OFC Meter: Offshore Financial Centers across the world

• Financial counterparties readily transact in reserve currencies, and often do so outside the reserve-issuing country. For example, non-banks outside the United States borrow US dollars mainly offshore, from banks outside the United States (Graph 4, left-hand panel). A substantial share of offshore lending in US dollars, yen, sterling and Swiss francs – lending by banks outside the currency area – takes place from cross-border centres (red bars). Since the 1970s, greater financial integration has caused external assets and liabilities to grow faster than GDP worldwide and especially so in cross-border centres.

A big pharmaceutical company, for example, might set up a new entity in Bermuda or the Netherlands, and “sell” that entity a patent for a profitable drug. The parent company might then pay a big licensing fee to the offshore company, which in turn would allow it to record lower profits at home — and pay a lower tax bill. Drug companies have avoided billions of dollars in taxes this way, according to Oxfam. Shell companies can hold money, luxury homes, intellectual property, businesses and other assets. They also play a vital role in facilitating the flow of illicit money around the globe.

• Since the financial crisis, the EU and the OECD have increased pressure on tax avoidance, with modest effects.
• Other law firms, including Appleby from the Paradise Papers, charged a flat fee of almost $2,000 in one popular tax haven, the Isle of Man, and $2,700 in Bermuda.
• Tax havens make significant income from fees paid by people and companies who create and use shell companies.
• Generally, only consolidated financial information is available for large companies–i.e., the revenue of all the subsidiaries is reported in both the subsidiaries and the parent company.
• Some jurisdictions are particularly popular, such as Bermuda, the British Virgin Islands, and the Cayman Islands2.

Centres that compete on these grounds face a highly elastic demand for their services; small differences can have a significant impact on their market share (Sinha and Srivastava (2013)). As a result, much of the business booked in such centres involves entities that have low setup costs and a minimal physical presence, so that the business can be relocated with ease (Dixon (2001)). Cross-border financial centres are also typically open to foreign financial institutions and their expertise.

But even small time differences can be inconvenient for financial institutions and their customers. Furthermore, information frictions increase with physical and cultural distance (Mian (2006)). This creates opportunities for multiple financial centres even within a given time zone, as in the case of Hong Kong SAR and Singapore. During April–June 2000, the Financial Stability Forum–International Monetary Fund produced the first list of 42–46 OFCs using a qualitative approach. Haque CPA is a Manhattan CPA firm with a specialized focus in the hedge fund industry. From midsized domestic funds to multi-million dollar offshore investments, we offer a comprehensive list of hedge fund administration, tax, and audit services with a personal touch.

ICIJ partners at Univision’s Fusion opened a Delaware shell company … for a cat. Politicians, like Iceland’s former prime minister, Sigmundur David Gunnlaugsson, and Nigeria’s former senate president, Bukola Saraki, have concealed investments or luxury homes with the help of shell companies. Notables include the son and daughter of former Pakistan prime minister, Nawaz Sharif, and Isabel dos Santos, the billionaire daughter of former Angolan strongman president, Jose Eduardo dos Santos. Commerce Secretary Wilbur Ross are among the bold-faced names that ICIJ has linked to shell companies. Some, like Queen Elizabeth II, say they don’t even know they have invested offshore.

Other law firms, including Appleby from the Paradise Papers, charged a flat fee of almost $2,000 in one popular tax haven, the Isle of Man, and $2,700 in Bermuda. There’s a cottage industry of offshore specialists — including Mossack Fonseca (now defunct), Appleby and Asiaciti, as we’ve reported previously — eager to make that phone call or write that email on your behalf (for a fee) to set up a shell company. Drug lords and ladies, bank robbers and arms traffickers, mafia kingpins and queens and bribe takers and makers also use shell companies to obscure their identities and conceal money, assets and illicit activities. The CORPNET research group uncovers, investigates and aims to understand global networks of corporate control. The group, housed at the University of Amsterdam, employs a multidisciplinary approach to understanding the global corporate system using methods from the field of network science.

