Research paper

“Offshore financial centers: policy initiatives”

2015
 Introduction

Today, the state is the created institute and its existence assumes existence of
taxes. And there where there are taxes, there is a way to avoid them. And this way
is called offshore centers.

Origin of the offshore industry is connected with the desire of the states to
attract investments and to encourage the international cooperation, distracting a
minimum of resources on state regulation and intervention in economy. Large-
scale development of offshore business began in the 1960th with appearance of the
independent states - the former colonies. These states began to provide tax and
other privileges to the companies which aren't conducting activity in their territory
with the purpose to attract the capital. Significant increase in number of the arising
offshore contacts transition of the developed countries to monetaristic model of
economy’s management that led to toughening of various requirements imposed to
banks. This as a consequence entailed increase in scales of evasion of the capitals
from the USA and other developed countries by opening the banks by the
multinational companies in offshore centers, and then - by means of creation of
own trading, insurance, holding and other companies and trusts. Thus, providing to
various companies the non-resident mode, offshore centers raise funds in the form
of the fixed taxes and fees, without worrying about what consequences can cause
activity of the similar companies as they, as a rule, conduct it only abroad.

For many reasons the chosen subject of the research paper is actual. One of
them - globalization of the economy. A lot of companies conducting business
began to go out of the country. Additionally, the other reason is a big role in world
economy. According to some information about a half of all international financial
streams, anyway, pass through offshore zones which says about their huge value
for the international business. Besides the low taxation offshore centers have some
other advantages. Employment of hired workers in the countries of offshore
business can be mentioned. For the countries it is also attractions of additional
investments as adverse conditions for business have the majority of them and only
preferential terms for the foreign companies promote inflow of the capital and the
qualified labor.

The object of the research are offshore centers and their role in the
international operations.

The object of research is essence and prospects of development of offshore

business.

The purpose of the study - to determine the principles of offshore centers

and their regulation.

The paper is organized in three chapters. Chapter 1 is all about the definition
of offshore centers and their main characteristics. Chapter 2 is about the usage of
the offshore zones nowadays. In chapter 3 the main policy initiatives are examined.
 Chapter 1. Theoretical aspects of offshore centers

First of all, before trying to analyze nowadays’ situation with the offshore
centers and their regulation it is very important to give the definition of offshore
centers.

There can be find a lot of different meanings in different sources that is why
I tried to make one which unite all of them:

Offshore centers - territories within which the existing legislation gives to

the owner of the foreign enterprises opportunity to reduce tax obligations in the
countries of their origin. In other words, the offshore centers allow individuals and
legal entities to facilitate considerably tax burden by full or partial release from
payment of taxes in the home country. A more practical definition of an offshore
financial center is a center where the bulk of financial sector activity is offshore on
both sides of the balance sheet, (that is the counterparties of the majority of
financial institutions liabilities and assets are non-residents), where the transactions
are initiated elsewhere, and where the majority of the institutions involved are
controlled by non-residents.

Characteristic feature of the offshore center is that the capital deposited there
doesn't stay without the movement, and intends for investment into high-profitable
branches with the low taxation.

Offshore zones are obliged to legalize themselves — and in the general plan
and, especially, in the relations with other states, having received their consent to
the low taxation. It is one of the most important, but not their only distinctive
feature. The others will be mentioned later in the research paper.

So what are the main goals for the company to conduct business in offshore
centers? In my opinion, there are three the most significant:
 1. First of all, it is favorable to the companies which want to keep
the capitals from political instability of their home country, and also – to
have an opportunity to freely dispose money, moving them worldwide.
2. Secondly – if the company conducts foreign economic activity:
the offshore will allow simplifying document flow and to accelerate
financial streams.
3. Optimizing taxes and evading oа double-taxation

A number of advantages of operating of the companies in offshore centers

was described above. First of all it is an optimization of tax planning, but, also, in
my opinion, there are also such advantages, as:

 Opportunity to code information on the real owner of the

capitals and to keep full confidentiality of other commercial information;

 Opportunity systematically to take out money abroad;

 Lack of currency control, and possibility of conducting the

operations in any currency.

