and uncontrolled.
Traditionally, offshore banking denoted carrying on banking activity at offshore financial
centres in a physically neutral way. These centres are also known sometimes as tax
havens and the bank offices brass plate or shell branches. Bahamas for example is
tax haven.
Several of the US international banks set up branches at an offshore centre such as
Bahamas to get away from the restrictions of the US federal government on domestic
banking in USA or set up a shell or brass plate branch to take advantage of low or
complete absence of taxes.
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ADVANTAGES AND DISADVANTAGES
OF OFFSHORE BANKING:-
Advantages of Offshore Banking
1 Offshore banks provide access to politically and economically stable jurisdictions. This
may be an advantage for those resident in areas where there is a risk of political turmoil
who fear their assets may be frozen, seized or disappear. However, developed countries
with regulated banking systems offer the same advantages in terms of stability.
2 Some offshore banks may operate with a lower cost base and can provide higher
interest rates than the legal rate in the home country due to lower overheads and a lack of
governement intervention. Advocates of offshore banking often characterise government
regulation as a form of tax on domestic banks, reducing interest rates on deposits.
3 Offshore finance is one of the few industries, along with tourism, that geographically
remote island nations can competitively engage in. It can help developing countries
source investment and create growth in their economies, and can help redistribute world
finance from the developed to the developing world.
4 Interest is generally paid by offshore banks without tax deducted. This is an advantage
to individuals who do not pay tax on worldwide income, or who do not pay tax until the
tax return is agreed, or who feel that they can illegally evade tax by hiding the interest
income.
5 Some offshore banks offer banking services that may not be available from domestic
banks such as anonymous bank accounts, higher or lower rate loans based on risk and
investment opportunities not available elsewhere.
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6 Offshore banking is often linked to other services, such as offshore companies, trusts or
foundations, which may have specific tax advantages for some individuals.
7 Many advocates of offshore banking also assert that the creation of tax and banking
competition is an advantage of the industry, arguing with Charles Tiebout that tax
competition allows people to choose an appropriate balance
of services and taxes. Critics of the industry, however, claim this competition as a
disadvantage, arguing that it encourages a race to the bottom in which governments in
developed countries are pressured to deregulate their own banking systems in an attempt
to prevent the offshoring of capital.
8 Many people are unaware of this factor and its appears to be a foreign concept to many.
Most western countries do not offer any protection as to the details of your banking. The
protection factors makes offshore banking one of the most popular banking solutions.
Unlike many bank accounts, it is impossible to get account details, including the account
balance, of an account in an offshore jurisdiction.
9 In offshore banks, privacy laws are very stringent, as opposed to laws in the
United States. People are jailed and made to pay heavy fines if they disclose any
information regarding bank accounts in offshore banks. Offshore banking allows you to
conduct business in the country in which you have your bank account with the local
currency. It will help you to increase your profits, provided you are aware of all the
details involved in investing and depositing your money.
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Disadvantages of Offshore Banking
A Offshore banking has been associated with the underground economy and organizedcrime, through money laundering. Following September 11, 2001, offshore banks and tax
havens, along with clearing houses, have been accused of helping various organized
crime gangs, terrorist groups, and other state or non-state actors.
B The existence of offshore banking encourages tax evasion, by providing tax evaders
with an attractive place to deposit their hidden income.
C Offshore jurisdictions are often remote, so physical access and access to information
can be difficult. Yet in a world with global telecommunications this is rarely a problem.
Accounts can be set up online, by phone or by mail.
D Developing countries can suffer due to the speed at which money can be transferred in
and out of their economy as hot money. This Hot money is aided by offshore
accounts, and can increase problems in financial disturbance.
E Offshore banking is usually more accessible to those on higher incomes, because of the
costs of establishing and maintaining offshore accounts. The tax burden in developed
countries thus falls disproportionately on middle-income groups. Historically, tax cuts
have tended to result in a higher proportion of the tax take being paid by high-income
groups, as previously sheltered income is brought back into the mainstream economy.
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European Savings Tax Directive
In their efforts to stamp down on cross border interest payments EU governments agreed
to the introduction of the Savings Tax Directive in the form of the European Union
withholding tax in July 2005. A complex measure, it forced EU resident savers
depositing money in any country other than the one they are resident in to choose
between forfeiting tax at the point of payment, or allowing notification by the offshore
banks to tax authorities in their country of residence. This tax affects any cross border
interest payment to an individual resident in the EU.
Furthermore the rate of tax deducted at source will rise in 2008 and again in 2011,
making disclosure increasingly attractive. Savers' choice of action is complex; tax
authorities are not prevented from enquiring into accounts previously held by savers
which were not then disclosed.
Banking services:-
It is possible to obtain the full spectrum of financial services from offshore banks,
including:
deposit taking
credit
wire- and electronic funds transfers
foreign exchange
letters of credit and trade finance
investment management and investment custody
fund management
trustee services
corporate administration
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Not every bank provides each service. Banks tend to polarise between retail services and
private banking services. Retail services tend to be low cost and undifferentiated, whereas
private banking services tend to bring a personalised suite of services to the client.
Statistics concerning offshore banking
Offshore banking is an important part of the international financial system. Experts
believe that as much as half the world's capital flows through offshore centers. Tax
havens have 1.2% of the world's population and hold 26% of the world's wealth,
including 31% of the net profits of United States multinationals. According to Merrill
Lynch and Gemini Consulting's World Wealth Report for 2000, one third of the wealth
of the world's high net-worth individualsnearly $6 trillion out of $17.5 trillionmay
now be held offshore. Some $3 trillion is in deposits in tax haven banks and the rest is in
securities held by international business companies (IBCs) and trusts.
The IMF has said that between $600 billion and $1.5 trillion of illicit money is laundered
annually, equal to 2% to 5% of global economic output. Today, offshore is where most of
the world's drug money is allegedly laundered, estimated at up to $500 billion a year,
more than the total income of the world's poorest 20%. Add the proceeds of tax evasion
and the figure skyrockets to $1 trillion. Another few hundred billion come from fraud and
corruption. "These offshore centers awash in money are the hub of a colossal,
underground network of crime, fraud, and corruption" commented Lucy Komisar quoting
these statistics.[1] Among offshore banks, Swiss banks hold an estimated 35% of the
world's private and institutional funds (or 3 trillion Swiss francs), and the Cayman Islands
are the fifth largest banking centre globally in terms of deposits.
Terrorist Finance Tracking Program
A series of articles published on June 23, 2006, by The New York Times, The Wall
Street Journal and The Los Angeles Times revealed that the United States government,
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specifically the Treasury Department and the CIA, had a program to access the SWIFT
transaction database after the September 11th attacks (see the Terrorist Finance Tracking
Program) rendering offshore banking for privacy severely compromised.
Regulation of offshore banks
In the 21st century, regulation of offshore banking is allegedly improving, although
critics maintain it remains largely insufficient. The quality of the regulation is monitored
by supra-national bodies such as the International Monetary Fund (IMF). Banks are
generally required to maintain capital adequacy in accordance with international
standards. They must report at least quarterly to the regulator on the current state of the
business.
