Offshore bank 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:
greater privacy (see also bank secrecy, a
principle born with the 1934 Swiss Banking Act)
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
being "offshore" from the United Kingdom, and most
offshore banks are located in island nations to this
day, the term is used figuratively to refer to such
banks regardless of location, including Swiss banks and
those of other landlocked nations such as Luxembourg and
Andorra.
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 the personal income tax
of many countries 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
accounts—which may or may not be numbered bank
accounts—they may have. Although offshore banks may
decide not to 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
possible crossroads for major illegal money flows.
Defenders of offshore banking have criticized 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 cite the fact
that offshore banking offers a competitive threat to the
banking and taxation systems in developed countries,
suggesting that Organization for Economic Co-operation
and Development (OECD) countries are trying to stamp out
competition.
Advantages of offshore banking
Offshore banks can sometimes
provide access to politically and
economically stable jurisdictions.
This will be an advantage for
residents in areas where there is
risk of political turmoil,who fear
their assets may be frozen, seized
or disappear (see the corralito
for example, during the 2001
Argentine economic crisis). However,
developed countries with regulated
banking systems offer the same
advantages in terms of stability.
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
government intervention. Advocates
of offshore banking often
characterise government regulation
as a form of tax on domestic banks,
reducing interest rates on deposits.
Offshore finance is one of the
few industries, along with tourism,
in which geographically remote
island nations can competitively
engage. 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.
Interest is generally paid by
offshore banks without tax being
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.
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.
Offshore banking is often linked
to other structures, such as
offshore companies, trusts or
foundations, which may have specific
tax advantages for some individuals.
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.
Disadvantages of offshore banking
Offshore bank accounts are less
financially secure. In a banking
crisis which swept the world in 2008
the only savers who lost money were
those who had deposited their funds
in an offshore banking centre (the
Isle of Man). The Isle of Man
Depositors had not receive any
compensation even after 11 months.
We understand that The Isle of Man
compensation scheme in place as at
October 2009 is £20,000 so potential
depositors should be aware that any
deposits over that amount are at
risk.
Offshore banking has been
associated in the past with the
underground economy and organized
crime, 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. However, offshore banking is
a legitimate financial exercise
undertaken by many expatriate and
international workers.
Offshore jurisdictions are often
remote, and therefore costly to
visit, so physical access and access
to information can be difficult. Yet
in a world with global
telecommunications this is rarely a
problem for customers. Accounts can
be set up online, by phone or by
mail.
Offshore private banking is
usually more accessible to those on
higher incomes, because of the costs
of establishing and maintaining
offshore accounts. However, simple
savings accounts can be opened by
anyone and maintained with scale
fees equivalent to their onshore
counterparts. 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 The Laffer curve
demonstrates this tendency.
Offshore bank accounts are
sometimes touted as the solution to
every legal, financial and asset
protection strategy but this is
often much more exaggerated than the
reality.
Depositors of offshore bank accounts
should be aware that they are not tax
free savings and that tax is stopped at
source by the Isle of Man Government and
paid to the UK or country of residence
of the depositor
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
Not every bank provides each service.
Banks tend to polarize between retail
services and private banking services.
Retail services tend to be low cost and
undifferentiated, whereas private
banking services tend to bring a
personalized suite of services to the
client.
Offshore financial centers include:
Antigua and Barbuda
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 30 June
2006. No new Exempt Company certificates are being
issued from that date. [7] [8]
Ghana [9][10]
Hong Kong
Isle of Man
Labuan, Malaysia
Liechtenstein
Luxembourg
Malta
Macau
Mauritius
Monaco
Montserrat
Nauru
Panama
Saint Kitts and Nevis
Seychelles
Switzerland
Turks and Caicos Islands
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