The
term 'offshore' has become
a dirty word to some.
Offshore jurisdictions
are by seen by the press
as nothing more than
tax shelters (or they're
derisively called 'tax
havens').
However,
offshore financial
centers (or OFCs) do
play a crucial role
in the global economy
by ensuring that democratic
nations remain free
and have fair markets.
Offshore financial
centers do this in
two ways. First, they
allow individuals to
legally to avoid punitive
and uncompetitive tax
regimes. Secondly,
they allow multinational
companies to legally
reduce their effective
worldwide taxes by
initiating a group
holding company incorporated
in a 'tax neutral'
offshore jurisdiction,
thereby benefiting
all of their 'onshore'
shareholders.
The
products and services
offered to people by
OFCs offer have attracted
a lot of attention,
and the traditional
benefit of going offshore,
specifically privacy
through banking secrecy,
has been severely eroded
in many jurisdictions.
In spite of this, there
has been a rapid growth
in offshore havens,
and they are increasingly
attracting large amounts
of capital from both
North America and Europe
due to the growth of
products and services
they offer to corporate
and business clients.
For
example, a recent statistics
report has shown that
Canadian direct investment
in offshore financial
centers increased greatly
since 1990 to close
to $73 billion in 2003.
The
report further stated
that ‘from 1990 to
2003, Canadian enterprises
invested substantial
and growing amounts
in countries known
as 'offshore financial
centers’, many of them
in the Caribbean. These
centers include countries
that are often referred
to as tax havens as
well as those which
have important financial
sectors, such as Switzerland,
but also Ireland'.
Consequently,
offshore jurisdictions
increasingly have come
under attack for their
corporate products
and services, particularly
from a group of multi-national
organizations, such
as the Organization
for Economic Co-operation
and Development (OECD)
and the Financial Action
Task Force (FATF).
In addition, in the
year 2000 the UK government
commissioned an independent
review of financial
regulation in its Overseas
Territories. What the
government was seeking
was an assessment of
the extent to which
the UK's overseas territories
complied with international
standards and good
practice in how they
regulated their international
financial sectors.
During
the past four years,
Bermuda, BVI, Cayman
and Gibraltar implemented
virtually all the commission’s
recommendations with
a number of new laws
along with an upgrade
of their regulatory
bodies.
The
British Crown Dependencies
of Guernsey, Jersey
and the Isle of Man
have followed the changes
in the UK overseas
territories and made
equivalent improvements
with their own regulations
and regulatory bodies.
The
EU's savings tax directive
is another example
of an initiative that
has been forced upon
offshore financial
centers in the past
several years, although
this initiative has
been delayed because
of the opposition from
the U.S., Luxembourg,
Switzerland and the
offshore financial
centers themselves.
Because of the extended
negotiations, the implementation
date for the EU tax
directive has been
postponed several times.
The
attacks by the OECD
and FATF have had major
ramifications for the
offshore world. For
example, the country
of Liechtenstein is
making major adjustments
to its constitutional
arrangements in order
to respond to such
attacks in the future.
Some
European bureaucrats
are convinced that
these initiatives have
put the offshore financial
centers off balance
and that most of them
soon vanish. .
Fortunately,
they are greatly mistaken.
Both the EU and the
OECD have wasted great
amounts of time and
resources in pursuing
the offshore financial
centers. In the final
analysis, the changes
implemented by the
offshore jurisdictions
as a result of these
attacks
have made them stronger
and more relevant,
not weaker.
In
particular, the leading
offshore financial
centers have:
-
established new and/or
entrenched their existing
zero/low tax regimes;
-
substantially enhanced
their reputations by
adopting better regulations
and strengthened regulators;
-
extracted important
benefits in return
for imposing greater
regulation, such as
international recognition
for their stock exchanges,
acceptance of banking
secrecy laws, and in
some cases EU treaty
exemptions; and
-
Have been allowed to
sit in at ongoing global
tax forums with equal
negotiating status
under the 'level playing
field' concept.
While
these attacks may have
strengthened some of
the OFCs, they have
had the exact opposite
effect for some of
the multilateral bodies
involved in the process,
especially the OECD,
because the whole process
has attracted negative
attention to them and
opened them up to more
global criticism.
The
leading offshore financial
centers have weathered
the storms extremely
well. This, in part,
is due to the resistance
of the U.S. and the
larger centers, such
as Switzerland. But
it is also because
the offshore financial
centers managed to
establish acceptance
of
the level playing field
concept.
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