A bank that is located in a country other than the country of residence of the depositor is an offshore bank. An offshore bank generally provides a tax haven and advantageous legal and financial services. Offshore banks are usually located in low tax jurisdiction countries. Benefits of offshore banking include: less legal regulation, minimal to no taxation, protection against local instability be it financial or political, deposits are easy to access because of the low regulation, bank secrecy and high privacy. The term offshore banking originated from the Channel Islands just off the shores of Britain – interestingly most off shore banks are located on island nations today. Although the term originates from a meaning referring to an ‘offshore’ location, landlocked locations like Switzerland, Andorra, and Luxembourg are still included. Offshore banking is associated with organized crime and underground economies that are trying to evade taxes. Legally, individuals still have to pay personal income tax on interest even if assets are in an offshore bank. Offshore banks have are under no legal obligation to report income tax to the government authorities as they are protected by bank secrecy – this does not, however, make tax evasion acceptable. Due to the incident of Sept. 11, 2001, there are much stricter regulations related to international finance, offshore banks, and clearing houses such as Clearstream in Luxembourg.
Offshore banking advantages:
Off shore financial institutions are able to operate with lower costs due to low overhead and minimal government intervention, and therefore can provide higher interest rates in comparison to the rates given in the depositor’s country. Interest is usually paid by offshore banks without any tax deducted – this works for people that do not pay tax on worldwide income, do not pay tax until the tax return is accepted, or for people that feel they can illegally ignore their taxes by hiding their interest income. Offshore banks also give access to stable jurisdictions – both politically and economically. This is a benefit for people who live in areas of political unrest and fear that their assets may be seized, lost or frozen. People that support offshore banking argue that tax and banking competition is created – which becomes an advantage for the whole industry. These banks also help developing countries economically, such as remote islands that don’t have much else to offer the world save tourism. Often offshore banks provide services that local banks do not such as different rates of interest, and anonymous bank accounts.
Offshore banking disadvantages:
The main con of offshore banking is it’s relation to the underground economy and the organized crime community through money laundering. Such banks almost encourage tax evasion by providing secret places for criminals to deposit money that they want to hide. Physical access to offshore banks is often difficult because of the remote locations of most of these institutions (ie on islands). Another disadvantage is that developing countries will often be affected negatively due to the speed that money goes in and out of their economy. Financial imbalance is often a result of the movement of this ‘hot money’. Another disadvantage of offshore banks is that it’s mainly only for the wealthy, thus the burden of tax falls on middle income groups of people.
Offshore banking centres
For a complete list of offshore banks around the world visit WorldOffshoreBanks.com.
Main offshore banking locations:
Saint Kitts and Nevis