Since the late 1990s, especially following September 11, 2001, there have been a number
of initiatives to increase the transparency of offshore banking, although critics such as the
Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC)
non-governmental organization (NGO) maintain that they have been insufficient. A few
examples of these are:
* The tightening of anti-money laundering regulations in many countries including most
popular offshore banking locations means that bankers are required, by good faith, to
report suspicion of money laundering to the local police authority, regardless of banking
secrecy rules. There is more international co-operation between police authorities.
* In the US the Internal Revenue Service (IRS) introduced Qualifying Intermediary
requirements, which mean that the names of the recipients of US-source investment
income are passed to the IRS.
* Following 9/11 the US introduced the USA PATRIOT Act, which authorises the US
authorities to seize the assets of a bank, where it is believed that the bank holds assets for
a suspected criminal. Similar measures have been introduced in some other countries.
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* The European Union has introduced sharing of information between certain
jurisdictions, and enforced this in respect of certain controlled centres, such as the UK
Offshore Islands, so that tax information is able to be shared in respect of interest.
Joseph Stiglitz, 2001 Nobel laureate for economics and former World Bank Chief
Economist, told to reporter Lucy Komisar, investigating on the Clearstream scandal:
"You ask why, if there's an important role for a regulated banking system, do you allow a
non-regulated banking system to continue? It's in the interest of some of the moneyed
interests to allow this to occur. It's not an accident; it could have been shut down at any
time. If you said the US, the UK, the
major G7 banks will not deal with offshore bank centers that don't comply with G7 banks
regulations, these banks could not exist. They only exist because they engage in
transactions with standard banks."[1]
In the 1970s through the 1990s it was possible to own your own personal offshore bank;
mobster Meyer Lansky had done this to launder his casino money. Changes in offshore
banking regulation in the 1990s in the form of "due diligence" (a legal construct) make
offshore bank creation really only possible for medium to large multinational
corporations that may be family owned or run.
Other Requirements for Offshore Banking Centre
One common feature of successful offshore centre is the presence of good
telecommunication network, domestic as well as international. Actually financial centres
are now a part of global information highway or cyber space. This is one aspect that has
to be taken care of if a decision is taken to set up an offshore facility in India. A banker
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should be able to reach his constituent or counterpart when he wants to irrespective of
location.
The freedom of movement of expatriate personnel of international banks is another aspect
that has to be ensured. International travel has to be much easier. It is not frequency of air
services but relative ease with which you walk through customs and immigration that are
important. At most of the airports of the financial centres in Europe, USA and Asia it
hardly takes 30 seconds to go through customs and immigration. The obtaining of visa
has also to be made much more easier and free than what is today. Visas and travel
documents are to be looked upon as matter of form since information is necessary from
the view point of traffic control as well as security but nothing beyond that. An
international financial service status may be created which is at par with diplomatic
service for grant of travel facilities and clearance at the airports.
Other infrastructure facility that have mattered in the decision to set up an offshore
banking centre are good office accommodation, housing for expatriates working at the
branches of the international banks located at the offshore centre, schools, medicals and
recreational facilities. Provision of these facilities does not really pose any problem but
they have to be met if an offshore centre is to be floated
.
Another factor that has influenced the successful functioning of an offshore centre is the
location of the centre time zone-wise. India is definitely at an advantage as it is between
London and Singapore. We are five-and-a-half hours in advance of London and two
hours behind Singapore. We can transact on the same day with London and Singapore.
Bahrain is the only centre which enjoys such a favourable location time zone-wise. Any
proposed offshore banking facility in India would really be a bridge between the Asian
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and Euro-dollar market. Mumbai with its tradition of banking and trade would be an ideal
choice for locating the proposed OBC.
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Bank secrecy
Bank secrecy (or bank privacy) is a legal principle under which banks are allowed to
protect personal information about their customers, through the use of numbered bank
accounts or otherwise. Effective bank secrecy is better achieved in certain countries, such
as Switzerland or in tax havens, where offshore banks adhere to voluntary or statutory
levels of privacy.
Created by the Swiss Banking Act of 1934, which led to the famous Swiss bank, the
principle of bank secrecy is sometimes considered one of the main aspects of private
banking. It has also been accused by NGOs and governments of being one of the main
instrument of underground economy and organized crime, in particular following the
Class action suit against the Vatican Bank in the 1990s, the Clearstream scandal and
September 11, 2001.
Advances in financial cryptography (e.g. public-key cryptography) make it possible touse anonymous electronic money and anonymous digital bearer certificates to achieve
financial privacy and anonymous internet banking
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Offshore financial centres
In terms of offshore banking centres, in terms of total deposits, the global market is
dominated by two key jurisdictions: Switzerland and the Cayman Islands,[4] although
numerous other offshore jurisdictions also provide offshore banking to a greater or lesser
degree. In particular, Jersey, Guernsey and the Isle of Man are known for their well
regulated banking infrastructure. Some offshore jurisdictions have steered their financial
sectors away from offshore banking, as difficult to properly regulate and liable to give
rise to financial scandal.
List of offshore financial centres
Offshore financial centres include:
Bahamas
Barbados
Belize
Bermuda
British Virgin Islands
Cayman Islands
Channel Islands (Jersey and Guernsey)
Cook Islands
Cyprus
Dominica
Gibraltar is no more an offshore centre since 30th June 2006. No new Exempt Company
certificates are being issued from that date. [6] [7]
Ghana [8][9]
Hong Kong
Isle of Man
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Labuan, Malaysia
Liechtenstein
Luxembourg
Malta
Macau
Montserrat
Nauru
Panama
Saint Kitts and Nevis
Seychelles
Switzerland
Turks and Caicos Islands
Selected Offshore Centres
Bahamas
Bahamas an archipelago of 700 islands stands with Nassau as capital. Nassau is favorably
located time zone-wise especially in relation to customers located in Western hemisphere.
Bahamas was an offshore tax haven in mid sixties with a few branches of foreign banks.It has grown since, to the top ten banking centres in the world with the asset base of the
banking centre at $120 billion. There is large physical presence of banks. Of the 415
licensed, 166 have a physical presence.
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Banks in Bahamas have a sound capital base with capital asset ratio around 11 per cent.
A license fee $25,000 is payable by a bank. Large and prestigious banks from 36
countries operate. Offshore banks are not subject to any liquidity requirements and
regulations are minimal. Banks have however to adhere to certain norms. There is a self
regulatory code of conduct to deter the use of banks for criminal activities. The offshore
centre is supervised by the central bank which ensures the maintenance of professional
integrity.
There are no taxes. Political stability and proximity to United States have rendered
Bahamas an attractive offshore centre. The islands have developed business infrastructure
and transport and communication.
Bahrain
The offshore centre at Bahrain was founded in 1975 to encourage offshore banking units
(OBUS). It neatly bridges the gap between Singapore and London. The centre has now 65
licensed OBUs. Bahrain has a very favourable time-zone and is located in the proximityof the worlds major oil producing countries.
OBUS are allowed to deal in offshore advances and deposits without restrictions and
regulations that apply to commercial banks. OBUS are not allowed to deal with residents
of Bahrain, other than government and fully licensed banks. OBUS have to have physical
presence and fully staffed.
OBUS are not required to maintain any reserves and there are no formal solvency
requirements. OBUS are however required to provide Bahrain monetary agency with
monthly statistical information and a copy of their annual audited financial statements.
