A report extract from Capital Economics:
In a world where national boundaries have ever decreasing significance to people and to businesses, it should come as no surprise that there is demand for services that facilitate efficient and secure cross-border transactions.
This is the context within which offshore financial centres operate. They have evolved to meet the needs of global businesses and internationally footloose individuals. These needs include resolving the complexities of the taxation of cross-border transactions - but are not limited to tax affairs alone.
Typically small self-governing jurisdictions, many offshore centres have developed consistent tax codes, legislation and financial regulations (and fostered appropriate expertise within local businesses) to deliver:
- Jurisdictional neutrality - The offshore centre provides a location that is independent of the home jurisdictions of the various counterparties where transactions can be conducted, whilst adding little or no additional cost. This can be important, for example, when forming joint venture vehicles between organisations from different countries, and maybe helpful when establishing a secondary market for the resale of assets and portfolios
- Administrative convenience - The offshore centre provides a neutral location for administrative tasks ensuring that the business or individual can remain footloose withou risk of additional tax or other costs
- Tax neutrality - The offshore centre permits assets to be pooled, grown and/or distributed across borders without imposing any additional taxation. This is important, for example, when developing fund structures to attract international investors and/or to invest in a portfolio of assets across borders. It ensures that investors are not exposed to double taxation, and only pay taxes due to the authorities in their domicile
- Regulatory specialisation - The offshore centre is able to concentrate resources on regulating specific types of financial sector activity effectively, while larger countries have to spread regulatory resources across a wider range of activities. This bespoke regulation allows specific sectors locating in offshore centres to avoid the unintended inefficiencies of 'catch-all' regulation of larger jurisdictions.
- Country risk mitigation - The offshore centre provides a safe haven, where assets can be kept protected from potential loss, damage or sequestration resulting from socio-political instability or delinquent legal, regulatory or enforcement institutions in a particular country
Some of the offshore centres may also be known for their domestic taxation regimes. Many offer a low tax environment for their residents and the businesses operating there. Low rates of tax on domestic incomes, profits and sales are achievable because of the levels of prosperity locally, which are supported by employment in higher value finance and related jobs. Meanwhile, some offshore centres also offer favourable tax rates to high net wealth immigrants. This is a policy deployed by some larger countries too, such as the United Kingdom with its 'non-dom regime'.
Independent macroeconomic research