How to Choose an International Offshore Financial Centre?

The following article will guide you about how to choose an international offshore financial centre.

Multinational businesses can effectively structure their worldwide operations as they wish.

For example, it is conceivable to have an international group with:

i. A production plant in Ireland or a tax-free zone in France,

ii. An offshore financing company in the Netherlands,

iii. An offshore management company in the United Kingdom,

iv. A co-ordination centre in Belgium,

v. A wholesale purchase and distribution company in Singapore,

vi. An offshore marketing company in Hong Kong, etc.

The selection of an offshore centre largely depends on two basic criteria, namely the characteristics of the activity, and the characteristics of the territory. Ideally, one would prefer a jurisdiction with no corporate taxes and no taxes on incoming receipts and outgoing payments of income and capital.

There should be no tax anti-avoidance provisions, no exchange controls, good communications and local workforce, strong regulatory environment, political and economic stability, etc. The use of a tax haven should not add to the overall tax burden. Such jurisdictions do not exist. Existing offshore centres have both advantages and disadvantages.

Some specific questions to ask for a treaty haven are:

i. What are the tax benefits given under either the domestic law or under the tax treaties today and in future?

ii. Is the tax structure simple and cost effective to justify the extra expense?

iii. Do any anti-treaty shopping or other anti-avoidance provisions affect them?

iv. What are the non-tax benefits and risks in using the offshore centre?

The use of tax havens in international tax planning is complex. It requires the understanding of the tax laws of at least three different countries, namely the home and host countries besides the tax haven jurisdiction.

Non-Tax Factors:

Besides tax, other commercial and financial considerations affect the choice of an intermediary location. It must be economically viable, easy to set-up and manage, and, above all, it must be safe. The ultimate decision would also depend on the type of the business operation.

For example, a manufacturing facility abroad would involve additional choice factors compared to offshore trading and financial services that can be carried on with small or no physical presence in the offshore jurisdiction.

Significant non-tax factors include:

i. The political and economic stability;

ii. The legal and commercial infrastructure;

iii. The attitude towards commercial activities;

iv. The professional services obtainable in the jurisdiction;

v. The business reputation and image;

vi. The ease of access and good communications;

vii. The availability of competent and trained professional staff;

viii. The lack of exchange controls and currency restrictions;

ix. The ease in conducting business in the country;

x. The protection under the domestic law;

xi. The ease of company formation and compliance requirements;

xii. The initial formation costs and recurring costs;

xiii. The access to capital markets and other sources of finance;

xiv. The ability to change jurisdictions (“re-domiciliation”), etc.

The political and economic stability is probably the most significant factor. The offshore centre should be easy to use, but not to misuse, and it must be able to achieve the objective of “profit with safety.”

Poorly regulated centres are unacceptable internationally. Therefore, the reputation and image, as well as the quality of regulation over money laundering and fiscal evasion, have become significant issues.

Additional considerations include guarantees against expropriation or nationalization, and fair treatment and protection of property under the domestic laws. Besides the safety of the investment and capital protection, the legal system should exist to enforce the validity of commercial and contractual arrangements.

The lack of exchange controls and currency restrictions ensures free movement of funds with minimal currency exposure. In particular, some of the questions asked are: Can funds be accumulated and transferred safely? What are the regulations affecting them? Are exchange rates linked to major global currencies?

The ability to transfer funds or change the domicile (i.e. re-domiciliation or migration facilities) quickly may be an essential requirement, particularly in new, remote or volatile centres.

The use of an offshore centre adds additional costs (both set-up and operating costs) that must be justified by the benefits accruing from their use. Multinationals avoid offshore centres when the incorporation and annual costs are high.

The choice is also influenced by the time and administrative procedures required to set up a legal entity. Besides the ease of incorporation, ongoing corporate and legal compliance issues are also taken into account.

For certain investors, the disclosure of beneficial ownership may affect the choice of an offshore centre. In such cases, confidentiality may be retained through the use of nominee shareholders and directors if bearer shares are not allowed.

The commercial infrastructure covers the ease of communication and travel, along with efficient and low-cost postal and telecommunication facilities, reasonable physical access, and time zone advantages.

The advances in information technology and the integration of the world economy through better information systems and telecommunications nowadays make physical location a less crucial factor.

The quality of local trained staff and professional assistance, immigration laws and work ethics can be significant factors. Generally, offshore services do not require a large labour force, but they do need efficient, literate and skilled local employees, and competent professional support.

The availability of international banking and legal facilities and accounting capabilities are often essential. In certain industries, technically trained manpower may be a crucial factor (e.g. computer software development, financial services, etc.).

The geographical location near either the markets or the source of production is a strong factor in transhipment activities. Several offshore centres have set up free trade zones and Freeport facilities for packaging, labelling, processing and manufacture for re-export.

These activities may be carried on without the payment of import duties or taxes. Offshore manufacturing activities are attracted by centres with cheaper production costs (particularly skilled labour) and tax or other incentives. Their export-based activities are also influenced by trade agreements that provide access on preferential terms to specific markets.

No offshore financial centre meets all the requirements or expectations. Therefore, the taxpayers must choose the location of “best fit”. Moreover, as many offshore centres provide similar facilities, many of the factors are now essential and do not give a comparative advantage.

However, their absence may be a disadvantage. The choice today is eventually dictated by subjective considerations, such as proximity, previous experiences, recommendations and common language or ethnic connections.

An important factor is the personal relationships with professional advisors in onshore jurisdictions that refer their clients to specific offshore centres. They must be kept informed of the latest developments in the law and practices affecting the offshore centre and the opportunities that they create for their clients.