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Bahrain has no corporate tax or personal taxes. There are no restrictions on repatriation of
capital, profit or income.
Cayman Islands
Cayman Islands are self governing British dependent territory South of Florida and West
of Jamaica. It is the fifth largest financial centre in terms of assets held after London,
Tokyo, New York and Hong Kong and holds largest consolidated international claims
among offshore centres. There are 550 banks and trust companies licensed by the
government.
Businesses transacted in Cayman Islands include Eurocurrency borrowing and lending,
deposit placing and taking, issue of bonds and floating rate notes, consortium lending and
international fiduciary and corporate services.
Cayman Islands have no controls on international banking and trust activities and have
flexible regulations for liquidity ratios and capital requirements. The Islands have access
to Eurocurrency markets and there are no restrictions on Euro-dollar transactions. Profits
may be retained or repatriated. There is no deduction of tax at source on interest.
Applications for licenses are scrutinized and approved. Regular returns and compliance
with government requirements is insisted upon. There are two kinds of bank licenses.
Category A license could entitle a bank to engage in both local and offshore bankingbusiness. There are 85 banks in A category. Category B license entitles the bank to
engage in business originating outside the islands. About 400 B licenses have been
issued. Minimum capitalization is stipulated for the two types of banks.
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Hong Kong
Hong Kong is one of the freest money markets in the world and there is no distinction
between resident and non-resident accounts. Hong Kong does not belong to the tax haven
category. It has no exchange control and residents may place funds in the Euro-dollar
market free of any regulation. Profits, dividends and interest can be fully repatriated.
Panama
Among the non-reporting centres Panama is quiet large in terms of asset and liabilities.
Favourable tax environment, absence of controls on capital and incentives offered to
foreign banks are the major factors that contributed to the growth of Panama as an
offshore centre. In addition Panama has excellent communication facilities,
internationally trained legal experts and international auditing firms. Banks can maintain
numbered or coded accounts to offer secrecy and protection to depositors.
Panama has encouraged offshore business mainly with a view to mobilize resources for
development of Panama. The National Banking Commission set up in 1970 issues bank
licenses. It regulates the credit system by setting the statutory reserve and liquidity
requirements. Paid-up capital is defined in relation to productive assets or as a per cent of
local loans. Banks are required to submit monthly statement of assets and liabilities and
quarterly analysis of credit facilities and other assets in Panama.
There are three kinds of licenses. The general license which enables the bank to function
both in Panama and abroad; the international license which is exclusively for offshore
operation and representative license for banks which keep their representative in Panama.
Different amounts of paid-up capital are prescribed for general license and international
license.
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There are no taxes affecting offshore business. Interest and dividends received from
foreign sources and interests on time deposits placed with local banks in Panama are not
subject to tax. There is no withholding tax payable on the distribution of such income.
Singapore
Among the offshore centre Singapore has emerged as an important Asian based market in
Euro-dollars. The Asian dollar market was created in 1968 at the initiative of the
Singapore Branch of Bank of America. The Singapore market deals not only in US
dollars but in other convertible currencies such as Deutsche mark, the Netherlands
guilder, the Swiss franc and the yen. Some of the factors that are responsible for the
establishment of a market in Singapore are the existence of a well-developed financial
system, near absence of inhibiting controls on domestic and international financial
transactions, stability of the government and the social system and favourable
geographical location. The convertible foreign currency deposit accounts Unit (ACUs)
transactions are kept separate from the banks other transactions.
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Offshore Banking Strategies
We generally leave the offshore banking business and questions about potential uses to
our offshore partner banks; however, we often field questions regarding these issues and
find it necessary to explain a few simple strategies often utilised. None of the
information in this section and indeed in this website should be construed as tax advice in
your home country. These strategies may or may not be legal in your home country. We
can only advise on legal uses in the countries where we establish corporations and bank
accounts on behalf of our clients.
For clients looking to repatriate funds from an offshore account without having to cash
out, a back to back loan may be an option. We work with several banks that are able to
provide this service.
Back to Back Loan
Back to back loans are generally intended to hedge against changes in currency
valuations. The concept is relatively simple. You deposit funds with the bank in one
currency and the bank issues a loan in another currency using your deposit as collateral.
With the continuously deteriorating US Dollar, this has been a great tool for many people
in recent years. In practice, these loans have several uses which have contributed to their
popularity.
Scenario #1 (Business Loan)
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You have an offshore company and bank account with funds you have been accumulating
over time. A situation arises and you find your onshore
business is in need of a cash infusion. You may be able to structure a back to back loan
with your offshore bank. It is generally a simple concept. You deposit funds at the bank
and using your deposit as security they draft a loan agreement at an interest rate and term
decided by you. The bank loans the funds to you solving your cash flow problem and
allowing you to show the cash as a liability on your books. This may be an instance
when you actually prefer to pay a higher rate of interest. Your interest payments may be
tax deductible expenses allowing you to save taxes in future years.
Scenario #2 (Property Mortgage)
You are building a new house or buying a piece of property and need cash. Your
offshore bank can draft a back to back loan as a mortgage at an interest rate and term of
your choosing (usually at a fairly high rate) allowing you to purchase the property and
maintain a lien on the property by filing the mortgage. Many high net worth
individuals prefer not to own property and investments in their own names and seek
arrangements which make their assets more difficult to locate for potential adversaries.
This is a popular strategy in these cases. Any searches for assets would turn up a fully
mortgaged home rather than one owned free and clear. These loans may be kept topped
up to 100% of the value of the home as well. As with the business loan, interest
payments are often tax deductible providing future income tax savings which may come
in handy, especially if you have the good fortune of being in the highest tax brackets.
Private Annuity Contract
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Private annuities can be used for a variety of purposes in estate planning. Although
commonly used as a tool in transferring ownership of appreciated assets to family
members, private annuities can also serve estate planners as a device for transferring cash
from cash-rich estates. Additionally, these
contracts can be used to guarantee income and to minimize estate tax liabilities.
A private annuity is an annuity contract issued by an individual rather than a commercial
insurance company. In the past, it was used most often to transfer appreciated property to
family members. There is every reason to suggest it may be as effective for transferring
cash from a cash rich estate, to assure income and for saving on estate taxes.
As a contract, a private annuity is quite simple. The issuer of the contract agrees to pay
the annuitant a periodic payment for the annuitant's life in exchange for a payment of
cash or for the transfer of property. The annuitant cannot be in imminent danger of death,
nor can the annuity contract be collateralized or otherwise secured. If it is known on the
valuation date that the annuitant will die from an illness in a very short time, the value of
the annuity is based on that fact.
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Offshore Banking Jurisdictions
The list of offshore banking jurisdictions and offshore financial centers continues to
expand as tax competition and globalization continue to fuel demand for international
low tax banking solutions. Here is a brief look at the recommended banking jurisdictions
by Sterling Offshore.
Isle of Man Banking
Jersey and Guernsey Banking
UK Banking
Luxembourg Banking
Austrian Banking
Swiss Banking
Liechtenstein Banking
"Offshore" Financial Centres
Asian Banking
EU Banking
Over the last few years, EU banks have benefited from measures aimed at liberalizing
trade and business practices such as the Single Passport System. Other measures crafted
to create tax and information sharing hegemony amongst all of the member states such as
the EU Savings Directive 2005 were not as welcomed by some of the traditionally
popular banking jurisdictions. The EU Savings Directive 2005 is explained in more
detail in another section, but let us briefly discuss the positive impact of the Single
Passport System.