Consequently, smaller nation-states, and targeted offshore jurisdictions, are forced to adopt such agreements due to economic and political pressure. Offshore Financial Centre (OFC) have come under fire due to their preferential treatment of non-resident offshore companies and their low tax environments that attract foreign investors. Offshore banking is simply another name for having a bank account outside your home country. It may be more challenging to open an offshore bank account than a domestic bank account because you may need to prove you have a minimum amount of money or a business relationship with the bank’s country. 4  Outliers are detected using a boxplot adjusted for the skewness of the distribution. For further discussion of measures and methods for identifying cross-border financial centres, see Pogliani and Wooldridge (2022).

Each conduit jurisdiction is specialized in a geographical area and there is significant specialization based on industrial sectors. Against the idea of OFCs as exotic small islands that cannot be regulated, we show that many sink and conduit-OFCs are highly developed countries. The proposed network analytic approach to identifying OFCs has a number of advantages. First, it makes no a priori assumptions about the global economy and the countries involved; the possible identification of a country as an OFC is purely data-driven. Second, it does not rely solely on aggregated macroeconomic indicators that may introduce significant noise and deviations, but on fine-grained data of firm-level corporate ownership. Third, this firm-level data allows us for the first time to quantitatively identify and distinguish between both sink-OFCs and conduit-OFCs.

Tax-neutral is a term that OFCs use to describe legal structures where the OFC does not levy any corporation taxes, duties or VAT on fund flows into, during, or exiting (e.g. no withholding taxes) the corporate vehicle. Popular examples are the Irish qualifying investor alternative investment fund (QIAIF), and the Cayman Islands exempted company, which is used in investment funds, corporate structuring vehicles, and asset securitization. Many onshore jurisdictions also have equivalent tax neutrality in their investment funds industries, such as the United Kingdom, United States, and France. Tax neutrality at the level of these vehicles means that taxes are not paid at the OFC but in the places where the investors are tax resident.

They feature the highest US dollar values of cross-border financial intermediation; in addition, their ratios to GDP are higher than the cross-country median but lower than those of cross-border centres. Shanghai (CN) is not yet in the league of global centres because the large US dollar value of its cross-border intermediation is small relative to the size of the Chinese economy. The value going through each conduit in chains of size three ending in sink-OFCs is depicted.

The rapid growth of cross-border centres, as well as the financial integration of emerging market economies, has contributed to a more diverse geographic distribution of external positions (Lane and Milesi-Ferretti (2018), Broner et al (2020)). The concentration of external liabilities has been roughly stable, partly due to the growth of US external liabilities Starting Up An Independent Broker-dealer as a share of the global total. At the same time, the concentration of external assets across all countries fell by about half between the 1970s and 2010s (Graph 3, right-hand panel). Our approach identifies, characterizes and ranks OFCs and as such helps to increase transparency of and insight in highly complex international corporate financial structures.

In this way, these funds are not open to retail investors whom are normally investors in jurisdictions that cater for greater investor protection. The zero tax rate, as in many onshore funds, is so that the profits are taxed in the countries where the investors who earned the profits are tax resident. Any tax that was levied on the fund itself would have to be deducted from the onshore tax on those profits in order that the same profit is not taxed twise.

When cross-border financial centres first emerged in the 1970s, they typically specialised in banking. A substantial share of this banking activity consisted of intragroup transactions among affiliates of the same (foreign) banking group. Even business involving unrelated parties, such as lending to non-bank borrowers, was typically originated by banks based elsewhere (McCauley and Seth (1992)). In effect, assets and liabilities were recorded in cross-border centres for financial reporting purposes, but mind and management for making meaningful lending and borrowing decisions were located elsewhere (Dixon (2001)). Many offshore financial centres also provide registrations for ships (notably Bahamas and Panama) or aircraft (notably Aruba, Bermuda and the Cayman Islands).

The European Union list also does not rank jurisdictions, giving the same status to the British Virgin Islands and to Anguilla, while in fact 170 times more value ends in the former than in the latter. In certain situations, the costs of regulation and operation in OFCs can be lower than in the onshore financial centres. However, often the contrary is true owing to rising compliance, regulatory, and legal costs. When dealing with these complexities, especially in matters like timeshares, it’s crucial to have professional guidance. A lawyer to cancel timeshare can navigate the intricate legal landscape, ensuring that all compliance and regulatory requirements are met efficiently, potentially saving costs and avoiding legal pitfalls.