Some twenty years ago, there were only a handful of offshore, (tax havens) and to many, their use was surrounded in ‘mystique’. Also, there were only a few professionals specializing in offshore practice and tax havens, and those that did, typically made use of only one or two jurisdictions.
Over the last twenty years, startling advances in technology and the telecommunications revolution, have made it easier to access offshore facilities – so much so, that today’s offshore industry has developed in to a major global business, spanning all quarters of the world, involving, in one way or another, approximately half of the world’s financial transactions by value.
Consequently, International Financial Services Centers are no longer surrounded by the ‘mystique’ of twenty years ago. They are used globally, twenty-four hours a day, each and every day, as an integral and important part of the world’s financial system.
Possibly more to the point is a little bit of history about limited companies generally, on which all offshore companies are based. From understanding this it is a small step to understanding the need and growth of ‘Offshore’!
The concept of limited liability companies can be traced back to the early part of the 19th century and the insatiable demand for cash which the industrial revolution and its thousands of manufacturing and trading organizations spawned. Whilst many of these early businesses were government backed, the demand for funding was so great that entrepreneurs started looking to the public for investment money.
Many of these early enterprises were highly successful of course, leaving only happy investors, but many others failed, either through misjudgments, bad luck, incompetence or downright fraud. Sometimes, when these businesses failed, the investors were not only left nursing the loss of their original investment, but frequently faced demands for all the company’s losses. Not unreasonably, faced with such mounting losses and ensuing bankruptcies, demands were made for legislation to protect stockholders and other investors.
THE FUTURE OF THE TAX HAVENS AND OFFSHORE INDUSTRY
As we approach the 21st Century, there will be major changes in world geo-politics. The current world population is increasing by 90 million a year – 15 million of whom are born in China.
Presently, thirty per cent of the world’s working population is unemployed. Additionally, the world’s population is increasingly expecting higher standards of living and improved work opportunities.
These radically changing patterns in expectations, population and wealth will continue to create political and economic instabilities. Governments in both the developed and the developing world will have no option but to continue to levy high taxes to meet these expectations and the associated costs of providing new and improved infrastructure.
Thus, one does not need a ‘Crystal ball’ to clearly see that the offshore industry will continue with its rapid development and growth.
The following political and economic trends will influence the development of the offshore industry, not only in Europe but world-wide:
The spectacular growth in South East Asia.
The after-effects of the collapse of the Soviet Union.
The emergence of South America, India and China as economic power houses.
Volatility in currency markets.
For example, consider South East Asia. Today, approximately 6 million people in the ASEAN countries enjoy the equivalent of Australian middle-class living standards. It is estimated that this number will have grown to 45 million by the year 2005.
Therefore, it is not surprising that South East Asia will become the world’s paramount market, not only for consumer goods but also for financial services.
The users of International Financial Services Centers are becoming increasingly demanding. They expect high quality service at a reasonable cost, and access to sophisticated investment services – as well as confidentiality.
Tomorrow’s offshore users will be looking for centers that can compete with today’s onshore financial centers in the following areas:
The Limited Liability Company.
From this early legislation the concept of the limited liability company grew. These companies had two important features, firstly the director’s and stockholder’s liabilities became limited to the amount of the share capitalization of the company, and secondly the companies were viewed as a separate legal entity, distinct from its owners.
Thus, the legislation ensured that should a limited company fail, for whatever reason, the directors and stockholders of the company were limited in their financial liability to the failed company and its investors and creditors to the amount of the share capital they owned. In practice the directors and stockholders of a failed limited company simply lost their original investment.
Over the years, the legal framework of limited liability companies has changed to keep pace with more modern business practice, however the basic concept still remains to this day. Ensuing legislation now gives more protection to investors and the general public, especially from companies run with intent to defraud, and tries, with some success, to ensure that those convicted or suspected of fraudulent dealings are barred from holding directorships.
It is the separate legal identity aspect that makes the limited company an ideal tax planning vehicle.
