TAX HAVENS HISTROY
Some twenty years
ago, there were only a handful ofoffshore,
(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 off shore companies are based.
From understanding this it is a small step to understanding the
need and growth of 'Offshore'!
Origins
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:
• Regulation
• Communications
• Specialization
• Credibility
• Infrastructure
• Stability
• Expertise
• Flexibility
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:
• Political and economic instability.
• Market globalization and deregulation.
• The internationalization of business.
• The lifting of trade barriers.
• A trend towards steady global economic growth.
• A global relaxation of foreign exchange controls.
In addition to political and economic
catalysts there are also global tax related catalysts that continue
to influence the growth of the offshore industry.
These include:
• High tax regimes.
• More effective tax recovery.
• The opportunities of utilizing double taxation treaties.
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.
• Expatriates and emigrants.
• Owners of businesses.
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:
• Multinational companies.
• Conglomerates.
• Shipping companies.
• Financial institutions.
INDIVIDUAL USERS
Whilst the profiles of individual users are diverse, they would
include, amongst others:
• Individuals enjoying inherited
wealth.
• Entrepreneurs and industrialists.
• Businessmen and senior executives.
• Entertainers and authors.
• Sportsmen and other personalities.
• Inventors, engineers and designers.
• Owners of intellectual property rights.
• Medical practitioners and other professionals.
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:
• Tax planning.
• Estate and investment planning.
• Pre-immigration planning.
• Confidentiality and privacy.
• Security.
CORPORATE USERS
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:
• Regional headquarters.
• Marketing, trading and administration centers.
• Re-export, trans-shipment and pre-positioning.
• Manufacturing and assembly plants.
• Transportation and distribution.
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. |
