Offshore Banks: Based Outside Your Country In A Low Tax Area

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Offshore banks: Offering Low Tax Services With Confidentiality

offshore banks

Offshore banks are becoming increasingly maligned as they fight to protect your wealth from the prying eyes of aggressive governments.

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An off shore bank is generally in a country with low or no government levies on income, wealth or death, and which provides financial and legal advantages. These advantages typically include:

* greater privacy, a principle born with the 1934 Swiss Banking Act

* less restrictive legal regulation

* low or no taxation

* easy access to deposits

* protection against local political or financial instability

While the term originates from the Channel Islands as "offshore" from Britain, and most of them are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location e.g. Switzerland, Luxembourg and Andorra in particular are landlocked.

Offshore banking has often been accused of helping the underground economy and organized crime, via tax evasion and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest.

Except for certain persons who meet fairly complex requirements, the personal income tax of many countries makes no distinction between interest earned in local banks and those earned abroad. Persons subject to US income tax, for example, are required to declare on penalty of perjury, any offshore bank accounts which they may have.

Following September 11, 2001, there have been many calls for more regulation on international finance, in particular concerning tax havens and their banks, and clearing houses.

Defenders of off.shore banking have criticized these attempts at regulation. They claim the process is prompted, not by security and financial concerns, but by the desire of domestic banks and tax agencies to access the money held in offshore accounts.

They cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting that Organization for Economic Co-operation and Development (OECD) countries are trying to stamp out competition.

Advantages of offshore banking

* Such entities provide access to politically and economically stable jurisdictions. This may be an advantage for those resident in areas where there is a risk of political turmoil who fear their assets may be frozen, seized or disappear. However, developed countries with regulated banking systems offer the same advantages in terms of stability but not of taxation.

* Some of them may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention. Advocates of offshore banking often rightly characterize government regulation as a form of tax on domestic banks, reducing interest rates on deposits.

* Offshore finance is one of the few industries, along with tourism, in which geographically remote island nations can competitively engage. It helps developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world.

* Interest is generally paid by them without tax deducted. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income.

* Some offer banking services that may not be available from domestic banks such as anonymous bank accounts, higher or lower rate loans based on risk and investment opportunities not available elsewhere.

* Offshore banking is often linked to other structures, such as offshore companies, trusts or foundations, which may have specific tax advantages for some individuals.

* Many advocates of off.shore banking also assert that the creation of tax and banking competition is an advantage of the industry, arguing that tax competition allows people to choose an appropriate balance of services and taxes.

Disadvantages of offshore banking

* Offshore banking has been associated in the past with the underground economy and organized crime, through money laundering.

* Following September 11, 2001, tax havens and their banks, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors. However, offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers.

* Offshore jurisdictions are often remote, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem for customers. Accounts can be set up online, by phone or by mail.

* Offshore private banking is usually more beneficial to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. However, simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counterparts. The tax burden in developed countries thus falls disproportionately on middle-income groups.

Historically, tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy.

Banking services

It is possible to obtain the full spectrum of financial services from these banks, including:

* deposit taking

* credit

* wire- and electronic funds transfers

* foreign exchange

* letters of credit and trade finance

* investment management and investment

Custody

* fund management

* trustee services

* corporate administration

Not every bank provides each service. Banks tend to specialize between retail services and private banking services. Retail services tend to be low cost and undifferentiated, whereas private banking services tend to bring a personalized suite of services to the client.

Regulation of tax haven banks

*Following September 11, 2001, there have been a number of initiatives to increase the transparency of offshore banking. A few examples of these are:

* The tightening of anti-money laundering regulations in many countries including most popular offshore banking locations means that bankers are required, by good faith, to report suspicion of money laundering to the local police authority, regardless of banking secrecy rules. There is more international co-operation between police authorities much to the tax haven's dismay.

* Following 9/11 the US introduced the USA PATRIOT Act, which authorizes the US authorities to seize the assets of a bank, where it is believed that the bank holds assets for a suspected criminal. Similar measures have been introduced in some other countries.

* The European Union has introduced sharing of information between certain jurisdictions, and enforced this in respect of certain controlled centers, such as the UK Offshore Islands, so that tax information is able to be shared in respect of interest.

Offshore financial centers

In terms of off.shore banking centers, in terms of total deposits, the global market is dominated by two key jurisdictions: Switzerland and the Cayman Islands, although numerous other offshore jurisdictions also provide offshore banking to a greater or lesser degree. In particular, Jersey, Guernsey and the Isle of Man are known for their well regulated banking infrastructure.

Some offshore jurisdictions have steered their financial sectors away from offshore banking, as difficult to properly regulate and liable to give rise to financial scandal.

Typical banks in different jurisdictions

1. Barclays Bank PLC

Bank description: Renowned international bank, global presence

Type of account: corporate account

Type of usage: Regular trading / accumulation / asset holding / investment

Minimum balance: USD 2,500 or equivalent

Remote operation: Internet banking to be introduced shortly.

Operational costs: Average (wire transfer charges 0.15%, min $20 - max $65)

Opening procedure: By mail, via approved intermediary

Due diligence: Detailed due diligence on all principals and signatories

Restrictions on signatories: None

2. Standard Bank, Isle of Man

Type of account: corporate account / personal account

Type of usage: Accumulation / savings / asset holding / investment. Active trading operations discouraged

Minimum balance: EURO 10’000 or equivalent

Remote operation: Internet banking / facsimile

Operational costs: Average (outgoing wire transfer charges $50)

Opening procedure: By mail, via approved intermediary

Due diligence: Detailed due diligence on all principals and signatories

3. Anlage & Privat Bank AG, Switzerland

Type of account: corporate account

Type of usage: Accumulation / asset holding / investmentActive trading operations possible, but not recommended

Minimum balance: EURO 25’000 or equivalent

Remote operation: Facsimile

Operational costs: High

Opening procedure: By personal presence in bank or with banks’ representative in Switzerland or Latvia

Due diligence: Detailed due diligence on all principals and signatories

4. Anglo Irish Bank Austria AG, Austria

Type of account: corporate account

Type of usage: Accumulation / savings / asset holding / investment. Regular trading possible, but discouraged

Minimum balance: EURO 25’000 or equivalent

Remote operation: Facsimile

Operational costs: Above average

Opening procedure: By mail, via approved intermediary

Due diligence: Detailed due diligence on all principals and signatories

An offshore company acts as a buffer between you and the bank account and is advisable, instead of having a bank account in your own name.

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