The most important ones I decided to draw in the scheme in order to make it
more visual (fig.1):
 Advantages of offshore centers

Opportunity to protect the

For the owner of an organization conducting business offshore

capital investments from the
economic shocks and
Attraction of foreign financial disorders occurring
investments in home country

For the
Attraction of foreign
State on Optimization of taxation
companies
which
territory
Storage of the capital in the
there is a
No need to control actions of country with stable economy
financial
the offshore organizations center
Confidentiality

An opportunity to freely
dispose money, moving them
worldwide

Fig. 1 Advantages of offshore centers

But, despite all notable advantages, the businessman conducting business in

offshore center for the first time should be ready to that this sphere has the “reefs”.

First of all, in such centers it is difficult to be insured from changes of the

tax law therefore, it is important to treat with full responsibility to a country choice
where the company will settle down.

Also, many western organizations with doubt treat the opaque offshore
because of what the last can have difficulties with building new partner
communications.
 And one more moment is a prejudiced relation to the companies which are in
offshore zones from the hoe country state’s officials as they consider the offshore
companies as a way of evasion from taxes.

Moreover, there can be some restrictions which are imposed directly by an

offshore center:

1. It is forbidden to do the business in the territory where the offshore is

registered.

2. Ban of technical character: use of the words "Bank", "Royal" (royal), "Re-
insurance" / "Insurance" (insurance), in the name of the offshore company is
strictly forbidden. Besides all this, for conducting medical, bank, educational,
safety activity by the company the license is necessary.
 Chapter 2. Uses of offshore centers

The most popular activities conducting in offshore centers, as was

mentioned above, are banking, mostly, but in addition to them other services which
are provided by offshore centers are insurance, fund management, tax planning,
trust business and IBC activity. Statistics are sparse—but impressions are of rapid
growth in many of these areas in recent years, in contrast to some decline in
banking.

But before explanation of the possible uses of offshore centers below can be
found a list of them. But it is important to emphasize that there is no common list
of zones of the offshore therefore controlling of these centers is done by as the
central banks nearly of all countries of the world, and also the IMF - the
International Monetary Fund. In table 1 there are only some offshore centers
designated by notable institutions, namely IMF and OECD (Organization for
economic co-operation and development).

The IMF list is based on countries in which a significant amount of _financial activity
involves
offshore parties on both sides of the transaction. The OECD list is based on countries
classified
as "tax havens," denied as a jurisdiction in which there are significantly lower taxes on
financial transactions and limited disclosure of tax information on clients.
 The main offshore centers are:

 Bahamas, having a considerable number of registered vessels. The

region used to be the dominant force in financial offshore world, but fell from
favour after independence in the 1970s.

 Bermuda, being the market leader for captive insurance, and also

having a strong presence in offshore funds and aircraft registration.

 British Virgin Islands, with the largest number of offshore

companies.

 Cayman Islands, having the biggest value of assets under

management in offshore funds

 Jersey - the most international of the British Crown dependencies, all

of which can be counted as offshore centres.

 Luxembourg, which is the market leader in Undertakings for

Collective Investments in Transferable Securities (UCITS)

 Singapore  is a hub for hedge funds and its private banking industry is
growing at a rate of 30 per cent annually.

 Panama, is now second only to the British Virgin Islands in volumes

of incorporations.

 New Zealand has the advantage of being a true primary jurisdiction

but with a tough but practical regulatory regime.

 Switzerland is sometimes considered a tax haven due to its general

low rate of taxation, its political stability as well as the various tax exemptions
or reductions available to Swiss companies doing business abroad, or foreign
persons residing in Switzerland.
 When we are taking about possible uses of offshore centers we can
describe the following ones which are mentioned in table 2.
 Chapter 3. International policy initiatives

There are a lot of ongoing initiatives—some of which are more fully

discussed below, aimed at curbing OFC involvement in financial crime, tax
evasion and lax financial regulation. While cross-border and offshore banking have
been at the core of the Basel Committee's work since the mid-1970s, OFCs have
more recently become a major target of the FATF .

CFATF - Caribbean Financial Action Task Force; FATF- Financial Action Task Force; IOSCO- International Organization of
Securities Commissions; ODCCP - U.N. Office for Drug Control and Crime Prevention.
 The international initiatives mentioned above have an important aim at
offshore financial centers relate in various ways to the Fund's heightened focus on
assessments of financial stability, including under bilateral and multilateral
surveillance, and notably more recently through the implementation of the joint
Bank-Fund Financial Sector Assessment Program (FSAP).

