In the context of a global economy, competition in all areas of finance has become so critical that financial turmoil in a tiny island nation can send adverse ripples all across the globe, affecting all markets. Even now, we walk a financial tightrope spanning oceans and entire continents. Getting to a spot where you can gain some respite is a valuable commodity in itself.

In these times of economic difficulties, any means of getting ahead, any financial advantage that can be acquired, any way of ensuring some level of financial security is certainly going to be in demand. That is why offshore financial centers have be come so much in vogue these days.

More than that, the role of offshore jurisdictions in personal and corporate finance has come under fire. The criticisms come particularly from other high-tax, highly regulated financial jurisdictions that are directly threatened by the competition posed by often smaller offshore centers – a sort of David versus Goliath of the financial battlegrounds, if you will.

Defining Offshore Jurisdictions

In the simplest sense, offshore jurisdictions are states, territories or countries that provide competitive legal and financial structures for the use of foreign individuals and companies outside of their primary jurisdiction. In other words, using offshore services going offshore is taking your business and your money elsewhere other than your own country for beneficial purposes.

The practice is clearly a by-product of globalisation. In fact, the term “offshore” clearly has its origins in the international shipping industry. During the middle part of the 20th century, registering ships and shipping assets in a country other than where the owners of the shipping company originally resided became a common practice. It was soon realized that using offshore services was more expedient and, as it turned out, less costly.

Utilizing such offshore services as legal and financial structures at offshore jurisdictions eventually grew beyond the shipping industry. Its bottomline benefits overflowed to other industries and even to personal finance.

To a limited extent, public finance also uses offshore service available at offshore centers. There are cases where government aid or loan, from a major country to an underdeveloped nation that has unsuitable legal and corporate structures in place, has to go through a neutral offshore jurisdiction in order to materialise.

Offshore Woes

As previously stated offshore jurisdictions are experiencing an inquisition from the likes of the 30-member nation OECD (Organisation for Economic Co-operative Development) and the FATF (Financial Action Task Force). Both have come out with their own blacklists of offshore jurisdictions labeled as “uncooperative tax havens”.

Tax havens by themselves are not necessarily a bad thing. Many people migrate within their own country to avail themselves of lowered taxes or incentives in other localities or states. Tax mitigation is generally an accepted practice.

What has caused the aforementioned groups is the propensity of some offshore jurisdictions to be uncooperative insofar as disclosing tax related information regarding foreigners who are making use of their country’s offshore services. Such characterization of offshore jurisdictions lends itself to the wrongful impression that these countries are coddling gamblers, criminals, tax exiles and even terrorists.

It is a delicate situation that puts all sides on the defensive. At one end, the larger countries want an exchange of information relevant to concerns over tax evasion, money laundering and similar financial crimes. On the other end, clients of offshore jurisdictions demand their privacy and offshore centers are more than willing to protect their clients' anonymity.

Benefits Of Offshore Jurisdictions

The current predicament begs the question – what’s in it for offshore jurisdictions in the first place? Why do they foster an environment that challenges the status quo of larger economies?

In some instances, it is actually not by design. Some governments cannot simply prescribe a tax rate beyond the capacity of its people. In other cases, the society’s level of productivity is such that revenue by taxation matters little to the local economy.

In contrast, other offshore jurisdictions purposely maintain such financial structures with the clear intention of attracting foreign capital. By participating in the offshore industry, these jurisdictions are able to raise national revenue fast and push the development of the economy with minimal expenditures.

Either way, the benefits for offshore jurisdictions is that by fostering offshore company formation activities in their country they are able to raise government funds. Although the rate of taxation is minimal, the sheer volume of demand, with assets poured into the global offshore industry now estimated at $5 trillion to $7 trillion, raises more than enough revenue to keep their respective economies running.

Other benefits for offshore jurisdictions include knowledge and technology transfers and increasing employment opportunities for the offshore jurisdiction’s constituents.