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Business
Structures
It is a virtual certainty
that at least 65% of the world’s
hard currency is currently deposited in offshore banks; in
addition, approximately 40% of the world’s trade in
goods, especially services such as consulting and even more
so internet based businesses operate through offshore finance
centres, in most cases these structures also involve
offshore companies and secondary facilities such as credit
card processing, websites, hosting and communications services
such as phone number is the right locations, fax lines and
secure email.
The figures confirm that it spite of the problems created
back in 2000/2001 by the Organisation for Economic Co-operation
and Development (OECD); this is an area of massive growth,
which offers potential tax savings to both individuals and
companies.
Regardless of the changes that have been implemented due
to the OECD applying pressure against some offshore finance
centres, the question will always remain “Which is the
best jurisdiction to use for my offshore structure?”
In reality, the products offered by most Tax Havens are virtually
mirror images of each other. The decision will largely depend
on the quality of after sales service, objectives and goals
of the proposed corporation, foundation or trust and the clients
own personal and business circumstances. There are a number
of crucial factors, which determine the merits of a good offshore
centre; the following points should therefore be considered: |
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Political
and economic stability |
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The offshore jurisdictions
should not be subject to violent, political upheavals,
civil unrest, poor economic performance, or the likelihood
of an invasion or a military coup. These might be exciting
to watch on TV but it’s the last thing you need
where your business and money are concerned! |
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Quality
of communications |
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Good telecommunications
capabilities are a priority. By using ‘state-of-the-art’ communications,
your chosen jurisdiction must be able to send and receive
electronic funds transfers, it is also important that
your representative is able to receive instructions by
letter, telephone, fax, email or any other means. It must
however be considered that where in the past a company’s
agent was usually in the same location as the company
itself, these days this is often no longer the case.
Where previously a Jersey company had Jersey based nominees
and a Jersey bank account, it is common these days for
a company in, for example, Belize to have representatives
in Australia or South Africa and Banking in Cyprus or
the Caribbean. |
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Language |
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It is essential that your representatives
understand your instructions. Nothing is worse than going
through two or three different people, none of whom can
understand what you want them to do. |
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Legal
System |
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A good legal foundation with modern corporate
law is essential. Jurisdictions, which base their legal
system on English common law, with local modifications,
are very popular, this applies to any offshore location,
which was or still is under British control. |
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Confidentiality |
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Confidentiality is important when conducting
business in any location. Commonsense dictates no one
wants their competitors or enemies to know their inside
secrets. For this reason ORCA will carefully analyse your
needs and match your requirement to the most appropriate
location |
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Dirty
money |
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A good offshore centre should also actively
take steps to avoid dirty money entering its banking system;
it is the receipt of large amounts of illegal funds, which
cause a finance centre to become tainted, once a finance
centre has been unfortunate enough to gain a bad reputation
rehabilitation can take years. |
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Exchange
controls |
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It is important that you can freely move
your money in and out of the country. The best situation
is to bank in a country with no exchange controls. Money
that is restricted from movement can be easily subject
to possible seizure. It is important to keep in mind that
companies can open bank accounts in finance centres other
than that in which the corporation is established. |
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Banking
and professional services |
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Always remember that selecting the right bank for
your corporate account is equally as important as choosing
the correct jurisdiction for the company itself. Time
zones and day to day language compatibility is very
important.
The jurisdiction should offer full internet banking capability
and provide access to both the SWIFT and IBAN (in Europe)
transfer systems through a network of correspondent banks.
