Tax havens explained


The International Monetary Fund has a simple definition for an offshore financial centre (OFC), that is: “The provision of financial services by banks and other agents to non-residents.”

What is the difference between offshore and onshore?

Under this classification every country in the entire world could be an offshore jurisdiction but in the traditional sense offshore jurisdictions are the smaller tax havens, places like Jersey, the Cayman Isles and Bermuda who gain almost all of their income from the outside world.

So are offshore jurisdictions a home for criminals?

No. OFCs are most definitely a good thing for the financial world. The International Monetary Fund and the Organisation for Economic Co-operation and Development have forced the jurisdictions to open themselves up to initiatives and regulations. This has led to the OFCs becoming a very important part of the global financial system as they create competition in finances and tax.

You may wonder why tax competition is a good thing. Tax competition is prevalent in all countries; France recently announced that it was looking to cut its corporate tax rate down from 20 percent to 10 percent- even lower than Ireland, which has received criticism from other EU members in the past for their low rates.

If you look at tax revenues in both large and small countries you will see that revenues have been rising over the past three decades. Even though big countries have been cutting their tax rates, there is currently no correlation with cutting rates and cutting government revenue, in fact rates have gone down yet revenue is climbing. Experts suggest that by lowering tax rates you lower the rate of tax evasion and more people are willing to pay their taxes. Also as big countries like America, Britain and other EU places cut tax rates they have also been closing loopholes that allowed companies and individuals to avoid paying taxes.

Tax havens are simply another facet of this worldwide tax competition, if the large countries truly saw OFCs as a problem then there is no doubt that they would simply shut them down by coordinating all their tax systems into one. Thus they operate in tandem in a symbiotic manner.

Money laundering - does it happen and what can be done?

Money laundering has been an issue but efforts have been made to stamp it out. In the 1990’s the G7 countries debated globalisation, which has many positive aspects yet comes with many risks, one of which is financial stability. If there is a problem with one banking system this could swiftly spread to another country. There is a universal agreement with regards to what constitutes good tax competition and what constitutes bad. Bermuda, Jersey and the other well established offshore locations are as well regulated as anywhere. Money laundering is not just a problem located in offshore jurisdictions, it can be anywhere in the world.

In the past some offshore centres were not regulated correctly, in fact there are still some places that aren’t well regulated, but they are changing their ways because they simply have to - if they become cut off from the rest of the world’s financial centres then they will lose their livelihood. The OFCs can claim that these accusations are simply a case of the big countries seeking to protect their markets now that the OFCs are starting to compete.

There are also the big scandals that came from companies like Enron and Tyco, which were said to implicate OFCs. These illicit companies did have extensive dealings with offshore finance and this has led to much scrutiny of tax havens by America. The issue with Enron is that they did not actually use OFCs illegally; their fraud was committed through other means and structures. This still managed to tar the reputations of OFCs but it is thought that the real reason the USA doesn’t like OFCs is due to America’s huge tax deficits, which are showing no signs of improvement. Thus any time there is even the slightest mention of tax evasion then the OFCs are always the first to be put under the magnifying glass as it is easier to blame them than for America to look at its own problems.

Offshore financial centres act in their own interest by having tax regimes that are beneficial for outside money and offshore money. Despite it being done in their own interests they have helped the global economy, which is a conclusion that many academics have come to. Offshore financial centres are an inevitable outcome of globalisation, until of course all the big countries coordinate their tax systems in unison.