?? Offshore zones
Offshore zones are a phenomenon that often arouses considerable interest and lively discussion in society. In particular, in the Ukrainian public space, the first associations with the word "offshore" are usually oligarchs, capital flight and corruption. And this is understandable, given that this phenomenon has always been associated with scandals and exposure of government officials or big business. Therefore, I propose to delve deeper into the essence of this concept and answer the question: what is an offshore zone, why do they arise and how do they affect the global economy? What are offshore zones and what is the history of their emergence?
Offshore jurisdictions in their current form began to take shape as early as the late nineteenth century. A rather interesting case took place in the United States. One lawyer persuaded the governor of New Jersey to create liberal conditions for business on his territory liberal conditions for business, including low taxes. For the opportunity to register a business in this state, it was necessary to pay a small franchise tax. ? The next state to follow the same was Delaware, where, as of the beginning of the XX century, almost almost 1.5 thousand companies were registered in the state. Registration fees and franchise taxes gave these states considerable income. Around the same time, offshore jurisdictions were formed offshore jurisdictions in Luxembourg and Panama were formed at about the same time. In the 70s of the same century there was a real boom - more than 70 offshore centers emerged around the world, and in the 90s, according to experts, about half of foreign exchange transactions were conducted through offshore centers. The word "offshore" comes from the English offshore - "offshore", i.e., "located at some distance from the shore", and means territories where a preferential tax regime is in effect. A large explanatory dictionary of the modern Ukrainian language gives the following definition: ? "Offshore - territories that provide a preferential regime for financial and credit transactions with foreign participants in foreign currency". ? Offshore business has become an integral part of the global economy, it brings with it, as a positive phenomenon - the possibility of broad access to international financial markets, and negative, which is the spread of criminal and criminal schemes. Almost all large foreign banks and investment companies use offshore companies to conduct their financial transactions. In Ukraine, 70-75% of the investments received comes through offshore zones.
Offshore jurisdictions in their current form began to take shape as early as the late nineteenth century. A rather interesting case took place in the United States. One lawyer persuaded the governor of New Jersey to create liberal conditions for business on his territory liberal conditions for business, including low taxes. For the opportunity to register a business in this state, it was necessary to pay a a small franchise tax. The next state to follow the same was Delaware, where, as of the beginning of the XX century, almost almost 1.5 thousand companies were registered in the state. Registration fees and franchise taxes gave these states considerable income. Around the same time, offshore jurisdictions were formed offshore jurisdictions in Luxembourg and Panama were formed at about the same time. In the 70s of the same century there was a real boom - more than 70 offshore centers emerged around the world, and in the 90s, according to experts, about half of foreign exchange transactions were conducted through offshore centers. The word "offshore" comes from the English offshore - "offshore", i.e., "located at some distance from the shore", and means territories where a preferential tax regime is in effect. A large explanatory dictionary of the modern Ukrainian language gives the following definition: ? "Offshore - territories that provide a preferential regime for financial and credit transactions with foreign participants in foreign currency". Offshore business has become an integral part of the global economy, it brings with it, as a positive phenomenon - the possibility of broad access to international financial markets, and negative, which is the spread of criminal and criminal schemes. Almost all large foreign banks and investment companies use offshore companies to conduct their to conduct their financial transactions. In Ukraine, 70-75% of the investments received comes through offshore zones. Offshore jurisdictions in their current form began to take shape in the late nineteenth century. A rather interesting case took place in the United States. One lawyer persuaded the governor of New Jersey to create liberal business conditions on his territory liberal conditions for business, including low taxes. For the opportunity to register a business in this state, it was necessary to pay a small franchise tax. The next state to follow the same was Delaware, where, as of the beginning of the XX century, almost almost 1.5 thousand companies were registered in the state. Registration fees and franchise taxes gave these states considerable income. Around the same time, offshore