Professional services such as accounting, legal, management
and trust services, should also be readily available
if required. |
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Taxation |
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Jurisdictions that have no tax treaties
with other countries are often the best choice, unless
the tax treaty or dual taxation agreements fulfil a function
in your tax planning. |
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Restrictions
imposed on IBC’s |
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You should be able to conduct all types
of legal business activities without unnecessary restrictions. |
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Cost
of formation |
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Annual fees and services - These should
be realistic and offer value for money. |
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Location |
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Although much
less important today than in the past, location is a factor
to consider very carefully. Different time zones, banking
hours, courier delays and other factors can still pose
serious headaches. Always remember that a 10 hour time
difference means that you and the offshore centre are
never working at the same time. |
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Government
Attitude
A government that welcomes offshore business and
possibly even offers financial incentives sends a positive
message to offshore investors. Many jurisdictions actively
promote themselves as a tax haven and welcome offshore business
and investment capital, while others just tolerate it. A
government that does not completely support the activities
of their offshore industry can adversely change their policies
overnight or even more likely succumb to outside pressure.
There are currently around 40 major offshore finance centres
in the world. Interestingly
if we now look at how many countries are there in the world we find this figure
of 40 offshore centres means that they could comprise nearly 25% of the
total. The problem is that it’s not as easy as that because there may actually
be anywhere between 168 and 254 nations, depending on who is doing the counting.
There are approximately 170 separate currencies, 239 two-letter country codes
recognized by the ISO (International Standards Org.), and the Universal Postal
Union has listings for 500,000 localities in 189 Countries. By a recent count,
France and the US officially recognize 192 states, (though unofficially acknowledging
the existence of several others!), Switzerland recognizes 194, Russia 172, The
UK has over 200 diplomatic posts, and Germany also recognizes well over 200 so
let’s assume the number of offshore finance centres comprise between 20%
and 25% of the countries of the world in other words 1 in 4 or 1 in 5. It is
for this reason the entire offshore industry is a highly competitive business
with all of them wanting a slice of the cake! Offshore finance centres used to
be known as tax havens, but just like the Golliwog on the Robertson’s Marmalade
jar, some things just don’t quite fit into today’s politically correct
world!
One point which has become clear over the last 7 or 8 years is that if any country
complied totally with the OECD and EU’s demands for an exchange of information,
it would no longer be able to function as a viable offshore centre. This is perfectly
illustrated by the Bahamas which was a major centre until it caved into the OECD in
2001, although it is still a player and now viewed by many as effectively being
out of the first division. Until 2001 we formed on average 5 Bahamian corporations
per week, now I doubt that we will form that many in a whole year.
Clearly, with around 40 major offshore centres, and in excess of 30 minor players,
it would not be long before a new jurisdiction decided to fill the gap that had
been vacated by any country that throws in the towel. This has been confirmed
by the emergence of Singapore, Tanzania, Dubai and Hong Kong as leading banking
centres to offer a home for EU resident’s money since the EU
savings tax directive came into force in 2005.
Clearly, offshore finance centres are not likely to become
extinct for some time, the only thing that limits the number
is the amount of clients who use their services; in common
with any market, supply and demand dictates that not every
country can join the club. This is why they all try to find
a niche. |
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The
offshore finance centres
| Caribbean |
Anguilla
Antigua
Belize
Bermuda
Bahamas
Barbados
British Virgin Islands
The Caymans
Cost Rica
Dominica
Grenada
Netherlands Antilles
Nevis
Panama
St Vincent
Turks and Caicos |
| Europe
Offshore |
Channel Islands
Cyprus
Gibraltar
Guernsey
Isle of Man
Jersey
Malta and Sark
Europe Mainland
Austria
Hungary
Latvia
Liechtenstein
Luxembourg
Switzerland |
| Pacific
Rim |
Cook Islands
Hong Kong
Marshall Islands
Niue
Thailand
Philippines
Singapore
Vanuatu |
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The
OECD and its effects on offshore centres
The OECD has had a number of influences on the offshore
industry, some positive, some negative. The main effect of
the OECD pressure on the offshore centres, which began to
create difficulties in the summer of 2001, has been to increase
the exchange of information and transparency in respect of
taxation issues. Historically in some offshore centres, non-resident
companies paid no tax at all, other than the annual company
fee, where in other jurisdictions, for example, Jersey, The
Isle of Man and Mauritius, resident companies were taxed and
non-resident companies were not. What has happened now is
that the playing field has been levelled with companies, resident
and non-resident, paying the same rate of tax which is generally
quite competitive, an example is the 10% tax rate in Cyprus
which is the lowest in the EU. Many new EU members also have
favourable tax rates or exemptions.
