Offshore investment

Offshore investment is the keeping of money in a jurisdiction other than one's country of residence. Offshore jurisdictions are a commonly accepted means of reducing the taxes levied in most countries to both large and small-scale investors alike. Poorly regulated offshore domiciles have served historically as havens for tax evasion, money laundering, or to conceal or protect illegally acquired money from law enforcement in the investor's country. However, the modern, well-regulated offshore centres allow legitimate investors to take advantage of higher rates of return or lower rates of tax on that return offered by operating via such domiciles. The advantage to offshore investment is that such operations are both legal and less costly than those offered in the investor's country - or "onshore". Locations favored by investors for low rates of tax are known as offshore financial centers or (sometimes) tax havens.

Offshore centers are widely used and are accessible to anyone who can meet the minimum investment amount or pay the obligatory fees required to open such an entity. Investopedia indicates that, "More than half of the world's assets and investments are held in offshore jurisdictions and many well-recognized companies have investment opportunities in offshore locales."[1]

Payment of less tax is the driving force behind most 'offshore' activity. Due to the use of offshore centers, investors are able to conduct investment activities in a more profitable fashion. Often, taxes levied by an investor's home country are critical to the profitability of any given investment. Using offshore-domiciled special purpose mechanisms (or vehicles) an investor may reduce the amount of tax payable, allowing the investor to achieve greater profitability overall.

Another reason why 'offshore' investment is considered superior to 'onshore' investment is because it is less regulated, and the behavior of the offshore investment provider, whether he be a banker, fund manager, trustee or stock-broker, is freer than it could be in a more regulated environment.

Vehicles for offshore investment

Offshore investing includes investment strategies outside of an investor's home country. Investment opportunities in money-market, bond and equity assets are available through offshore companies.[1]

One may also charter an offshore corporation to provide a legal personality, limited liability, transferable shares, a centralized management, and shared ownership. In some cases the investment advantages of such a corporation are offset by legal, corporate and account registration fees imposed by the country in which the offshore account is established. Further, the officers of the corporation may be required to establish residence, own real estate, or meet an investment minimum (depending upon the country this may range up to $1 million).[1] An advantage which accrues from establishing a corporate structure is that although a citizen may be proscribed from establishing an offshore account, they can establish a corporation that can do so.[2]

Reasons for offshore investment

Motivations for investment offshore include:

Arguments against offshore investment

Reasons which have been advanced against offshore investment include:

Efforts to reduce use of offshore investment for tax evasion

International efforts to reduce tax evasion

The Organisation for Economic Co-operation and Development (OECD), the European Union (EU) and the United States of America (USA) continue to promote improved transparency on tax information and substantial progress has been made in the past 5 years.[6] The OECD has established a threshold of bilateral tax-information exchange agreements, twelve, as the minimum which a country is placed on the “white list” and recognized as having “substantially implemented” internationally agreed tax standards. The OECD “grey list” includes countries which have not achieved “white list” status and are considered as fostering tax evasion through insufficient financial openness. As a result, the Cayman Islands and Liechtenstein implemented financial openness reforms to get off the list and escape the threat of sanctions,[7] while Panama, Luxembourg, Liechtenstein, Switzerland and the British Virgin Islands (BVI) were still on the grey list as of late 2009.[6]

The expansion of the EU has motivated major improvements in tax-related transparency. The EU requires members to exchange tax information using automatic systems by the end of 2011, which assures that Austria, Belgium and Luxembourg are coming into compliance. Further, since January 2007 former tax havens (noted for their banking secrecy and low tax rates for foreign investments) in Bermuda, the Channel Islands (Jersey and Guernsey) and the Isle of Man have achieved “white list” status due to their EU ties.[6]

Panama is currently recognized as one of the more attractive countries for legitimate offshore investment as well as for tax evasion, and is on the OECD “grey list”. Panama’s free-trade zone handles over $19 billion in commerce per year and construction is booming. Corporations are easily created in Panama and, although they are heavily taxed on Panama-domestic operations, they pay no taxes on foreign activities. Company ownership can be readily concealed through the use of anonymous “bearer shares”. As a result, more than of 45,000 offshore shell companies and subsidiaries companies are created in Panama each year; Panama has one of the highest concentrations of subsidiaries of any country in the world. Panama’s banks are well regulated, providing stability and predictability. Panama does not yet participate in tax-information-exchange treaties; since they tax only domestic income, there is no reciprocal benefit in their sharing information with other governments. All these conditions combine to provide advantages to both legitimate business and to tax evasion.[7]

Recent developments

In 2009 the USA initiated increased efforts to close taxation loopholes and identify and prosecute tax evaders using offshore accounts. As an element of this effort, they have pursued amended tax treaties to offset the banking secrecy laws of nations such as Switzerland. In 2010 the USA and Switzerland agreed to a protocol increasing shared tax information to aid the prosecution of tax evasion. As with all treaties, this does not come into force until ratified by the appropriate legislative bodies (in this case the U.S. Senate and the Swiss Federal Council and Parliament).[8]

As one example of efforts to reduce illegal offshore investments made for the purpose of tax evasion, in 2010 the Swiss bank Union Bank of Switzerland (UBS) has paid a fine of $780 million and is cooperating on identifying the estimated 19,000 wealthy U.S. tax evaders who have accounts in UBS. The US Internal Revenue Service has offered amnesty to those who come forward voluntarily.[9] Similarly the banking firm HSBC has been alleged to have aided two U.S. citizens in a multimillion-dollar tax evasion scheme that relied on various accounts held in the names of foreign shell corporations, using Swiss lawyers to act as cut-out signatories for some of these accounts. The two men were arrested and are under indictment for tax evasion.[10]

See also

References

  1. 1 2 3 4 5 6 http://www.investopedia.com/articles/02/020602.asp |contribution-url= missing title (help), Pros And Cons Of Offshore Investing, Copyright © 2010 Investopedia ULC - a Forbes Digital Company, 2010, retrieved 22 April 2010
  2. American Citizens and Foreigners that own property and assets inside the US or hold US Residency Status or Green Card status should read the following, © Copyright 2002 - 2003 Ascot Advisory Services, 2010, retrieved 22 April 2010
  3. Sharing the pain, The Economist, 4 March 2010, retrieved 22 April 2010
  4. Harper, Christine; Ryan J. Donmoyer (24 April 2010). "Goldman's Blankfein Faces 'Pecora' Moment in Senate (Update2)". Bloomberg Businessweek. Bloomberg L.P. All Rights Reserved. Retrieved 24 April 2010.
  5. Gordon, Greg (22 April 2010). "Sen. Specter opens new front against Wall Street firms". Politics AP. Miami Herald Media Co. All rights reserved. Retrieved 24 April 2010.
  6. 1 2 3 Tax havens under pressure Whiter than white Britain’s offshore financial centres race for respectability, The Economist, 18 June 2009, retrieved 22 April 2010
  7. 1 2 Panama's financial industry Shades of grey The unfinished job of cleaning up the country’s financial reputation, The Economist, 29 October 2009, retrieved 22 April 2010
  8. "U.S. and Switzerland Agree To Share More Tax Data". The New York Times. Associated Press. 20 June 2009. Retrieved 24 April 2010.
  9. Angle, Jim (20 April 2010). "IRS Targets Taxpayers Hiding Income in Offshore Accounts". foxnews.com. Retrieved 24 April 2010.
  10. Sorkin, Andrew Ross (16 April 2010). "2 Charged in Tax Evasion Scheme Involving HSBC". The New York Times. Retrieved 24 April 2010.

External links

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