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District, actually operating as branches of the Isle of Man headquarters. This is mainly
for privacy and tax advantages afforded to the clients and the banks themselves.
Isle of Man banks offer a wide array of services including both private banking and
commercial/business services. Many international companies requiring sophisticated
credit card processing and other business support services often choose an Isle of Man
bank. Several of these Isle of Man banks also offer a variety of investment vehicles and
private banking services to international clientele. Sterling Offshore generally
recommends our Isle of Man banking partners for business and commercial accounts.
We also recommend them for private banking in certain circumstances.
Jersey and Guernsey Banking
Jersey and Guernsey banks were amongst the first to market to foreigners in the early
stages of what is now the modern offshore banking industry. Both are still utilized for
offshore banking; however, many of their banks are actually headquartered in Isle of Man
with the Jersey offshore banks and Guernsey offshore banks largely being utilized as
branches or representative offices. Many of the processes, services and even
communications are actually being routed through Isle of Man so we generally just
recommend an opening an offshore Isle of Man bank account if choosing amongst these
jurisdictions.
UK Banking
London is the biggest financial center in the world and obviously the banking options and
level of service is amongst the best in the world. While banking secrecy laws in UK may
not match those of many other jurisdictions, UK bank accounts for structures set up
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elsewhere still offer reasonable privacy. Additionally, funds transferred to and from a UK
bank account will draw less suspicion than from jurisdictions labelled as "tax havens".
Luxembourg Banking
Many are surprised to learn that Luxembourg is the second largest banking jurisdiction in
Europe (behind the UK) and the largest private banking country in Europe. Although not
as rich in history or as well known to laymen as Switzerland, Luxembourg banks have
gained enormous popularity over the years; especially since 1980 when it solidified its
long history of favorable taxation and banking secrecy into law. Since that time,
managed fund assets have grown from $3 billion to $1.85 trillion, 2238 managed funds in
all, at the end of 2006. Total assets held by banks amounted to $1.1 trillion of that figure.
Luxembourg Banking Laws and Regulations
Luxembourg does not use the term offshore in any of its legislation, regulations or
anything describing its company forms. The key to typical offshore tax status for
Luxembourg business lies in the various forms of holding companies, collective
investment vehicles and investment funds outlined in legislation such as the 1929
Holding Company, Milliardaire Holding Company, Financial Holding Company,
SOPARFI, Fond Commun de Placement, SICAV, SICAF and SICAR. Going into detail
about each would be beyond the scope of this section, but these basically provide several
options for favorable tax status for both resident holding and investment companies as
well as non-resident companies. Individuals holding accounts with Luxembourg banks
and financial institutions are also exempt from local taxation on capital gains, dividends
and interest unless they reside in one of the EU member countries.
One potential negative to banking in Luxembourg is their agreement to begin information
exchange with the EU by 2009 as a result of the EU Savings Directive 2005; however,
for individual clients not residing in any of the countries affected by this Directive and
non-resident corporate clients, Luxembourg taxes will likely be non-applicable to you
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allowing you to bank there with no local tax obligations. As always, it is advisable to
seek the counsel of your tax professional to identify your status.
Luxembourg Banking Services
Most of our discussion of Luxembourg has focused on investing and this is generally the
only use for which we recommend Luxembourg to our clients. Luxembourg does offer
commercial banking services for non-resident businesses; however, there are more
favorable options such as Isle of Man for most of these customers. Luxembourg is
suitable for clients seeking private banking and investment services or for large
businesses that may have an interest in establishing a physical presence in Luxembourg.
Austrian Banking
Austrian banks have a rich history dating more than 200 years. Austrian banks offer a
variety of services; however, for foreign individuals and non-resident legal entities they
are probably best used for private banking or for commercial entities looking to conduct
business in the booming Eastern European market. Austrian banks have had a presence
in Eastern Europe for over two centuries, but they have been rapidly expanding there as
well as in Central and Southeastern Europe since 1990. This was a bit of a gamble at the
time, but the gamble has paid off as many of these economies are among the fastest
growing in the world.
Banking secrecy is enshrined in the Austrian Constitution. This secrecy can only be
lifted by an Austrian Court Order for the purpose of investigating a criminal case or one
involving criminal tax fraud (forgery of documents). Tax evasion reaches the criminal
threshold when the evaded tax amount is 75000 Euro or the foreign currency equivalent.
While just slightly less appealing than the Swiss laws, Austrian banking secrecy is still
very solid by international standards.
Austrian banks are regulated by the Bankwesengesetz (The Banking Act) of 1994.
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Austrian banks are slightly less expensive and a much lower profile option to Swiss
banks. They offer solid private banking services as well as a few specialized products.
We generally recommend Austrian banks for commercial entities conducting business in
Eastern Europe and private banking clients, but we do have one bank in particular who
offers specialized products to US and Canadian clientele.
Swiss Banking
Swiss Banking History
Swiss banks and Swiss banking secrecy have their roots dating back more than 300 years.
Swiss Banks have long been famous for their privacy, security and superior private
banking services. Indeed, Swiss banks have proven themselves many times throughout
history to be both secure and committed to the privacy of their clients. In fact, it was
attacks on Swiss banking secrecy promulgated by Hitler in 1931 as well as French leftists
looking to uncover account information regarding French Aristocrats in 1932 that caused
the Swiss Parliament to codify the Swiss banking code into the Banking Law of 1934,
which still governs today.
Swiss Banking Laws and Regulations
The Swiss Banking Law of 1934 is a comprehensive piece of legislation which is still the
basis for the current legal and regulatory structure governing the Swiss banking industry.
One of the most important components of the Banking Law of 1934 was a provision
which criminalized violators of banking secrecy. It is important to note that Swiss
banking secrecy cannot be lifted by tax authorities or for requests made by treaty partners
for information requests relating to possible tax evasion. Tax evasion is only considered
an administrative offense in Switzerland. Swiss banking secrecy may only be lifted in
cases of serious criminal matters such as crimes relating to tax fraud, money laundering,
drug trafficking, weapons smuggling and terrorist financing.
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In line with internationally adopted practices, Switzerland has adopted mutual legal
assistance treaties and cooperates with foreign governments on
matters relating to serious crimes such as criminal tax fraud (falsifying or forging
documents), money laundering, drug and weapons trafficking and terrorist financing.
Although many in the offshore world see this as a potential sign of weakness and a
harbinger of things to come, our view is that this is ultimately good for Switzerland and
its image. Switzerland is not likely to allow this to be abused by foreign tax authorities.
As mentioned earlier, tax evasion is only an administrative offense in Switzerland and
thus does not rise to the necessary level of serious crime required to cooperate with
foreign governments on these matters. They have also elected to reject the information
exchange option of the EU Savings Directive, instead opting for the withholding route
and preserving the privacy of their banking clients.
Switzerlands storied history of privacy and neutrality is still alive and well today.
Privacy and neutrality remain cornerstones of banking laws and regulations.
Accordingly, Switzerland has refrained from applying for entry into the EU and it has
rejected most attempts by the EU to impose itself and infringe upon Swiss Independence.
