Offshore financial centres

Abstract

The term international financial centres which is occasionally used - incorrectly - as a synonym for tax havens refers more correctly to centres such as London, Luxembourg, Paris, Singapore and Zurich. A traditional international financial centre is not as vulnerable as the new offshore centres. The new centres, acting merely as conduits are subject to the whims of the user. The characteristics of a traditional international financial centre are (i) a relatively large inflow and outflow of capital (ii) a well developed domestic capital market based on large domestic savings (iii) an international open capital market for foreign borrowers and (iv) a well developed domestic and international market for short and medium terms funds. A financial centre is a market place for financiers and an offshore financial centre is a market place for financiers of many nations. The term offshore is employed primarily to refer to tax havens off the shores of the United States; by extension it refers to any tax haven. The more popular locations of offshore funds are Bermuda, the Channel Islands and the Bahamas. The term off shore has several meanings. It can mean freedom of taxation or freedom from exchange control regulations, or freedom of doing all kinds of business, or a combination of these elements. In this sense, one defines offshore on the basis of what the financial centre offers to investors. Another approach is to look at an offshore centre from the standpoint of the user. It is this definition which has to be taken into account by the authorities of an offshore centre in the small section of the world economy, the customer is King. Those who live and work in tax havens prefer to describe their jurisdictions as offshore financial centres. So much so that offshore financial centre has become to mean really a little more than a euphemism for tax haven. However there is a distinction between the two. Offshore finance means that banks in a country borrow funds outside the country in non-domestic currencies and re-land them to other non residents. The financial institutions in the centres where there transactions are carried out are intermediaries between holders and users of non domestic currencies. The characteristics of an offshore centre is that funds do not come into the country. That means that these funds are normally not available for investing on the domestic financial market.