Offshore Limited Companies
Because tax rates have always varied, not only from individual to business but from country to country, there has always been an incentive to live or work in or from a lower tax area. As the wealth of both companies and individuals has increased over the years, this incentive has become the foundation for a business in its own right.
The principle motivations behind the demand for offshore services from both individuals and corporations are:
Tax Minimization Risk Management Cost Reduction
With global instability, currency fluctuations and political uncertainties set to continue, our clients’ needs will be not only to minimize their global tax exposure, but also to protect and preserve their assets and investments in safe havens.
Thus, risk management has become as important a motivation for using International Financial Services Centers as international tax planning.
The political and economic catalysts that influenced the growth of the offshore industry in the eighties and nineties will continue to influence growth in the next two decades.
These catalysts are:
In addition to political and economic catalysts there are also global tax related catalysts that continue to influence the growth of the offshore industry.
In 1997 some 70,000 or so offshore companies were incorporated in the various Caribbean centers.
The most popular jurisdiction Delaware and the BVI whose registrar has incorporated approximately 300,000 IBC companies in the last ten years. Some 40,000 IBC’s were incorporated there last year.
It is estimated that 15,000 companies a year are incorporated in Hong Kong for offshore purposes and another 50,000 or so in the other offshore jurisdictions.
This means that the total number of companies formed for offshore purposes exceeds 140,000 per annum.
Estimates indicate that by the turn of the century a minimum of another half a million offshore companies will have been incorporated world-wide.
An increasing number of countries, often but not exclusively ‘third world’, have seized upon this to offer companies based in high tax areas, a ‘tax haven’ if they move their legal identity to their own low tax shores. Not only does this save the organization tax, it ensures that the ‘haven’ country gets both a revenue from registration fees (to its government) and employment and income for its citizens by way of formation agents and their own businesses. There are now some 40/50 different offshore jurisdictions worldwide, each offering slightly different companies but all sharing a common aim – to attract international business by way of offering a low or zero tax base from which to trade.
The Client Profile
The users of offshore facilities fall primarily into the two categories of individual and corporate users.
Individual users include:
High net worth individuals are generally those clients with disposable assets in excess of two million dollars.
Expatriates are, in the main, individuals who are living away from their home countries, either on overseas contracts of employment or as retirees, whereas emigrants are individuals who have permanently moved from one country to another in pursuit of a better quality of life and/or business interests.
The category of ‘owners of businesses’ relates predominantly to proprietary businesses where the shares are held by family members.
Corporate users include:
Whilst the profiles of individual users are diverse, they would include, amongst others:
Traditionally, such users originated from Europe, North and South America and certain African and Australasian countries. Over the last decade, however, clients falling into this category have increasingly come from the Eastern European countries, the CIS, the Indian sub-continent and the booming economies which make up South East Asia and the Pacific Rim.
– Individual users utilize offshore facilities for the following reasons:
Estate and investment planning.
Confidentiality and privacy.
Most modern corporations be they medium sized companies pursuing international expansion, multinational companies, conglomerates, shipping companies or financial institutions, are market driven and many have been able to establish and maintain their competitive edge by efficiently structuring aspects of their operations through offshore centers.
Holding companies, foreign direct investment companies, mixing vehicles, royalty companies and treasury management companies are but a few examples of the types of companies that have been established by corporate users in offshore centers.
Treasury management operations would typically include cash management, capital raising exercises, the provision of finance to subsidiaries and risk management. Corporate treasurers often apportion their cash resources between their subsidiaries. This process, known as ‘netting’, is regularly undertaken from an offshore center.
Many corporate users have favored establishing a physical presence in offshore centers, which, in addition to treasury management, are utilized for:
Free ports, export processing and special economic zones have continued to attract corporate users. Mauritius, which has in excess of 700 companies operating in its Export Processing Zone, the Isle of Man and Madeira have all been successful in attracting multinational and large companies to establish physical presences.
The individual and corporate users of offshore services are, diverse, matched only by the wide range of benefits that offshore centers offer.