Overview
Offshore banking has made its presence felt over the years because of its immense potential ( 2007(b). An offshore bank is a bank located outside the country of residence. It is simply banking in other government’s or state’s jurisdiction.
The main characteristics of offshore banking are familiarity with offshore and international business, worldwide investment and business perspective, tax-efficiency, confidentiality, lack of foreign exchange controls and access to special investment opportunities.
The companies, corporations and individuals are highly-motivated by tax and cost reduction, asset protection and enhancement, risk management, privacy maintenance and avoiding bureaucracy to divert into offshoring. There are so many reasons to go offshore: 1) free remittance of profits and capitals, 2) access to tax treaties, 3) customs and duty exemptions, 4) sanctity of contracts, 6) security of property rights and 7) tested legal systems.
Moreover, offshoring can be applied to trading, investment, financing, professional services and consultancies, patent, royalty and copyright holding, ship management and yacht owning and personal and corporate tax planning (2007).
Advantages
Offshore banking provides access to countries with stable political and economic jurisdictions. Due to lower overheads and a lack of government intervention, some offshore banks may operate on low-cost, high-interest rates. Further, interests are paid without tax deduction.
Offshore banks offer services such as anonymous bank accounts, higher or lower rate loans based on risks and investment opportunities that can not be provided by domestic banks. The linkage between offshore banks and offshore companies, trusts or foundations provide specific tax advantages for individuals.
In addition, the geographically remote island nations can competitively involve. As such, offshore banking can help developing countries to source investment and to create growth in their domestic economies in aid of redistribution of world finance (2006).
In a global world telecommunications, setting up an account is so easy via on-line, phone or e-mail. The process ensures an access to your money and bank account anytime anywhere. Thus, allowing you to invest in more number of products and services across the word.
Disadvantages
Offshore banking is more accessible to those on higher incomes due to the cost of establishing and maintaining an account. The tax burden, on the other hand, tends on the middle-income groups. Aside form this, developing countries might suffer because of the speed the money can be transferred in and out of their economy. Offshore banking can increase the problems regarding financial disturbance ( 2006).
However, the phenomenon is not of free-risks. You need to comply and abide to tax laws of your own country and the offshore country. Also, you are required to deposit a big amount to have an account and your money is at stake if something goes wrong in that country.
Criticisms
Many critics argue that offshore banking is inappropriate since it offers a competitive threat to the banking and taxation systems in developed countries. It has been associated with the underground economy and organized crimes. The illegal concept, according to them, serves as a host to tax evaders and money-launderers because they have a choice whether to report income to other tax authorities or to decide not to. Since they are protected by bank secrecy law, they have no legal obligations to do so.
In contrast, the defenders of offshore banking criticized attempts at regulation. According to them, the process is prompted by the desire of domestic banks and tax agencies to access the money placed in offshore accounts. Many advocates also assert that tax and banking competition is an advantage because it allows the people to choose a balance between services and taxes.
However, the counter claim is that it is a disadvantage that encourages a “race to the bottom” approach wherein developing countries are pressured to deregulate own banking system to prevent capital offshoring. Furthermore, there is an evident tax imbalance between high- and middle-income groups, thus, equity is being sacrificed.
The biggest question would be: Who really benefits from offshore banking?
Analysis and Evaluation
Having an offshore account is the ‘in’ thing today (2007, (a). Over the years, it became the buzzword in business, trade and investment. The purposes and intent of offshore banking produces an array of argument largely because of its vulnerability to ‘illegalities’ and regulation distortion.
Many believed that moving an asset offshore regains control. In American context, one should act according to federal rules and the offshoring concept place the entire jurisdiction of your money at your hands. It has to do basically with access to information which provides an escape form governmental conspiracy and jeopardy through favourable accounting and economic exposures.
The biggest motivating factor of offshore banking is foreign profits in an atmosphere of complete confidentiality ( 2007). The idea is safeguarding your assets legally through secrecy laws that forbid bureaucratic reviews of personal financial records.
Perhaps, it does provide control but limited to those who can afford and maintain an offshore account. These are: expatriates, rich and non-residents. Thus, offshore banking reflects people’s dissatisfaction on prevalent tax and banking systems within the domestic borders. Even more to the point, the perception of the people regarding the right institutions like the government, the laws and the authorities inside and outside a specific country benefits and hinders offshore banking.
The financial freedom is taking different meanings to those who earned money in good faith and those that are illegally-obtained. The more the money is hard-earned the more a person wants to guard and protect it. Likewise, if it is from illegal activities, the more you want to hide and the more you will need a legal right to privacy. The choice of the latter would be an offshore account.
Likewise, such offshoring elevates financial decisions which are beyond the reach of domestic rules, regulations and scrutiny. To do away with aggressive competitors, the companies’, businesses’ and other organization’s resort is an offshore account. In the process, they can convert files into financial information and placed it in an offshore account. So, the information will be protected under the foreign jurisdiction (2007).
Unlike in a domestic setting, the step-by-step legal process of patent and disclosure is rather complicated since it involves different departments and authorities. Offshore centers, however, can guarantee that confidentiality and privacy. So, most of the people are considering an option to do offshore.
While you are personally-managing the risks of your finances, the offshore banks are also doing everything they can to protect, maintain and sustain the value of your money. Most of the people who chose to have an offshore account are also maximizing their investment opportunities at a lower and sometimes no cost at all.
In this regard, the greater risk regarding offshore banking comes with choosing a bank to open an account. The company must be stable and must comply with international standards set by the Financial Actions Task Force and Organization for Economic Development. There is a probability that an account would be frozen and inaccessible if the companies would not comply.
The constraint, somehow, is that the domestic banks and government are losing a lot because of offshoring. The United States reported a total lost of billion annually (2007). The tax liability is diminished at the expense of middle- and low-income groups.
To wit, the people within countries with high-taxation scheme are more offshore-inclined. The larger benefit is vested on the countries and the people of such countries where offshore banks are residing. The impact of offshore banking centers on the host countries ( 1985).
Recommendations
There are so many prevailing laws regarding financial schemes, money laundering and tax evasions. The government, state and other authorities must commit in implementing those laws because offshore banks will never initiate on investigating their depositors’ background. So, the reports and investigations regarding suspicious accounts must be taken through country-specific schema since the transparency of offshore banking is relatively impossible.
The domestic banks must strategize on providing similar services that are provided by offshore banks. If possible, the government should decrease the tax burdens of its people or at least engage in tax neutrality.
The government should also provide regulatory advantages among its people, investors and domestic industries. In domestic business environment, restrictions and policies can affect business productivity and valuable resources. They should strive at jurisdictions that are business-friendly, straightforward and inexpensive to comply with (2006).
The value of currency changes frequently, so, depositors must really keep a close eye. Such changes affect international transactions including the offshore banks assets, liabilities and cash flows. It is very important to look at the financial stability of offshore banks and the process of their compliance to laws.
Depositors should not be motivated by high profits alone, instead, the proper motivation must be the benefits of opening an offshore account in the long run. We should remember that the real operating exposures of such banks depend widely on value of currency. Therefore, depositors should manage hedging, adaptation in economic strategies and accounting aspects of offshore banks ( 2007).
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