jurisdictions were formed offshore jurisdictions in Luxembourg and Panama were formed at about the same time. In the 70s of the same century there was a real boom - more than 70 offshore centers emerged around the world, and in the 90s, according to experts, about half of foreign exchange transactions were conducted through offshore centers. The word "offshore" comes from the English offshore - "offshore", i.e., "located at some distance from the shore", and means territories where a preferential tax regime is in effect. A large explanatory dictionary of the modern Ukrainian language gives the following definition: ? "Offshore - territories that provide a preferential regime for financial and credit transactions with foreign participants in foreign currency". ? Offshore business has become an integral part of the global economy, it brings with it, as a positive phenomenon - the possibility of broad access to international financial markets, and negative, which is the spread of criminal and criminal schemes. Almost all large foreign banks and investment companies use offshore companies to conduct their financial transactions. In Ukraine, 70-75% of the investments received comes through offshore zones. Offshore jurisdictions in their current form began to take shape as early as the late nineteenth century. A rather interesting case took place in the United States. One lawyer persuaded the governor of New Jersey to create liberal conditions for business on his territory liberal conditions for business, including low taxes. For the opportunity to register a business in this state, it was necessary to pay a small franchise tax.The next state to follow the same was Delaware, where, as of the beginning of the XX century, almost 1.5 thousand companies were registered in the state. Registration fees and franchise taxes gave these states considerable income. Around the same time, offshore jurisdictions were formed offshore jurisdictions in Luxembourg and Panama were formed at about the same time. In the 70s of the same century there was a real boom - more than 70 offshore centers emerged around the world, and in the 90s, according to experts, about half of foreign exchange transactions were conducted through offshore centers.
The first mention of the concept of "offshore" can be found in the late 50s of the XX century in one of the newspapers on the East Coast of the United States of America. The newspaper article was about a financial company that escaped the control of the US government by moving its assets and activities to another country that had more favorable and profitable tax laws. However, without being formalized into a separate concept, zones with similar qualities have certainly existed earlier in history.
For example, one of the first zones that can be conditionally called offshore is the island of Delos, where Phoenician and Greek merchants conducted free trade, avoiding the taxation system of Athens. In the Middle Ages, the cities of Livorno, Trieste, and Sibenik could be partially considered such zones.?
Offshore jurisdictions in their current form began to emerge in the late nineteenth century. In particular, Switzerland with its banking legislation that ensured reliable protection of deposits and personal data of clients, as well as the Netherlands, are considered to be the first. A rather interesting case took place in the United States. A lawyer convinced the governor of New Jersey to create a liberal business environment, including low taxes. A small franchise fee was required to register and start a business in this state. The next state to follow the same path was Delaware, where almost 1.5 thousand companies were registered as of the beginning of the XX century. Franchise fees and small taxes provided these states with considerable revenues. In the 70s of the same century, there was a real boom - more than 70 offshore zones appeared around the world, usually in former colonies of the British Empire.
So, how can we characterize offshore zones?
Offshore zones are small states or territories that have established a business-friendly tax, currency and financial regime, as well as a high level of banking and commercial secrecy, which apply to offshore companies, provided they comply with certain requirements set forth in the legislation of the country of registration. A distinctive feature of offshore zones compared to other countries that have a low or zero tax rate on all or certain categories of income and provide a certain level of banking and commercial secrecy is the availability of extraordinary guarantees of financial secrecy.
According to the Glossary of the Organization for Economic Cooperation and Development (OECD), the term "offshoring" means the replacement of production of services from domestic sources with foreign ones in order to obtain a more favorable tax/corporate regime. Thus, the term "offshore" refers to the jurisdiction to which the production of services is transferred. In addition, unlike free economic zones associated with the real sector of the economy, offshore zones are favorable for financial transactions.
There is no single classification of countries as offshore in the world.
