Offshore financial centre

Research in 2013–14 showed OFCs harboured 8–10% of global wealth in tax-neutral structures, and acted as hubs for U.S. multinationals in particular, to avoid corporate taxes via base erosion and profit shifting ("BEPS") tools (e.g. the double Irish).

[5][7] The definition of an offshore financial centre dates back to academic papers by Dufry & McGiddy (1978), and McCarthy (1979) regarding locations that are: Cities, areas or countries which have made a conscious effort to attract offshore banking business, i.e., non-resident foreign currency denominated business, by allowing relatively free entry and by adopting a flexible attitude where taxes, levies and regulation are concerned.” An April 2007 review of the historical definition of an OFC by the IMF, summarised the 1978–2000 academic work regarding the attributes that define an OFC, into the following four main attributes, which still remain relevant:[4] In April 2000, the term rose to prominence when the Financial Stability Forum ("FSF"), concerned about OFCs on global financial stability, produced a report listing 42 OFCs.

[8] The FSF used a qualitative approach to defining OFCs, noting that: Offshore financial centres (OFCs) are not easily defined, but they can be characterised as jurisdictions that attract a high level of non-resident activity [...] and volumes of non-resident business substantially exceeds the volume of domestic business.

[8] In June 2000, the IMF accepted the FSF's recommendation to investigate the impact of OFCs on global financial stability.

[12] Large projects were carried out by the IMF and the OECD from 2000 onwards, to improve data transparency and compliance with international standards and regulations, in jurisdictions that had been labeled OFCs and/or tax havens by the IMF–OECD.

The reduction in banking secrecy, was partially credited to these projects as well as global advances in combatting illicit finance flows, and Anti-Money Laundering legislation and regulations.

[14] While from 2010 onwards, some researchers began to treat tax havens and OFCs as practically synonymous, the OECD and the EU went in a different direction depending on their desired outcome.

By 2017, and after many years of regulatory changes in OFCs and some onshore IFCs, the OECD's list of "tax havens" only contained Trinidad & Tobago, which is not a prominent international financial centre.

Oxfam, which has entities and activities in jurisdictions such as Lichtenstein, Luxembourg, Netherlands and Delaware, has become a prominent critic of OFCs and has produced reports with the Tax Justice Network, to try to depict their point of view.

These are widely discredited by professionals and academics and prominent TJN leaders resigned complaining that the reports were not compiled by knowledgeable tax experts and were manufactured to present a desired outcome, which detracts from good faith efforts to curb BEPS, aggressive tax planning and illicit funds flows.

In July 2017, the University of Amsterdam's CORPNET group ignored any definition of a tax haven and followed a quantitive approach, analyzing 98 million global corporate connections on the Orbis database.

The following eight OFCs (also called pass-through economies) were co-identified by an IMF working paper, as being responsible for 85% of the world's investment in structured vehicles.

[17] The fuller table is produced in the § Shadow banking section, however, the 4 largest OFCs for shadow banking with OFI assets over 5x GDP are:[17] Offshore finance became the subject of increased attention since the FSF–IMF reports on OFC in 2000, and also from the April 2009 G20 meeting, during the height of the financial crisis, when heads of state resolved to "take action" against non-cooperative jurisdictions.

[18] Initiatives spearheaded by the Organisation for Economic Co-operation and Development (OECD), the Financial Action Task Force on Money Laundering (FATF) and the International Monetary Fund have had an effect on curbing some excesses in the offshore financial centre industry, although it would drive the OFC industry towards a § Focus on tax for institutional and corporate clients.

The second reason, Favourable regulations, had also dissipated, but to a lesser degree, as a result of initiatives by the IMF–OECD–FATF post–2000, promoting common standards and regulatory compliance across OFCs and tax havens.

[22][20][19] For example, while the EU–28 contains some of the largest OFCs (e.g. Ireland and Luxembourg), these EU–OFCs cannot offer regulatory environments that differ from other EU–28 jurisdictions.

Substantially, but not exclusively, Cayman and the BVI are investment funds jurisdictions, as well as structured finance and holding company vehicles for large assets (such as infrastructure, commercial real estate), or SPVs for investment into jurisdictions with less certain legal and judicial infrastructure, such as China, Russia or India.

[23][25] In August 2014, Zucman showed OFCs being used by U.S. multinationals, in particular, to execute base erosion and profit shifting ("BEPS") transactions to avoid corporate taxes.

In August 2016, the EU Commission levied the largest tax fine in history, at US$13 billion, against Apple in Ireland for abuse of the double Irish BEPS tool from 2004 to 2014.

In January 2017, the OECD estimated that BEPS tools, mostly located in OFCs, were responsible for US$100 to 240 billion in annual tax avoidance.

[28] However, it is notable that developing countries often suffer from kleptocracy and serious corruption regarding national wealth, and BEPS is very much a secondary concern.

[15] (‡) Identified as one of the largest 5 Sinks (British Virgin Islands, Luxemburg, Hong Kong, Jersey, Bermuda), by CORPNET in 2017.

No other jurisdictions exceeded 5 times GDP for this measure.OFCs, however, have expanded into a related area to shadow banking, which is asset securitisation.

OFCs have more recently become leaders in regulation, operating under higher standards than onshore jurisdictions, and having advanced legal systems with sophisticated commercial courts and arbitration centres.

When the UK, USA and EU issued sanctions against certain Russian people, assets and companies, those which were held in OFCs with verified KYC documentation assisted greatly in identifying ownership trails - something that would not necessarily have been possible if European jurisdictions, Delaware or English entities had been used.

However, OFCs play a key role in providing the legal structure for global securitisation transactions that could not be performed from the main financial centres.

[..] In fact, countries that lie close to tax havens have exhibited more rapid real income growth than have those further away, possibly in part as a result of financial flows and their market effects.The most cited paper specifically on OFCs,[10] also came to a similar conclusion (although recognising that there are strong negatives as well): CONCLUSION: Using both bilateral and multilateral samples, we find empirically that successful offshore financial centers encourage bad behaviour in source countries since they facilitate tax evasion and money laundering [...] Nevertheless, offshore financial centers created to facilitate undesirable activities can still have unintended positive consequences.

[5][7] This claim can get into wider, and also contested, economic debates around the optimised rate of taxation on capital and other free-market theories, as expressed by Hines in 2011.

Aircraft are frequently registered in offshore jurisdictions where they are leased or purchased by carriers in emerging markets but financed by banks in major onshore financial centres.

For example, in 2003, state carrier Pakistan International Airlines re-registered its entire fleet in the Cayman Islands as part of the financing of its purchase of eight new Boeing 777s; the U.S. bank refused to allow the aircraft to remain registered in Pakistan, and the airline refused to have the aircraft registered in the United States.