The net effect of these changes has been to leave things
pretty much unchanged if you are a non resident looking to
minimise your taxes. If you happen to live in one of these
finance centres the benefits are now significant because your
locally based business receives the same treatment as a non
resident company. This was clearly not exactly what the OECD
had in mind because it does not achieve the results they were
hoping for. What is apparent is that the OECD failed to see
that most offshore centres would devise taxation plans that
did not destroy their suitability as places to do business.
The 40 low tax jurisdictions originally targeted by the OECD
all had certain basic features in common. For example, they
were all low tax jurisdictions, mostly small independent countries
or colonies of the UK or other European countries, and many
were in the developing world; most were also using financial
services as a means to diversify their economic base and were
not members of the OECD.
The Paris based bureaucracy clearly targeted these jurisdictions
in a misguided attempt to imprison an increasingly mobile
tax base in order to maintain the efficient, bloated and unproductive
welfare states of OECD member nations. The OECD sought to
do this at the expense of Poorer developing countries who
were already struggling to gain a foothold on the ladder of
economic progress. Clearly fair play means different things
to different people!
In a globally liberalised world where trade barriers are
falling, tax competition is a legitimate strategy for economic
development. Not only do sovereign states have a right to
use their tax systems to lure foreign investment, they owe
a duty to their citizens to use all and every legitimate mean
to generate economic activity and growth.
The offshore centres are being harassed into emasculating
their financial privacy laws so that high tax nations can
impose their oppressive tax burdens on income earned in low
tax economies. Why? Because the high tax nations are so anxious
to prop up their welfare states that as a result they are
threatening to impose financial protectionism against the
so called tax havens.
The question is will all or most of the offshore jurisdictions
ultimately fall in line? The current position is that although
the offshore centres have made concessions, most have simply
restructured their affairs to work around the rules. In general
terms as things currently stand, it is pretty much business
as usual. Some jurisdictions such as the Channel Islands,
Gibraltar, and the Bahamas are no longer particularly good
choices, but other locations are still rock solid.
It has become very clear that it is increasingly important
to mix and match a variety of facilities in a selection of
jurisdictions. As things currently stand, the OECD has closed
some doors but unwittingly opened a few others. Clearly all
the time demand exists for discreet facilities, a jurisdiction
somewhere will endeavour to provide them; this is exactly
what is happening. For example, many banking centres, not
previously seen as major players, have suddenly started to
offer useful services. Many of these new services become very
beneficial when packaged with other offshore arrangements
to create a highly workable offshore structure.
A number of factors will determine the outcome of the OECD's
attempts at tax harmonisation. For the OECD to be successful
would require the full cooperation of several leading offshore
finance centres, most are not at all happy about disclosing
details of their clients affairs, Switzerland and Liechtenstein
immediately spring to mind, neither are giving any real sign
of caving in. With such substantial funds on deposit it is
clear both fear large outflows of capital.
Possibly, the largest obstacle is the USA which has serious
reservations about the whole transparency issue, although
not on the grounds of protecting its citizen’s privacy.
The long term outcome is far from clear; the only certainty
is that while demand exists, solutions will be available to
satisfy people's offshore needs.
Not all recent developments in the offshore world are negative,
it is important to balance positive offshore developments
such as e-commerce, sophisticated communications, eBay, PayPal,
offshore merchant facilities, and anonymous ATM cards against
the attempts to reduce banking secrecy and eliminate impenetrable
corporations. Clearly, in many areas things are looking positive,
but only time will tell how things turn out long term.
In 2001 we looked at the developments with great concern and
even considered that the future of offshore was potentially
bleak. Now 7 year later, offshore tax free structures are still
viable and everyone is still making healthy profits. We all
need to keep our eye on future developments and watch out for
signs of further OECD and EU pressure but things are vastly
different from the doomsday scenarios portrayed by some offshore
service providers back in 2001. |
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