Why isn't offshore dying?
Contributed by Laveco Ltd
16 January, 2013
Contributed by Laveco Ltd. [www.laveco.com]
The end of the year is upon us, and at this time the number of justified and more significantly unjustified fears and nervousness about the future increases dramatically. Ever since I started in this business there has hardly been an end of year when someone around me hasnt croaked up that this is the end, that from tomorrow nothing will be the same and a whole new world is beginning. But, I wonder, is this really possible in the world economy? Are the decision-makers really capable of making several million undesirable offshore companies disappear from one moment to the next? Can the companies responsible for more than 50% of the worlds financial turnover really be sunk without trace from one day to the next? Naturally, this is all possible. Basically, and in theory it could be true. It is an undeniable and very visible reality that the international bodies, with the OECD, EU and USA at their helm, are fanatically waging war on the small countries, where it is easy for them to flex their muscles. The Seychelles or the British Virgin Islands are easy targets for the inquisitors, but they dont know where to start with countries such as, for example, Hong Kong. The central Chinese leadership would soon enlighten anyone who tries to pick a fight with them: Hong Kong is part of China, and here the Chinese leadership makes the decisions, and nobody is going to dictate to them from abroad.
From the above, it can be seen that the bargaining power of the different jurisdictions is very varied. Some can be dealt with as they please, while others are tougher nuts to crack. At the same time, we should also examine and define exactly what we mean by the term offshore. If we return to earlier definitions, going back some 20-30 years, then offshore company typically meant a company established in some small country where there was either no tax or the tax was a minimum, almost token amount. The reduced rate of tax was, or is, given on the condition that the company carried out no activities in the country of registration, thus ensuring that the tax interests of the given country are not damaged and there is no outflow of funds from that country. Offshore, then, signified a type of physical location, which was connected to tax planning and optimisation. Until now this all worked well, with the company set up outside the beneficial owners country with a foreign bank account, and the funds accumulating in the account being partly kept there and partly returned to the economy in the form of investments.
However, as the low-tax jurisdictions became more successful and attracted more and more capital, the countries with high rates of tax started to revolt, claiming that the capital was deserting them and migrating to those countries where it could achieve more, under more attractive conditions and basically could be used more effectively.
And here we have reached the crux of the matter. According to Marx, the first law of capitalism is the law of profit. Capital always seeks the route in the world where it can achieve the greatest profit. This is like a mountain stream which starts at the peak and follows the path which allows it to flow the most quickly. If the conditions are more advantageous in one country, with lower taxes and higher rewards and similar or even lower risk than in other countries, then sooner or later the capital will find its way there. This is dictated by the ruthless logic of the competition of capitalism. This was true 100 years ago, and today it is probably even more so when we can transfer our money from Londons stock exchange to Frankfurts or can buy securities in Tokyo at the press of a button on our computer.
Now, though, we have to ask some more questions. Are other laws capable of replacing the law of profit? I think the answer here is clearly no; here everybody wants to win; the entrepreneur, who has the capital, invests in order to maximise his profit. This law can not just be eliminated, as restricting the effectiveness of capital would remove the point of the whole thing. If lack of profit means it is not worth investing capital, then this would eventually undermine the entrepreneurial spirit.
This is where we reach the most important part of the topic, the human factor. And the question, can human nature change? Could it be that someone who goes into business wanting to profit wont want to win just as much tomorrow? Then more and more? And as his business grows he wont want the growth to spread? The answer is an emphatic no. Human nature hasnt changed for thousands of years. There will always be a segment of society who, materially speaking, want more than the average. Who are prepared to fight, push, take on projects, sacrifice time and energy in the interest of material success. And it wont be at the poker table that they do all this. At the most it could be some stock exchange, reached through virtual channels, but even this is part of the business world.
However, those who want to win in the business world seek those tools and methods which allow them to maximise their profits. Low-tax companies, and similar solutions, were, are and will be such tools. This is a little bit like doping in sport. Unfortunately, those who resort to doping are capable of greater results and gain an advantage over their competitors. Successful businessmen realised this years ago. All you have to do is look at the famous and successful entrepreneurs of any country. Show me just one who hasnt been involved in doping with an army of offshore companies behind their businesses! They couldnt have done it, if they hadnt used these possibilities, and would have fallen mercilessly behind their competitors.
But is this the same offshore that is being attacked from all sides? So what will be the outcome? Wont it be possible to use any of it in the future? The answer is yes, but the whole game will be much more complex. There will always be jurisdictions which want to attract capital and foreign entrepreneurs with lower taxes. We dont have to worry that the rivalry between countries when it comes to differences in taxes will ever disappear. They can not agree on a unified tax rate within the EU, let alone in the case of 200 countries worldwide.
However, while in the past offshore meant a type of geographical position, in the future it will come to be a synonym for outside the country. We can also see how some jurisdictions disappear, and others pop up as replacements, or rather the emphasis is placed on those offering better conditions. Many more people will take advantage of migration, whereby the same company is re-registered from one country to another. There have also been examples of this in the past. In 2006, for example, when Niue decided that it was no longer possible to incorporate new companies there and that existing ones could only be maintained for two more years, a significant number of companies were re-registered in the Seychelles and Belize. It will be a bit like cloud storage in the computer world: if the conditions are not favourable on one server, then we switch to another one.
So offshore will become a sort of collective term, meaning not so much a given country, but rather a method in asset protection. Here, again, I have taken a giant step forward, as in the future the emphasis will be far more on asset protection, the safe-placing of assets. But lets have a look at the worst case scenario: unified tax rates will apply all over the world naturally this is only possible in theories and everybody pays everything due to the state coffers. What will happen then? Capital will continue to accrue in the hands of the businessmen, and they will want to use this, to administer their fortunes, as long as they live, before passing it on to the next generations as inheritance. To this end the Offshore Financial Centres have developed legal formats perfect for the holding of assets and ensuring their smooth transfer to the next generation. Whether we take the private asset protection foundation or the trust, which has a history stretching back some 800 years in Anglo-Saxon territories, there is no competitive alternative anywhere in the world. And what is even more important, these vehicles are totally legal and are affordable for the average businessman. On the other hand, we do not have to worry about inheritance tax being scrapped, and only have to look at the minimal amount which has to paid in the UK. J
I could list the reasons which support the theory that the profit law can not be replaced because human nature has remained unchanged for thousands of years. Those with a desire to enter into business, who want to start enterprises, do so because they want to be successful, because they want more than others and as a result are constantly on the lookout for advantageous possibilities and tools. There is nothing bad or unnatural about this, and the process will be perpetual, all the while that Man lives on earth and private enterprise still exists. On the basis of the law of supply and demand, if demand for something exists, sooner or later supply will follow. And the same applies to our story, too. At the most, the format changes over the decades. Our line of business is currently heading for such a period of transformation. 5 or 10 years from now we will all be part of a totally new financial world order, which today we cant even begin to imagine
I would like to wish all our readers all the very best for the end of year festive season. Enjoy a good rest and charge up your batteries for the successes awaiting next year.
With warmest regards,
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