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History and Current Status of the Offshore Sector

From small beginnings early in the 20th century, the low-tax (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 in low-tax jurisdictions. There are 70 self-declared IOFCs (International Offshore Financial Centres) already, and another 100 countries that would be only too happy to join them if the business was there.

'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 highly-taxed nations', although those nations could have controlled the growth of low-tax jurisdictions 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?

In the last decades of the 20th century, it seemed that the large, rich nations no longer had the financial clout or even the desire to take on 'offshore' in any comprehensive way. This was partly because the rich countries had 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'. The OECD fulminated about 'harmful tax competition', and the EU complained about 'unfair tax practices', but in the real world of offshore there was little change to low-tax regimes. On the contrary, many jurisdictions which had traditionally made their living from bananas, sugar and tourism decided to join the low-tax bandwaggon.

In 1999 and 2000, global concerns about money-laundering and fears about the leakage of tax revenues gave the rich countries a motive and the opportunity to mount a more concerted attack on 'offshore', and this was much accentuated by the horror of 9/11 as the world tried to get to grips with the financing of terrorism.

The EU, the OECD and a US Democratic administration joined forces to attack 'offshore'. This certainly led to better regulatory structures in many of the IOFCs, and after initial fierce resistance to the underlying agenda of 'tax harmonisation', it also led to the spread of 'transparency' among low-tax jurisdictions, meaning that the domestic and international (non-resident) regimes were 'harmonized', usually at a tax rate somewhere between the pre-existing rates. Some jurisdictions simply abandoned corporate taxation altogether.

Perversely, the result of forcing the low-tax jurisdictions to clean themselves up was to make them into more effective competitors, and their growth rates in the first decade of the 21st century far outstripped those of the high-tax countries that were tormenting them.

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, gaming and financial services) to citizens in ways which completely bypass the traditional tax-measuring and tax-collecting arms of government. The tax leakage this implies has spurred governments on to a more effective attack on low-tax techniques and locations; but they have had only partial success. It's 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:

  • tax-efficient structuring of international trade
  • holding and investment companies
  • offshore investment funds
  • protection of personal wealth using trusts
  • international financial services, notably banking and the trading of financial assets
  • 'captive' insurance companies
  • shipping registries
  • betting and gaming
  • distribution of electronic goods including music and software

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, and helped on by the moral majority of high-tax nations who would like to make the word 'offshore' synonymous with 'terrorism' or 'money-laundering', 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 plenty of reputable advisers to help a beginner through the early stages of using a low-tax jurisdiction, whether in terms of trading, investing, or in terms of living there. It is one of the purposes of lowtax.net to make 'offshore' more accessible and understandable, and to provide a ready means of contacting professionals and suppliers in low-tax areas.