Most of the more successful centres have a strong network of professional advisors and have targeted specific services. For example, the City of London is a major international centre for financial expertise.

Bermuda is the market leader for captive insurance and reinsurance. British Virgin Islands has the largest number of offshore company incorporations. Hedge funds are popular in Cayman Islands, British Virgin Islands and Bermuda.

Jersey and Cayman Islands provide considerable securitisation expertise. Panama is a significant international maritime centre. The United Arab Emirates has successfully developed several free zones. Many states in the United States (e.g. Delaware) have targeted offshore activities that demand confidentiality.

In recent years, there has also been a major development in the use of offshore centres for e-business activities. There has also been a shift from personal to corporate financial services in many of the major centres.

Major offshore centres have also developed their own niche markets in specific onshore jurisdictions. For example, Singapore and Hong Kong are widely used for East Asian markets. Mauritius has successfully built its offshore business through the effective use of its tax treaty with India and South Africa.

The North Americans prefer Bermuda, Panama and the Cayman Islands. The United Kingdom has strong affiliations with the Channel Islands and the Isle of Man. Switzerland and Luxembourg are well known as centres for global financial services.

Some of the leading offshore jurisdictions today are:

i. Zero-tax jurisdictions – Panama, British Virgin Islands, Bahamas, Cayman Islands, Turks & Caicos Islands, Guernsey, Isle of Man, Jersey, Bermuda, Nevis and Antigua.

ii. Low-tax jurisdictions – Cyprus, Mauritius, Barbados, Madeira, Labuan, Ireland and Hungary.

iii. Captive insurance – Bermuda, Cayman Islands, Cyprus, Guernsey, Barbados, Isle of Man, Ireland, British Virgin Islands, Turks & Caicos, Jersey and Gibraltar.

iv. Tax treaty jurisdictions – Barbados, Cyprus, Denmark, Ireland, Luxembourg, Madeira (Portugal), Malaysia, Malta, Mauritius, Singapore, Switzerland and United Kingdom.

v. International shipping – Panama, Liberia, Bahamas, Cyprus, Malta, Marshall Islands, Isle of Man, Madeira, Gibraltar, Cayman Islands and British Virgin Islands.

vi. Collective investment schemes – Cayman Islands, Switzerland, Luxembourg, Bermuda, Guernsey, Bahamas, Jersey, Dublin (Ireland) and Hong Kong.

vii. Offshore banking – Cayman Islands, Switzerland, Hong Kong, Jersey, Guernsey, Isle of Man, Dublin (Ireland), British Virgin Islands and Bermuda.

There is no such thing as a best tax haven. The suitability of a particular country as a tax haven depends on who is using it and what he is using it for.

Tax and Non-Tax Factors – A Checklist:

Some of the significant factors that are often considered in the selection of an international offshore financial centre are listed below:

Tax Benefits:

i. Level of taxes,

ii. Nil or low withholding taxes,

iii. Treaty benefits,

iv. Tax incentives,

v. Anti-avoidance rules, and 

vi. Stability of tax laws.

Offshore Regulation:

i. Incorporation and compliance requirements,

ii. Speed and ease of incorporation,

iii. Local compliance requirements,

iv. Awareness of latest rules and practices,

v. Network with onshore advisors, and 

vi. Knowledgeable local and onshore advisors.

Professional Services:

i. Speed and quality of service,

ii. Confidentiality and trust,

iii. Accounting and auditing standards,

iv. Local training facilities,

v. Professional code of conduct, and 

vi. Regulatory and ethical standards.

Image and Reputation:

i. Political and economic stability,

ii. Quality of regulation and flexibility,

iii. Guarantees and certainty of treatment,

iv. Local attitudes to foreign investment,

v. Level of corruption and red tape, and 

vi. International reputation and awareness.

Convenience Factors:

i. Ease of access and communications,

ii. Confidentiality and privacy,

iii. Ease of incorporation and operational management,

iv. Financial disclosure requirements,

v. Suitable time zones, and 

vi. Ability to change jurisdiction (“re-domiciliation”).

Social Factors:

i. Comfort factors” e.g. ethnic, cultural, etc.

ii. Language barriers,

iii. Respect for “time”,

iv. Attitude towards business,

v. Quality of life and social values, and 

vi. Attitude towards foreigners.

Cost Factors:

i. Set-up and recurring compliance cost,

ii. Cost of local professional services,

iii. Cost of international tax structures,

iv. Cost of communications and travel,

v. Cost of revenue negotiations, and

vi. Cost of litigation.

Legal Framework:

i. Regulations over offshore activities,

ii. Quality of local laws and legal services,

iii. Investor protection under the law,

iv. Efficient tax regime and treaty networks,

v. Import and export controls, and customs duties, and

vi. No or few unwarranted laws or regulations.

Financial Issues:

i. Sources of available finance,

ii. Interest rates and borrowing terms,

iii. Borrowing regulations,

iv. Exchange controls,

v. Other financial services, and

vi. Financial incentives.

Currency Exposure:

i. Currency stability.

ii. Ability to manage multi-currencies,

iii. Speed and ease of currency transfers,

iv. Banking regulations,

v. Offshore banking facilities, and 

vi. Requirement to repatriate profits.

Commercial Infrastructure:

i. Ease of communications and travel,

ii. Financial and business infrastructure,

iii. Professional, commercial and banking facilities,

iv. Government procedures and practices,

v. Lack of red-tape and bureaucracy, and 

vi. Local employment laws and labour availability.

Personnel Considerations:

i. Availability and cost of personnel,

ii. Quality of local personnel,

iii. Work culture and employment laws,

iv. Ability to use expatriates,

v. Cost of expatriates (including taxation), and 

vi. Quality of life for foreigners.