OFFSHORE BUSINESS REVIEW - HISTORY AND CURRENT STATUS

From small beginnings early in the 20th century, the offshore sector has grown ever faster in response to high tax rates in the developed countries, until it is estimated now that more than half of the world's money is offshore.

'Offshore' has no precise dictionary meaning: the word simply reflects the fact that most low tax jurisdictions are islands. Loosely, it is used to mean 'outside the control of the highly-taxed Western nations', although those nations could have controlled the growth of offshore jurisdictions (International Offshore Financial Centres = IOFCs) much more tightly if they had wanted to. It is an interesting question, why they didn't – maybe a combination of individual self-interest and muddle?

Probably by now the large, rich nations no longer have the financial clout to take on 'offshore' in any comprehensive way. The OECD fulminates about 'harmful tax competition', and the EU complains about 'unfair tax practices', but in the real world of offshore there are only minor changes to low-tax regimes. This is partly because the rich countries have their own tax breaks and incentives for particular local purposes, and partly because the rich countries themselves (both the countries and their citizens) make plentiful use of 'offshore'.

In 1999 and 2000, global concerns about money-laundering have given the rich countries an opportunity to mount a more concerted attack on 'offshore'. This is certainly leading to better regulatory structures in many of the IOFCs, but they are fiercely resisting the underlying agenda of 'tax harmonisation': any tax haven that was weak enough to give in to rich-country pressure in any meaningful way would quickly be picked clean by its competitors. There are 70 self-declared IOFCs already, and another 100 countries that would be only too happy to join them if the business was there.

The one thing that the rich countries can do, and increasingly try to do, is to limit the behaviour of their own citizens offshore. As ever, their prohibitions have far more effect on poor people than rich ones. Well-advised, wealthy individuals and corporations generally manage to avoid anti-avoidance measures.

The Internet brings a new dimension to taxation, because for the first time it is possible for a supplier to offer and deliver some sorts of product (e.g. music) to citizens in ways which completely bypass the traditional tax-measuring and tax-collecting arms of government. It remains to be seen whether the tax leakage this implies will spur governments on to a more effective attack on the Internet and 'offshore'. It must be doubted whether an attack would succeed, and it's more likely that a global approach to e-commerce taxation will evolve in time. This is not a problem that can be solved by individual countries, or even by groups of countries.

IOFCs themselves are a very mixed bag, and serve a variety of different purposes for various types of individual and corporation. Not all of those purposes are legitimate: there is no question that drug barons and other illegal 'businessmen' have used and do use IOFCs to wash their money before recycling it legally. The world's Governments and over-arching economic organizations such as the OECD have had some success in preventing abuses, but laundering remains a problem in some IOFCs. Among the main legal uses of IOFCs are:

Many IOFCs are most useful in relation to a particular high-tax country, eg the Isle of Man which is offshore the UK. Others have specialized in particular business sectors. The Jurisdictions section of the lowtax.net site describes the characteristics and uses of many of all the main IOFCs in depth, and in the Uses of Offshore later in this section you will find a sector-by-sector analysis of how offshore can be used, with links to the jurisdictions that specialize in each sector.

The word 'offshore' has a certain mystique to those who have never been part of it. Wrongly, they often suppose that participating in 'offshore' is not only a bit naughty, but must necessarily be expensive. It can be both, but doesn't have to be. Many IOFCs use both English legal systems and the English language; and there are many reputable advisers to help a beginner through the early stages of using 'offshore'. It is one of the purposes of lowtax.net to make 'offshore' more accessible and understandable, and to provide a ready means of contacting offshore professionals and suppliers.