There are of course not all the initiatives in the list. Single countries’
initiatives are not also included because there are a lot of them. But I think it is
important to speak a little about Russian initiatives directed on offshore activities.

I want to pitch upon one of the recent initiative of 2014 year which is the
initiative aimed for the deoffshorization of the Russian economy and it is expected
to affect a rather big portion of Russian business. There is only a draft document
yet but the following main consequences of this process are expected to be the
following:

 Increasing in the tax burden on many operating structures, within those

associated with foreign financing, sales, etc.
 Increasing in the tax burden on many Russian holding structures
conducting their activity with the help of foreign holding companies/ the
need for a good review of activities conducted through such companies.
 Disclosuring beneficial owners in statements of accounting.
Enforcement of this will be aided by systematic information exchange
with European countries and many offshore centers and by allowing
Russian tax authorities access to information constituting audit secrets.

Initiatives to Limit the Legal Capacity of Offshore Companies and

“OffshoreControlled” Russian Companies [7]:

A number of State Duma deputies have prepared bills for discussion which
set out deoffshorization measures through amendments to Federal Law No. 115-FZ
of 7 August 2001 “Concerning the Countering of the Legitimization (Laundering)
of Proceeds of Crime and the Financing of Terrorism” and a number of other laws:
  The bill provides for the introduction of such concepts as “offshore
zone”, “offshore-controlled company”. In this respect, a list of
offshore zones would be approved by a federal executive body
authorized by the Government.
 The proposed definitions of an offshore company and an offshore-
controlled company are very broad. The existed wording could result
in many companies (including some with State participation) being
placed in the category of offshore-controlled companies.
 According to the bill, within 6 months of the amendments being
introduced offshore companies and offshore-controlled companies
must alienate shares in companies which produce strategically
significant goods, work and services. Otherwise they will not be able
to exercise certain rights, such as voting rights and the right to receive
dividends. Given the broad nature of the proposed wording, many
Russian business structures might fall under the scope of this
prohibition.

At this point the measures which are described in the “anti-offshore plan” of
the Ministry of Finance and in some of the bills described above reflect the main
purposes of the Russian deoffshorization policy. The initiatives mentioned above
are aimed firstly at limiting capital outflow from Russia into offshore jurisdictions,
and on the other hand represent an attempt to apply Russian taxation to structures
which use offshore companies administered from Russia.

.
 Conclusion

Nowadays the popularity of offshore zones is on its top. A lot of companies

conduct business with the help of different advantages provided by such centers.
These are – home country tax avoidance, confidentiality, low taxes in the offshore
company, great possibilities for the business in the whole and availability of
information and data, and what is important – a rather easy proves of becoming
offshore.

Views and opinions on offshore financial centers have always been and are
polarized. But during the research it was defined that there are mainly two
approaches – the ones who suggest that reputable offshore financial centers play
integral role in international trade and finance, and that their zero-tax structure
allows financial planning and risk management and makes possible some of the
cross-border vehicles necessary for global trade. The others consider offshore
financial centers to be a force draining tax revenues away from developed
countries by allowing tax arbitrage, and rendering capital flows.
 And nowadays we are able to witness a flurry of initiatives in all over the
world aimed at strengthening the framework for combating tax evasion and the
offshore centers activities in general. It is the evident from the recent initiatives
taken within the framework of the Global Forum on Transparency and Exchange
of Information for Tax Purposes and the OECD and internal policies and forums of
the countries.

I think that in a 10 years period international associations as well as

countries themselves will develop initiatives which will become the part of new
international legislation of controlling the offshore centers.

References

1. Chaschin A. (2013): Offshore Zones. Statutory regulation.

2. Hines, J.R. Jr. (2010) Treasure Islands. Journal of Economic Perspectives
24(4),
3. Rose, A.K. and Spiegel, M.M. (2007) _Offshore Financial Centers: Parasites
or Symbiosis? Economic Journal, 117(523)
4. Shaxson N. (2012) Treasure Islands: Uncovering the Damage of Offshore
Banking and Tax Havens Exsmo

Internet resources:

5. http://cpis.imf.org
6. http://www.europarl.europa.eu/
7. http://www.ey.com/Publication/vwLUAssets/EY-Tax-Alert-24-December-
2013-Eng/$FILE/EY-Tax-Alert-24-December-2013-Eng.pdf
8. http://www.imf.org