In a report published in 2000, the OECD identified a number of jurisdictions as tax havens according to criteria it established. Between 2000 and April 2002, 31 jurisdictions made formal commitments to implement the OECD standards on transparency and exchange of information. Seven jurisdictions (Andorra, the Principality of Liechtenstein, Liberia, the Principality of Monaco, the Republic of the Marshall Islands, the Republic of Nauru and the Republic of Vanuatu) did not make commitments to transparency and exchange of information and were recognized in April 2002 as non-cooperative tax havens. Subsequently, all of these jurisdictions have undertaken obligations and have been removed from the list of non-cooperative tax havens.?
The Parliament and the Council of the European Union have a different opinion. Thus, according to the blacklist of the Council of the European Union, adopted on February 24, 2022, the following jurisdictions are considered non-cooperative:
The Cabinet of Ministers of Ukraine is not far behind in this matter. In fact, our country has two lists of offshore zones, one for classifying business transactions with a resident counterparty in such a jurisdiction as "controlled" and applying the relevant principles of tax adjustment, and the other for financial monitoring purposes.
If you would like to read the lists in more detail, they can be found at the following link: https://youcontrol.com.ua/offshore/
What criteria should a jurisdiction meet in order to be classified as offshore?
Offshore jurisdictions set either zero corporate tax rates or much lower rates than in conventional jurisdictions. For example, in the British Virgin Islands there is no corporate income tax, capital gains tax, VAT and exit capital tax. It should also be noted that some offshore jurisdictions have created special legislation and tax regimes for foreign companies (these are those companies that are created by non-residents and operate exclusively in foreign jurisdictions). So, in Belize, the corporate tax for foreign companies is 0%, and for national 25%. And here, for sure, the reader will have a logical question - and what is the point of allowing companies to register and function at home, and not collect taxes from it. In fact, the benefit is quite significant - this is the creation of jobs for the local population, since there is often a requirement for the number of national employees in order to be able to register; Also, when registering and during subsequent calendar years, often the company must pay an administrative fee; to properly maintain the activities of such companies, a special sector of secretarial services arises, which brings significant benefits to the state. As you can see, the advantages for such jurisdictions are considerable.
A feature of offshore jurisdictions is the presence of excessively strict rules for the protection of banking and commercial secrets. They refuse to violate their security barriers even when there is a serious violation of the laws of another state. In particular, this can manifest itself in:
3. Relative ease and speed of company registration (usually the full term of offshore company registration lasts 1-3 weeks).
4. Simplified accounting and presentation of financial statements 5. Access to banking or payment institutions to redirect capital 6. No strict requirements for sabstens Sabstens is a concept that deserves separate research, however, in short, it is a term of Anglo-American case law that defines the economic and physical presence of a company or person in a particular jurisdiction.
Despite the presence in different countries of their own laws on economic presence (substance), we can distinguish the key requirements:
Until recently, in all offshore jurisdictions, the requirements for the economic presence of a foreign company either did not exist at all or were very relaxed. However, in 2019, most popular offshore jurisdictions (BVI, Bermuda) tightened the requirements for the economic presence of companies registered in their territory. In this regard, this criterion may eventually disappear as irrelevant.
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As a result, in my opinion, the above criteria are fundamental in determining whether a jurisdiction is offshore or not.
I propose to test them on a specific and very famous example - Cyprus.
In Cyprus, the corporate tax rate is 12.5%, which is significantly less than in other European countries. The tax on receiving dividends for non-residents, with some exceptions, is 0%, which attracts business from all over the world. However, there is a public register of legal entities, to a greater extent, open to everyone. And for a fee, you can get information about shareholders, the chronology of changes in the company, and what public services the company ordered. In addition, Cyprus has strict requirements for sabstens. Given this, it can be argued that Cyprus is not offshore, but rather a jurisdiction with a low tax burden and a favorable attitude towards business.
Causes of offshore jurisdictions
The genesis of offshore is caused by a complex of 2 interrelated reasons - the desire of offshore jurisdictions themselves to ensure their own economic development and too unattractive business conditions in the national jurisdiction of the company.
