Offshore banking refers to the deposit of funds by a company or an individual in a bank that is located outside his/her national residence. It is typically situated in low tax jurisdictions which gives account holders certain financial and legal edges over the banks located in their own country of residence. One should not get deluded by the word “offshore” as though it suggests locations like islands, many banks are contrastingly located in onshore areas, like Panama and Switzerland.
Origin
From time immemorial, the British and the Europeans have always been subjected to heavy taxation. This had ripped them off of all the benefits they could have reaped from their earnings. The opulent had now decided to look for a way out of their struggle. A small piece of land on the Northwest coast of France, Channel Islands crept in to calm down their financial maelstrom. Their bankers offered the Europeans confidentiality and lower taxation on their deposits in their banks. What followed next was a snowball effect and many offshore jurisdictions followed the trail. Regulations were updated to make the system safe and sound and this was the substratum of offshore banking.
Advantages
Though offshore banking has been around for decades, its idea has profoundly gained popularity because of the many following benefits associated with it-
• Tax benefits- This is one of the main aspects that brings offshore banks into the limelight; tax optimization by companies or individuals. Different countries have different tax regulations. By opening accounts in other countries, the account holders can take advantage of that country’s more favorable fiscal rules. For example- Cayman Islands has become a coveted tax haven because of the absence of direct taxation. There are no taxes on capital gains corporations, withholding, property, payroll, or income. However, it is important to note that certain countries like the U.S. tax their citizens on worldwide income which might be subject to certain exclusions.
• Security and stability- Within the home nations, there could be uncertain economic conditions with possibilities of seizure, bankruptcy, high inflation, etc. being at the drop of a hat. Further, unstable political conditions pose serious threats to businesses, and keeping some of the business’s assets in a highly regulated and transparent jurisdiction with strong privacy laws seems a lucrative option to ensure asset protection.
• Multi-currencies- This aspect makes such practices stand out. Account-holders allow their depositors to have a diverse currency portfolio. They can hold and make transactions with multiple currencies in their accounts. This also prevents possible harm from currency fluctuations which is the case in the home countries.
• Convenience and privacy- Such foreign institutions can be accessed from anywhere in the world and provide services around the clock. Further, they are protected by strong privacy laws of strict corporate and banking confidentiality like maintaining the anonymity of account holders. For example- Swiss accounts; Switzerland is known for its draconian bank-customer confidentiality protections in the world. Its well-regulated jurisdiction has demarcated certain laws for the maintenance of the privacy of data of customers.
• International exposure- It opens doors for its clients to a myriad range of international investment opportunities because of less government intervention. There may be certain restrictions on foreign investments, but with their flexible nature, they serve the entryways to international markets on a platter.
Disadvantages
• Vulnerability in financial crisis- Banking offshore has been historically riskier than banking onshore. During the 2008 financial crisis, many people who had their money deposited in other countries had lost their savings because they were not insured by these foreign banks’ countries, which was not the case with their home country banks.
• Association with the underground economy- Offshore banking has been associated with organized crime, money laundering, and tax evasion. For example- Many such banks, clearinghouses, and tax havens were accused of financial assistance to terrorist groups and organized crime groups following the September 11 attacks.
The Panama Papers Scandal (2016)
Whenever spoken about offshore banking, The Panama Papers scandal always comes into the picture. It was a colossal 11.5 million anonymously leaked, encrypted confidential financial information from the database of the Panama-based law firm Mossack Fonseca. The documents were released on April 3, 2016, by the German newspaper Süddeutsche Zeitung (SZ). It covered an extensive network of more than 214,000 tax havens involving people and companies from about 200 nations with data spanning from the 1970s to the spring of 2016.
It had stitched in the names of many political leaders, businessmen, celebrities. The turmoil caused across the globe was so huge that within 48 hours of publishing the news, Iceland’s Prime Minister, Sigmundur David Gunnlaugsson resigned upon being one of the persons in the list of 29 named offensive billionaires.
Offshore banking is not illegal but hiding it is. Despite its close relations with the underground economy as a means of corruption and tax evasion, it has emerged as a remunerative option of banking to save one’s hard-earned money. Its boons have outweighed its banes.
The entire game is about choosing the right bank!
References-
Investopedia
Forbes
Author: Sanaah Jain