Swiss Banking Institutions
Over 500 licensed bank and securities dealers operate in Switzerland holding
approximately 35% of the world banking deposits. These range from major international
banks to smaller Swiss private banks. The options vary from small independent Swiss
banks to large international banks, the two largest of which UBS and Credit Suisse hold
over 50% of Swiss banking deposits. For a variety of reasons, but mainly due to
international pressure placed on these two institutions by the USA and UK (where they
have a substantial presence), we do not recommend either of these Swiss banks to our
clientele seeking private banking.
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Swiss Banking Services
Swiss banks provide a variety of services but are best known, and indeed probably best
utilized, for private banking and wealth management for high net worth clients. Swiss
banks offer access to every international market and nearly every type of investment
imaginable, all supported by some of the
brightest financial minds in the world. The preferred Swiss banking partners of Sterling
Offshore certainly fit this description.
Liechtenstein Banking
Liechtenstein banks are similar to Swiss banks but on a smaller scale. There are only
sixteen Liechtenstein banking institutions and a few of those are actually branches of
Swiss banks. Twelve of the banks were granted licenses within the last four years.
Other than obviously being smaller and having fewer institutions, Liechtenstein shares
many similarities with Switzerland including being an independent state outside of the
EU.
Liechtenstein Banking Laws and Regulations
Liechtenstein banking laws and regulations closely resemble those of Switzerland. For
instance, tax evasion is also considered an administrative matter and not a criminal
offense. Liechtenstein only has one Mutual Legal Assistant Treaty and that is with the
United States. It is important to note that this treaty does not include probes into matters
concerning possible tax evasion since this is not considered a criminal matter.
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After a couple of high profile money laundering cases earlier this decade, Liechtenstein
implemented a law which increased internal regulation and auditing while also allowing
for a process where foreign governments may request assistance into criminal matters.
The foreign government must petition the Liechtenstein Court to have the authorities
conduct an investigation. There is an appeal process allowing the accused party to
possibly thwart the investigation. These are generally only for tax fraud (falsifying or
forgery of documents), money laundering, terrorist financing, weapons smuggling and
drug smuggling and other serious criminal offenses. For anyone concerned that this is a
harbinger of things to come, the ruler of the Principality, Prince Alois told Bloomberg
News in 2006 that Liechtenstein banking secrecy is very firmly anchored in
Liechtenstein. He went on to say that any measure to change this or water down existing
Liechtenstein banking secrecy laws would likely be rejected if put to a referendum to the
people.
Liechtenstein Banking Services
Liechtenstein banks are most noted for their private banking facilities and indeed offer
sophisticated, individualized services for clients. Access to international markets and a
host of investment instruments are available. Investment income on non-resident
accounts is not liable to local taxation. Commercial banking is generally not available
and/or practical for foreign companies.
In addition to those discussed previously, many other tax haven jurisdictions remain
popular for banking including the British Virgin Islands (BVI), Cayman Islands, Belize,
Panama, Bermuda, etc. For basic banking services, Barclays (Seychelles) is a fine
institution and one that we often establish along with a Seychelles IBC.
Asian Banking
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More recently, the Asian banks have made a strong push into the offshore banking realm
with both Hong Kong and Singapore gaining in popularity. Both of these require the
company to be established in the jurisdiction. Additionally, company incorporation is
generally more expensive with more restrictions than other popular jurisdictions.
Sterling Offshore continually researches the offshore banking sector in order to advise
clients on the best jurisdiction and bank for their particular needs. New agreements
between countries are being signed regularly affecting international depositors to the
institutions. We monitor these agreements and work closely with our partner banks to
provide timely and accurate information concerning the offshore banking world to our
clients.
Offshore Asset Protection
There is no better way to protect your affairs and privacy from potential adversaries than
through the creation of a well constructed offshore structure. As many countries become
increasingly more litigious, governments continue to encroach on civil liberties and
privacy and technology continues to make it easier for hungry lawyers to search for assets
while making the decision whether or not you are "sue worthy", many would benefit
from establishing an offshore presence to protect at least a portion of their assets.
Offshore Asset Protection Structures
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A variety of offshore components may be utilized in an offshore asset protection structure
including private foundations, offshore trusts, offshore companies, offshore bank
accounts and/or an offshore brokerage account. It may even be possible to maintain assets
in their current location while merely transferring ownership of the assets into an offshore
asset protection structure as well.
Offshore asset protection structures generally involve at least one offshore trust or
offshore private foundation perhaps coupled with an underlying offshore company.
Utilizing multiple jurisdictions is often desirable making it more difficult to locate and
win judgements against any assets.
Clients are advised that in order to set up a proper asset proctection structure, the client
must be willing to give up "ownership" of the actual assets being placed into it. Not to
worry though, as many legal and contractual safeguards are put into place as well as the
possibility to appoint protectors or guardians ensuring the assets will always be utilized
per the Foundation Charter or Trust Deed and associated documents as set out by the
Founder/Settlor.
While both offshore trusts and private foundations are useful in setting up asset
protection structures, a fair amount of offshore trusts established are
invalid and would be labeled "sham" trusts if ever challenged in a court. In fact, a leading
international trust expert conducting a very informal poll of the trust practitioners in a
popular offshore jurisdiction asked the practitioners how many of the offshore trusts
established by them would likely be considered "sham" trusts by the courts if challenged.
The answer was shocking: "75-80%..... but that is what the clients wanted" was the
general response. Clients establish the trusts but the settlor remains very much in control
of the administration of the trust in some cases. Often times, assets are never actually
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placed into the trust which means they obviously cannot be under the protection of the
trust. These are common occurrences which can lead to adverse court decisions.
Offshore Foundation
Due to the issues above and the fact that courts are able to "interpret" the legality of trusts
at all, Sterling Offshore prefers the use of the offshore private foundation for most asset
protection structures. Offshore foundations are much more versatile than the offshore
trust, are based in civil law meaning they are not up for "interpretation" by the courts and
offer a great deal of protection to the participants in the structure. The fact that the
offshore foundation is also legally separate from the Founder and beneficiaries and has
no legal "beneficial owner" makes it an invaluable tool in offshore asset protection. The
foundation itself is the "owner" of all assets (which may include shares of a company)
placed into it. This may be beneficial in countries with strict reporting requirements and
tax consequences regarding "controlled foreign corporations" (see your tax advisor as this
varies among countries).
Offshore Bearer Share Company
One of the best privacy tools still available today is the offshore bearer share company.
While the availability of jurisdictions offering bearer share companies is decreasing and
restrictions are generally increasing, Sterling Offshore still offers services in several
jurisdictions that offer allow shares to be issue to "bearer". We offer a Seychelles bearer
share company, Panama bearer share company, Belize bearer share company and BVI
bearer share
company. Panama and Seychelles offer the best terms regarding government fees and
restrictions.
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Opening bank accounts for bearer share companies is generally a bit more difficult;
however, Sterling Offshore has several banking options with reputable banks with whom
we can open bank accounts for a bearer share company.
Perhaps a better alternative to the bearer share company is the issuing of registered shares
to a nominee shareholder. We also frequently issue the shares in the name of a private
foundation when setting up an asset protection structure or to a trust with the foundation
as the beneficiary of the trust.