Most offshore zones are territories with a whole set of unfavorable factors that interfere with their normal development, in particular: remoteness, poor natural conditions, the absence of its own industry or its underdevelopment, the lack of natural resources, the small population, island isolation and others. The establishment of preferential conditions for foreign companies allows attracting foreign capital, which gives impetus not only to economic development, but also to the influx of qualified personnel. In some countries, offshore business brings up to 50% of income and provides jobs for most of the population.
However, this is still not enough for the effective functioning of the offshore. Business, in its considerable share, would not be interested in using the opportunities of offshore zones, if not for the harsh conditions in its own state. Thus, if the jurisdiction is characterized by an opaque banking system, a high level of corruption, political instability, imperfection of legislation and the judicial system, problems with debt collection mechanisms and other adverse factors, all this forces the business to take measures to protect its own assets - including their withdrawal to offshore.
Often in different sources you can find the opinion that the main purpose of using offshore is to minimize tax duties, and therefore offshore zones and businesses that use their capabilities should definitely be interpreted as a negative phenomenon. However, here it is advisable to cite the position of the famous judge Learned Hand, who noted that there is nothing wrong with organizing your work so as to pay as little taxes as possible. Everyone does this: rich and poor, and they are right. No one is obliged to pay more than the law requires; taxes are a forced tribute, not a voluntary contribution. Therefore, such a form of exemption from taxation cannot be considered illegal, since business always considers its goal to be profit, it is clear that, if possible, the largest and therefore uses all methods so that the profit received is not taxed. The impact of offshore zones on the global economy
Offshore zones are an integral part and at the same time a consequence of the globalization of the world economy. So, without the mobility of finance through relatively open state borders and convenient ways of redirecting capital, modern offshore would simply not have arisen.
If we turn to statistics, then according to one estimate, offshore may be 10% of world GDP or 5.6 trillion US dollars. However, more pessimistic studies indicate a much larger scale: 32 trillion US dollars. As of now, the offshore segment in the world economy occupies about 21% of all banking operations, up to 7% of world commercial activity, while the territory of tax havens is inhabited by about 0.4% of humanity.
As for Ukrainian finances, according to the Tax Justice Network, since the early 1990s, about 162 billion US dollars have been withdrawn from Ukraine to offshore. The most common ways of using offshore are export-import schemes and schemes with direct foreign investment. In particular, Cyprus is a leader in foreign direct investment (FDI) in Ukraine.
Below you can see the infographics of the states from which the largest amount of capital was withdrawn offshore, as well as the original report.
Original report - https://taxjustice.net/reports/the-cost-of-tax-abuse/?
The OECD, together with the International Anti-Money Laundering Group (FATF), the IMF, the UN, the EU and other international organizations, have been actively investigating the activities of offshore financial centers since the early 2000s. In particular, they define both positive and negative aspects of the existence of offshore zones in the global economy: Positive: - This is a colossal redistributive link in the global movement of financial capital
- Creating conditions for investment diversification, improved access to credit and better capital allocation
- Improves living standards in countries that have established offshore jurisdiction
- Creates motivation to reduce the tax burden in other jurisdictions and on this basis stimulates activity in the global economy
- Improving the competitiveness of companies at the national and global levels
- Stimulates the development of the financial services market
Negative: - Creating an element of instability in the global economy and finance through the potential concentration of large amounts of capital in offshore zones, especially speculative
- Promotes capital outflow
- Negative impact on the social situation in donor countries
- Facilitating the potential legalization of funds obtained by crime through the financing of terrorism and the proliferation of weapons of mass destruction
Instead of a conclusion.
Offshore zones play an important role in the global economy, providing foreign investors and companies with the opportunity to optimize their financial transactions and reduce the tax burden, as well as attract large financial flows for their own development by undeveloped states. However, these advantages are often used for various negative phenomena - capital laundering, terrorist financing, rent withdrawal, etc. Comparison of advantages and disadvantages shows that the same property of offshore companies can be considered from diametrically opposite points of view, depending on how the interested person wants to use the functionality of such jurisdictions. That is why offshore zones cannot be considered unambiguously a negative or positive phenomenon - they are a logical result of globalization of the world economy.