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Offshore Banking |
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Offshore banking refers to banking activities which are located outside the country of residence of the depositor.
The term offshore banking does not necessarily refer to banks located on islands.
Offshore banking can also refer to banks in Switzerland, Luxembourg, Liechtenstein, or some other landlocked country.
Typically the banking location is in a low tax jurisdiction that provides financial and legal advantages.
These advantages are: Low or no taxation. Greater privacy. Protection against political, financial instability, high inflation in the depositor's home country. Offshore banking is often associated with tax evasion. The reason for this is because taxes in the depositor's home country may still be due on interest earned in the offshore banking location. In most countries tax codes make no distinction on interest earned in local banks or in banks located outside the depositor's country. If the offshore bank decides not to report the interest of a depositor to the depositor's home country, then it is up to the depositor to report the interest on their tax returns. So you can imagine the offshore banking community is a considerable target for tax authorities around the world. This is especially true following September 11, 2001, in which regulators called for a closer watch on the offshore banking community and clearing houses (Clearstream). The claim is that offshore banking communities could be the intersection of major illegal money flows. Defenders of the offshore banking community counter by saying that these concerns are not prompted by security concerns, but by the desire of tax agencies and local agencies to access the money and lost tax revenues causes by local residents using offshore banks. Offshore banking defenders state the fact that offshore banking offers a competitive threat to the banking and taxation systems in the onshore countries. They further suggest that organizations such as the Economic Cooperatin and Developemnt (OECD) countries are trying to destroy competition. Offshore banking has many advantages for individuals: Many offshore banking locations are politically neutral, politically stable, and economically stable. For clients from areas where there is political instability, where the client's assets may be frozen, seized, or disappear due to high inflation or some other reason, offshore banks could save the client's financial life. Some offshore banking locations have a lower tax base. Therefore they can provide higher interest rates than the rates in the client's home country. Interest paid in offshore banking locations is generally paid without tax being deducted. This is an advantage to individuals who are not obligated to pay tax on their worldwide income. It is also an advantage to individuals who do not pay tax untill their tax return is filed as the interest can earn more interest. Other advantages of offshore banking: Some countries whose only economic base was tourism have thrived as offshore banking has allowed them to diversify their economy. Offshore banking brings competition to the banking industry. Many advocates of offshore banking assert that the creation of tax and banking competition is an advantage of the industry, in that tax competition allows people to choose an appropriate balance of services and taxes. Critics of this argument claim that this competition encourages governments in developed countries to deregulate their own banking systems in an attempt to prevent the offshoring of capital. |
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