Offshore Bank Account
The last but probably most important component of a offshore asset protection structure
is the offshore bank account. Unfortunately, this is probably also the weakest point of any
structure and the likely target of any queries into your affairs. Especially considering the
increasing disregard of legal structures and focus on the "beneficial owner" in some
countries, it is critical to both create the right structure and establish the right offshore
bank account for your offshore asset protection structure.
Sterling Offshore is able to provide introductions for the purpose of establishing an
offshore bank account. . The applications and requirements vary depending on the
institution.
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Offshore Banking Facts
Offshore banking and offshore banks are often misunderstood and intentionally maligned
by governments of high taxing jurisdictions. It is important to note that just like an
offshore company, an offshore bank is merely a bank domiciled in a country other than
that of the persons country of residence, domicile or citizenship. Hollywood has also
done a good job of associating offshore banking with cigarette boats, private jets and
criminals of all kinds. In reality, these offshore jurisdictions and offshore banks are very
different than what typically conjures in the mind. Let us look at some myths and facts
about offshore banking with an unbiased and historical perspective.
Myth #1
Offshore banks are only used to evade taxes.
Fact: Popular offshore banking jurisdictions often provide a number of benefits over
onshore banks including lower administration costs, higher interest rates, the ability to
deposit and transact in multiple currencies, increased privacy, access to otherwise
unavailable international investments, sophisticated private banking, the ability to
facilitate international business transactions, etc. Additionally, offshore banking provides
increased asset protection from potential extraneous lawsuits, unstable governments,
unstable economic conditions, unlawful seizure, etc.
Myth #2
Offshore banking is only conducted by money launderers, drug dealers, weapons
smugglers and terrorists.
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Fact: There is no question that offshore banks are abused by some of these unwanted
elements. Let us maintain a proper perspective on this however. These same elements
have been offshore banking in the US and UK for many years due to the lax restrictions
on foreign deposits in these two countries. Conservative estimates put the total amount
of money held in US banks from proceeds of money laundering at $300 billion. In fact,
many
offshore banking jurisdictions have better laws and regulations than either of these two
countries. All jurisdictions offered by Sterling Offshore have implemented the 40
recommendations of the OECD (Organization for Economic Co-operation and
Development) FATF (Financial Action Task Force). In 2006 the FATF commenced a
review of all of the major financial jurisdictions and found only the USA to be non-
compliant due to, amongst other things, insufficient information exchange concerning US
depositors.
Myth #3
Offshore banks are less secure than onshore banks.
Fact: Many of these banking jurisdictions offer banking histories and current conditions
far superior to their international counterparts. Switzerland is estimated to hold over
35% of the worlds banking deposits and our premier banking partner there has been in
business for over 300 years. Cayman Islands is the 5th largest banking jurisdiction in the
world. Panama has over 130 major banks including many of the largest international
banks in the world.
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Depositors need to consider all factors when choosing a banking jurisdiction. Many of
these offshore banks and banking jurisdictions have histories far superior to that of banks
in their own country. Many have lending practices that are much stricter than that of the
banking institutions in their own countries. How safe are deposits for US depositors who
have money held at any of the US banks that have been lending money at alarming rates
with alarmingly low reserve requirements with the recent subprime debacle? Can anyone
figure our the trillions and trillions of dollars in derivatives (supposedly backed by
something) that have been spun out of these institutions? How safe is the US dollar which
is no longer backed by anything of substance and only a guarantee by a government that
cannot balance a budget? How about depositors in the UK with the debacle of Northern
Rock and subsequent nationalization by the government?
International Offshore Banking
There is a staggering amount of money in the world, and more and more of it is in
offshore jurisdictions.
According to a study by consulting firm McKinsey and Company published in January,
2007, the value of total global financial assets, including equities, government and
corporate debt securities, and bank deposits, expanded to $140 trillion in the 12 months to
the end of 2005, an increase of $7 trillion from a year earlier. That is a growth rate of
5.3%.
There are no consolidated figures for the growth in offshore assets - many jurisdictions
simply don't release figures. But for those that do, it is clear that the rate of increase in
banking, trust and fund assets dramatically outpaces McKinsey's global figure. In Jersey,
for instance, banking assets were GBP159bn in December, 2004; by September, 2006,
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they stood at GBP188bn. That is an annual growth rate of 10.2%, roughly double the
global rate; and Jersey banking is by no means untypical of offshore
performance. Indeed some other jurisdictions have shown higher growth rates; and fund
assets have grown faster even than banking ones.
With 'onshore' high-taxing countries chopping finer and finer in order to remove tax
loopholes, and imposing ever more stringent anti-money-laundering rules, it is no
surprise that more and more people move their assets offshore, if they are able to.
The purpose of this special feature is to describe the history of offshore banking, and to
contrast the offshore banking sector with its onshore rival.
A Very Potted History of Offshore Banking
If the words 'offshore banking' conjure up for you a shadowy figure wearing a Panama
hat and crumpled white suit, smoking a cigar, and probably sipping cocktails from a
hollowed out coconut, then you've clearly been reading too much John Grisham. Stop it.
It isn't good for you. In an increasingly globalised world, in which more and more of the
population are becoming internationally mobile, and need financial services which reflect
their circumstances, offshore and international banking has moved on. The growing need
for international banking on both a personal and corporate level has led to an increase in
the number and quality of financial centres, both offshore and on, and the diversity of
financial services offered.
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As a result, there is a huge spectrum of different offshore banking services available to
expats, international investors, globetrotters, international consultants and corporations,
offering varying degrees of return, protection, and privacy. Before we look into the
different sorts of offshore bank account available, however, a brief rundown of the
background of this ever-growing industry is necessary, in order to understand the present
situation.
As more and more financial institutions became keen to establish themselves on an
international level, regulators perceived a need for greater banking
regulation, and introduced a set of minimum standards and safeguards, known as the
Basle Accord (introduced 1988). The Accord outlined the requirements necessary for
banks to obtain licenses, which included two minimum types of bank capitalisation- core
capital and supplementary capital. Core (Tier 1) capital is basically a mixture of
shareholder equity and disclosed reserves, and supplementary capital is a mixture of debt
and equity instruments. (Wake up there, you at the back! There is a reason why we're
telling you this).
The Basle Accord set the minimum capital adequacy level for each type of bank capital at
4%, meaning that many banks operating in countries under this accord were forced to
increase their capital reserves and to invest in 'safer' investments. Recently introduced
modifications to the original Basle Accord (originally enough, called Basle 2, and
running to 541 pages) seek to align capital requirements with the underlying risks of
loans made, and will further affect the amount of capital which each bank is required to
hold. This may mean that banks in countries which are operating under the Basle Accord
are forced to be more cautious about the instruments in which they invest, resulting in
potentially less attractive returns. However, in non-Accord countries (which includes
many offshore jurisdictions), regulation of this kind is usually down to the regulatory
authorities of the jurisdiction, and the required capital adequacy levels can vary.
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Other legislative issues have also had an effect on the offshore banking world. Initiatives
by the OECD/FATF/G7 countries to combat money laundering have, in the process,
severely damaged the banking secrecy laws of many offshore jurisdictions. 'Know your
Customer' legislation has meant that privacy in high tax and certain low tax jurisdictions
has been jettisoned in return for international acceptance. In addition, US rules have
introduced 'Qualified Intermediary' status which also imposes more stringent controls on
any institution wanting to avoid having to tax US-source income regardless of the
nationality or tax status of the recipient. For all these reasons, opening an offshore
account can now often require a small rainforest's worth of paperwork.
