| Offshore Finance Industry and Offshore Financial Centers Generally the term, Offshore Financial Industry, refers to the financial services of banks and other agents provided to non-residents. These services include the borrowing of money from non-residents and lending to non-residents. Additional services generally associated with the offshore financial industry are fund management, insurance, trust business, tax planning, and International Business Company (IBC) activity, gambling licenses, yacht and shipping registration, and expatriate services. Source: IMF |
| Offshore Financial Centers (OFCs) At its broadest, an OFC can be defined as any financial center where offshore activity takes place. Generally they are small jurisdictions such as Jersey, Bermuda, or Guernsey that make a living through attracting financial capital from all over the world. A more practical definition of an OFC is a center where the bulk of financial sector activity is offshore on both sides of the balance sheet, (that is the counterparties of the majority of financial institutions liabilities and assets are non-residents), where the transactions are initiated elsewhere, and where the majority of the institutions involved are controlled by nonresidents. Thus OFCs are usually referred to as: * Jurisdictions that have relatively large numbers of financial institutions engaged primarily in business with non-residents; * Financial systems with external assets and liabilities out of proportion to domestic financial intermediation designed to finance domestic economies; and * More popularly, centers which provide some or all of the following services: low or zero taxation, moderate or light financial regulation, banking secrecy, political stability, and discretion (which is really a rightful exercise of a nation's sovereign authority to not help a foreign government tax economic activity inside its own borders). Source: Center for Freedom and Prosperity. Better governed countries are much more likely than others to become tax havens, this according to a recently released paper by James Hines and Dhammika Dharmapala entitled, "Which Countries Become Tax Havens?" |
| Further Classifications Attempts have been made to further classify Offshore Financial Centers using criteria that includes the type and effectiveness of regulatory standards and infrastructure. * International Financial Centers (IFCs)—such as London, New York, and Tokyo—are large international full-service centers with advanced settlement and payments systems, supporting large domestic economies, with deep and liquid markets where both the sources and uses of funds are diverse, and where legal and regulatory frameworks are adequate to safeguard the integrity of principal-agent relationships and supervisory functions. IFCs generally borrow short-term from non-residents and lend long-term to non-residents. In terms of assets, London is the largest and most established such center, followed by New York, the difference being that the proportion of international to domestic business is much greater in the former. * Regional Financial Centers (RFCs) differ from the first category, in that they have developed financial markets and infrastructure and intermediate funds in and out of their region, but have relatively small domestic economies. Regional centers include Hong Kong, Singapore (where most offshore business is handled through separate Asian Currency Units), and Luxembourg. * OFCs can be defined as a third category that are mainly much smaller, and provide more limited specialist services. As noted above, OFCs as defined here, still range from centers which provide specialist and skilled activities, attractive to major financial institutions, and more lightly regulated centers that provide services that are almost entirely tax driven, and have very limited resources to support financial intermediation. Small countries, with small domestic financial sectors, may choose to develop offshore business and become an OFC for a number of reasons. These include income generating activities and employment in the host economy, and government revenue through licensing fees, etc. Indeed the more successful OFCs, such as the Cayman Islands and the Channel Islands, have come to rely on offshore business as a major source of both government revenues and economic activity. OFCs can be used for legitimate reasons, taking advantage of: (1) lower explicit taxation and consequentially increased after tax profit; (2) simpler prudential regulatory frameworks that reduce implicit taxation; (3) minimum formalities for incorporation; (4) the existence of adequate legal frameworks that safeguard the integrity of principal-agent relations; (5) the proximity to major economies, or to countries attracting capital inflows; (6) the reputation of specific OFCs, and the specialist services provided; (7) freedom from exchange controls; and (8) a means for safeguarding assets from the impact of litigation etc. They can also be used for dubious purposes, such as tax evasion and money-laundering, by taking advantage of a higher potential for less transparent operating environments, including a higher level of anonymity, to escape the notice of the law enforcement agencies in the "home" country of the beneficial owner of the funds. Source: IMF |
Offshore Manual
