Offshore financial centres or International Financial Centres (‘IFCs’) have changed the way that many business organisations and individuals manage their finances and their operations. They are used because they enable individuals and companies to manage their financial or business affairs in a more efficient way than they could in their own country.
Definition of an IFC
IFCs specialise in the creation, registration and
administration of companies and other entities. Most
of these are set up and controlled by companies and
individuals who are resident in other countries, and
many of them are engaged in international trade or
investment activities.
An IFC can be described by its characteristics, which
are as follows:
- it is a jurisdiction, often a sovereign state but possibly a territory of a larger country but with its own local law-making powers. The ability of an IFC to make and apply its own laws is a key feature.
- the centre has a very large number of financial entities owned by and operated for the benefit of non-residents. If the financial entity is a business, it conducts most of its business with non-residents.
- an IFC also has an infrastructure of financial and professional services that is very much bigger than the infrastructure needed to support local businesses. The financial systems and services in an IFC have been established to support the foreign-owned financial entities.
Although regulations differ between IFCs, they are also notable for:
- low rates of taxation relative to other countries, or zero tax.
- relatively light financial regulation, but also welladministered regulations.
- banking secrecy, in spite of international pressure to persuade IFCs to provide more information to the authorities of other countries about the bank details of their nationals.
IFCs have flourished as commerce and finance have become more global. Within the Western-led financial system, there are few restrictions on the movement of money and capital from one country or financial centre to another. Large amounts of capital can be transferred very quickly and at relatively little cost from one country to another.
The freedom of movement of money and capital includes IFCs. Money can be moved into an IFC and out again without restriction, and in any freelytraded foreign currency. When an IFC is able to offer advantages to a foreign company or investor, such as lower taxation or less regulation, it is well placed to attract large volumes of business.
Some IFCs specialise in particular types of business, for example shipping registrations, insurance or hedge funds. However, all of them attract banking and investment business. Whatever types of activity are attracted to IFCs, the centre must be capable of providing the necessary professional infrastructure, such as legal and financial advisors and administrators, as well as efficient communications links.
How much business goes through IFCs?
In the 1960s, there were only a few offshore financial centres, as they were called then, with relatively few financial and legal professionals, and restricted communications links with the rest of the world. Since then, many more centres have developed, the professional infrastructure has grown and worldwide communications links have improved enormously. Reliable statistics about the size and significance of IFCs in the global economy are very difficult to obtain.
There are no official statistics about how much business the centres handle. However, it is certainly the case that:
- a very large proportion of global business is conducted through IFCs, and
- a very large proportion of global assets are owned or held by entities registered in IFCs.
A problem with measuring the size of business in IFCs is that there is no accepted definition of an IFC, and there is no official list of the jurisdictions either. There are many financial centres that compete for global business, but not all of them are IFCs.
Nevertheless, although rather dated and completely unverified, there have been a few estimates of the size of business that takes place in IFCs. In 2000 the IMF reported that they held about 50% of all the world’s cross-border assets. Almost one-third of the world’s Gross Domestic Product (GDP) and half of global monetary stock have been reported to pass through tax havens at some stage (Oxfam, 2000).
US corporations and its richest citizens have apparently (according to a Senate Subcommittee in 2001) deposited some $800 billion in the Cayman Islands alone (or some US$20 million for each person living there) – if true this would represent nearly 20% of all the bank deposits in the USA. The IFCs are, according to the British Government, hosts to some US$6 trillion of wealth (UK Home Office, 1998), nearlyten times the then value of all companies quoted on the London Stock Exchange. Given the surge in the world’s economy in the past ten years, if these figures were close to the truth then, they must have increased dramatically by now.
A brief history of IFCs
Specialist financial centres have a long history, but the use of some financial centres as a way of avoiding payments of tax probably began soon after the end of the First World War and in the 1920s. At that time, Switzerland developed as a banking centre for nonresidents and Bermuda began to establish itself as a ‘tax haven’.
The use of IFCs to manage tax affairs more efficiently, and finding ways of reducing liabilities to tax, developed more strongly from the 1940s. It was not until the 1980s that the concept of the International Business Corporation emerged in centres such as Gibraltar, the Bahamas and the British Virgin Islands.
An International Business Corporation was a company (corporation) established subject to special legislation in the IFC, and which was exempt from many of the regulations to which local companies within the centre were subject, such as tax on their income. More recently, the Organisation for Economic Co-operation and Development (‘OECD’) has led successful moves to persuade some IFCs to abolish the status of International Business Corporations, but the tax benefits for companies based in these IFCs remain.
They were called ‘offshore’ centres because the main centres were originally set up on small islands off the mainland, such as Cayman off the US and Jersey and Guernsey (the Channel Islands) off the UK and European mainland. Companies and individuals on the mainland transferred assets offshore in everincreasing quantities. Today there are many offshore and onshore financial centres around the world.
The IFCs this book focuses on include:
- Bahamas
- Barbados
- Bermuda
- British Virgin Islands
- Cayman Islands
- Dubai
- Dublin
- Gibraltar
- Guernsey
- Hong Kong
- Jersey
- Labuan/Malaysia
- Luxembourg
- Malta
- Mauritius
- Netherlands
- Seychelles
- Singapore
- Panama
- Qatar
There are historical reasons for using the term ‘Offshore Centre’, but it is now widely accepted that the term is misleading because many ‘offshore’ centres are not actually islands off the mainland shore. The International Monetary Fund, for example, appears to have accepted the view that the distinction between ‘offshore’ and ‘onshore’ is difficult to define. As the amount of trade and financial activities conducted through specialist financial centres has grown, centres on the continental mainland have developed similar operations and now compete successfully to attract foreign business and assets. IFCs that are not island jurisdictions include Dubai and the Republic of Ireland, for example. All IFCs compete with major international financial centres to attract foreign business. London, for example, is an example of a well-established ‘mainland’ financial centre that competes aggressively for foreign business. Many foreign companies are listed on the London Stock Exchange and large numbers of non-UK banks use London as a centre for their international banking operations.
The term ‘onshore’ centre is now used for financial centres that are not in island jurisdictions.