The OECD's first shot across the bows of banking secrecy was fired in earnest with the
release of a report in 2000 into improving access to bank
information for tax purposes, endorsed by all 29 members of the organisation. Although
the report was more a statement of intent rather than a detailed plan, it set the template
upon which national tax authorities could obtain information about specific individuals or
companies whom they have reason to suppose are engaged in tax evasion or criminal
activity.
Although many offshore jurisdictions have responded to the pressure brought about as a
result of their blacklisting by the OECD and the FATF by strengthening legislation
against money-laundering and introducing better controls over financial institutions, the
high tax countries have failed to really galvanise a move towards any comprehensive
dilution of banking secrecy, and the international framework of mutual assistance treaties
remains largely as it was.
Indeed, the high-tax countries themselves are gradually being forced by peer pressure and
international regulations to tighten up their own regimes.
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In January, 2007, for instance the UK took the latest in a series of EU-inspired measures
when Economic Secretary to the UK Treasury, Ed Balls, published draft money
laundering regulations for consultation.
The regulations are designed to implement the EU's Third Money Laundering Directive,
and have already caused controversy.
Offshore Versus Onshore in 2007
It is unlikely that the relative advantages of offshore will be undermined in the short term
at least. The OECD's rather uneventful Global Forum on Taxation in Berlin in June 2004
encouraged participants to continue to strive towards effective exchange of information
and transparency by 2006, although it was also recognised that flexibility is required
since many
participants have not yet initiated negotiations towards the required signing of bilateral
agreements.
The OECD claims however that substantial progress has been made. A report from the
Global Forum secretariat in 2006 stated that countries continue to improve their
international cooperation to combat tax abuse by putting in place mechanisms which
enhance transparency and exchange of information for tax purposes. Many of the
economies reviewed have enhanced transparency by introducing rules on customer due
diligence, information gathering powers and the immobilisation of bearer shares. Most
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have entered into double taxation conventions and/or tax information exchange
agreements, and many are engaged in negotiations for such agreements.
The OECD also noted that none of its member countries, and very few non-members,
now make domestic tax interests a condition for responding to a treaty partners request
for information on a specific taxpayer. However, the Organisation argues that more
progress can be made to improve global tax transparency, and stated that some countries
still place constraints on international co-operation to counter criminal tax matters and a
number continue to impose strict limits on access to bank information in civil tax matters.
"The direction of change is clear," Paolo Ciocca, Chair of the OECDs Committee of
Fiscal Affairs and Co-Chair of the Global Forum stated. "Onshore and offshore financial
centres are prepared to work towards the implementation of mutually agreed standards. I
look forward to the day when the centres that have met these standards are joined by
other jurisdictions that have not yet achieved them," he added.
Leasi P. T. Scanlan, Governor of the Central Bank of Samoa and also a Co-Chair of the
Global Forum, said the report demonstrated the ability of OECD and non-OECD
countries to co-operate in order to prevent their financial centres being misused for illegal
tax avoidance and evasion. "This has been a huge undertaking but we now have a clear
idea of where we stand. It is an important step in helping countries to work towards a
level playing field so that these abuses do not simply shift from one financial centre to
another," he observed.
It must be made clear that although in most countries, having an offshore account is not
illegal in itself, the illegality comes when the client doesn't declare the account, or the
income from it. Banks in jurisdictions with strong banking secrecy legislation tend to
place the onus for this reporting on the client themselves (which is not to suggest for a
moment that they recommend not reporting the income, merely that they do not volunteer
the information to other countries, and will usually reject requests for the client's personal
details unless there is evidence of criminal activity).
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Despite the efforts of the OECD countries to restrain the offshore banking sector, the
reality is that in most offshore centres, deposit totals have shot up in recent years, and
seemed to be having a particularly good year in 2006, with double digit percentage
increases in many cases.
Is Offshore Banking Legal?
This is one of the frequently asked questions about offshore banking, and in short, YES,
offshore banking is legal. Offshore banking is so legal that, it's always going to remain
legal. Offshore banking is a benefit to all of society and is indispensible. Using offshore
banking for tax evasion purposes is what is not legal, and that is usually what is
associated with offshore banking in general and is the cause of the misconception.
Offshore banking is also associated with criminal activities such as money laundering.
This article will clarify the distinction and examine why offshore banking remain legal.
The term offshore was originated from the British Channel Islands, tax havens located
literally offshore from the United Kingdom. Now the term is used to refer to all tax
havens whether islands or not. Technically, just moving your money from an account in
your country of residence to another jurisdiction is considered offshore banking, even ifit's not a tax haven. This is the main reason why offshore banking will always be legal.
How can it be illegal to move money from one country to another?
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Individuals and businesses, large or small, and even governments all have the need to
move money around the world. If moving money from one country to another was illegal,
our global economy would have serious problems and i don't see how we could make it.
We are constantly ordering items from eBay and some do so from other countries. People
use Paypal accounts to transfer funds when ordering online. Governments are involved in
import export activity and have to pay for it somehow. So again, no one can stop you
from taking your money to another country; it is a legal and everyday process that will
remain that way.
The thing that is NOT legal is banking offshore for tax evasion. Depending on which
country u reside in, it is usually illegal to take money out of the country or making money
overseas and never submitting it to your country of residence or declaring it. as stated,
this depends on your tax status and country of residence. For instance, in the United
States, the federal government requires all citizens to declare all taxable assets regardless
of where they are located in the world. Failing to do so is committing a criminal offense.
There are ways around this though, such as expatriating for certain amount of time to
save on taxes. International companies can also reduce their tax burden through using a
slick network of offshore bank accounts and IBCs. And another thing to keep in mind is
that a lot of countries don't charge income tax on money earned out of the country and
brought in. They also don't tax interest earned on accounts.
So, if US citizens and UK and European citizens can't even save tax through offshore
banking, how can it be beneficial?
Saving on taxes is not the only advantage of using offshore banking accounts. There are
many other benefits, including but not limited to:
-Optimized account Privacy
-Protection from aggressive litigations
-More competitive account structures ad interest rates
-global access to your money
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-Ability to bank in multiple currencies
-Access to global business opportunities
And not to forget that those who reside in countries with corrupt or unstable economic
systems have the opportunity to bank in an economically and politically stable
jurisdiction.
Characteristics of Offshore Centres
The analysis of the select offshore centres presented reveals that the characteristics of the
offshore banking centres are:
(a) Local capital requirements are low or non-existent;
(b) License fees are low;
(c) Entry is relatively easy and
(d) Taxes and levies on offshore business are virtually non-existent.
]
In none of the offshore centres enumerated above minimum reserve requirements onoffshore liabilities are levied or withholding tax on income is deducted. A major feature
of offshore centres is their proximity to important loan outlets or deposit sources.
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Offshore Centre For India
Introduction
Mobilisation of resources to finance domestic economic development through the setting
up of an Offshore Banking Facility was attempted earlier by Panama and Philippines. The
existence of an offshore center, tax haven or international capital market benefits the host
country enormously; through the capital inflows the financial center brings and increasesemployment and income.
Objectives of the Offshore Banking Centre
The raison d etre for setting up of an Offshore Banking Center (OBC) is that it would
help foster a regional capital market which enlarges the flow of foreign capital to raise
the level of domestic investment. The Expert Group on Foreign Exchange Markets in
India (1955) set up by the Reserve Bank of India also suggested the setting up of the
offshore centre within India to encourage offshore transactions towards development of a
financial centre particularly for countries which have not yet achieved capital account
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convertibility. According to the Expert Group the setting up domestic Offshore Banking
(OBUs) is seen as an interim (but necessary) step towards development/sophistication of
the Indian foreign exchange markets Units. Any future plans of full convertibility of the
Indian Rupee according to the Group are greatly dependent on narrowing the gap
between international financial markets and domestic markets. Domestic OBUs offer the
benefit of providing Indian financial institutions global know-how/human
skills/technology/infrastructure in a relatively controlled environment prior to opening up
the foreign exchange markets to full impact of convertibility.
India has a special position in South Asia in terms of productive network, skilled
manpower and technology. Financial and banking services in India which are yet to adopt
modern technology would be exposed to international finance and business based on
electronic data processing and
telecommunication networks if we set up an OBC. According to the Expert Group there
are a multitude of benefits in setting up a centre such as: (a) increase in skilled
employment (both direct and with multiplier effects); (b) imparting of valuable training
and exposure to international banking for local financial institutions; (c) increasing depth
and scope of services available to exporters/importers/investors; (d) increased investment
in world class infrastructure and transfer of latest banking technology, especially treasury
skills and products on an ongoing basis. In addition several other indirect benefits like
attracting regional (South Asian) foreign exchange business and improved international
perceptions of the country with foreign investors/institutions.
International banks based at the offshore centre can augment the foreign exchange
resources of India. Foreign commercial capital can play a key role in making rapid
growth possible. India can absorb billions of Dollars in investment capital and spew
everything from hot rolled steel to sewing machines. Since capital is obtained on
commercial terms, it can be used to buy the machinery, equipment and raw materials at
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the most competitive prices internationally. It also leads internally to the adoption of
more rigorous investment criteria whit beneficial impact on resource allocation.
The offshore banking centre would also enable the Indian banking system to handle the
surpluses and needs of genuine international transactions. Indian banks operating at the
OBC apart from borrowing in the interbank market can mobilize resources directly from
abroad and attract deposits from persons of Indian origin resident abroad and surpluses
from the overseas earnings of Indian companies. Indian banks could use the resources
they mobilize to book approved loans to finance projects in India and undertake
intermediary business in non-domestic currencies on their own account and on behalf of
non-residents.
The current trends in international liquidity when banks are fairly liquid and emerging
improvement in the credit rating of India combined with a deregulation and
administration of whatever controls we have intelligently and flexibly may attract an
adequate number of international banks representing the spectrum of international capital
market. The flow of foreign capital could help India experience rapid economic growth
by investing in infrastructure and by adopting latest technology which would raise
productivity and improve the competitive position of Indian manufactures in the world
market.
It is suggested that an offshore banking centre may be set up in Mumbai. Foreign banks
of standing and repute representing different geographical areas across the continents
may be invited to participate provided they keep separate books for their transactions at
the OBC.
Conditions for the success of the Offshore Centre
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The factors that are generally considered essential for the successful working of an
offshore centre are the absence of taxes, exchange regulations and bank supervision and
control. While they are essential, they are not adequate to make a centre a success. It is
the understanding they are not adequate to make a centre a success. It is the
understanding and flexibility with which the government and central bank deal with the
international banks that is more important. London had more offshore business than
domestic business in almost all the 25 years of the exchange risk and inflation risk.
Actually, the British financial circles and the financial system when confronted with
replacement of sterling as a world liquidity medium by the dollar they just turned to
dollar and started accepting dollar deposits and deploying them outside the United States.
Similarly, Singapore until 1978 operated with an exchange control system and even today
offshore banking is segregated from domestic banking system. Neither London nor
Singapore which really were offshore centres par excellence can be called tax havens.
The taxes are quite onerous in London; and Singapore has taxes which make it less
attractive than other centres. Although, offshore business is subject to various taxes,
banks still book their business in Singapore and London than in some tax haven or brass
plate branches in the Caribbean or Pacific. In the case of Bahrain also which has all the
features we would consider essential for the success of an offshore centre, such as the
absence of taxes, exchange controls and bank supervision still has not made as rapid
strides as Singapore. Bahrain has been successful because of its political acceptability to
Arab World which has surplus funds.
Fiscal the taxes that are relevant for international banks decision to open a branch at the
offshore banking centre are the tax on net profits and the withholding tax on interest.
Since international banking is carried out on small margins say a quarter per cent or one
eighth per cent a tax on net profits as in the case of India would make it unattractive for
the banks to come to India. They may prefer to book the transactions if it lends to Indian
constituents at a no tax or lower taxes centre rather than India. The only exception would
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be the case of a centre like London which has the skills and infrastructure in a degree to
outweigh the tax advantage of booking the transaction at a tax haven. In Panama offshore
banks transactions with non-residents are exempted from tax while those with residents
are subjected to tax. In Singapore and Philippines offshore income is subjected to a lower
rate. In regard to Indian banks which set up offices at offshore centre their offshore
income may be exempted or treated on par with those of foreign banks.
Tax on interest which is withheld at source acts as a much greater deterrent than tax on
net profits. Since offshore banking is essentially an interbank transaction banks gave to
pay tax on their borrowing, interest plus withholding tax. If there is a withholding tax in
the borrowers country, the borrower has to pay the withholding tax himself to enable the
lender to realize the return which he can obtain tax free in another country. Withholding
taxes on interest are really a tax on solved by segregating offshore transactions and
exempting them from any tax on interest paid as Singapore and Hong Kong have done.
Exchange Control: It is assumed that the present exchange control will continue. This
assumption is reasonable in the context of setting up of an offshore centre, since several
countries operated their centres with exchange control such as UK and Singapore. But
banks in the offshore banking centre be they international banks or Indian banks should
have complete freedom to do intermediary business in nondomestic currencies. Dealing
in foreign exchange or buying or selling of currencies on a spot or forward basis is a
normal function of a bank in the international capital market which is what the offshore
centre would be. A standard foreign exchange activity is the
creation of deposits for lending purposes. A US bank will trade dollar for Deutsche marks
or a Deutsche mark loan and vice versa. Even if one had dollars to make a dollar loan the
forward exchange rate may be such that it is cheaper to take a deposit in another currency
for the appropriate period of time and swap it into dollars on a matched basis.
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Banks in the international markets also meet the needs of customers by spot and forward
transactions enabling the constituent to match or cover his own currency position. But
banks rarely confine themselves to merely matching transactions. Banks normally
anticipate constituents requirements or market movement by taking a position for or
against a particular currency. Such major exchange positions contribute significantly to
profits. Banks do observe internal limits to open positions where they are either long or
short in a currency on a spot or forward basis and to forward positions where they have a
matched position overall concealing long and short positions within the overall maturity
ladder.
Banks at the offshore banking center may be allowed to square their position either
through inter