3. International Practice of Offshoring
3.1. Scale
3. International Practice of Offshoring
In the previous chapter we provided the theoretical foundations of offshore activities, defined the phenomenon and classified offshore jurisdictions and companies. In the next pages we will evaluate the global offshore industry and list the most popular offshore territories.
3.1. Scale
The global integration of markets and capital has provided companies with more opportunities to incorporate their affiliates in locations with favorable tax, regulating and privacy policies. A
“huge, secretive offshore industry” (Henry 2012) became a ‘dark side of globalization’ where offshores are the "nodes" through which the financial and investment flows of the global economy pass. For example, annual exports of capital from the Netherlands, Luxembourg and Ireland that are recognized as offshores is $10-12 trillion, which exceeds the export of capital from the United States. Out of 100 companies within the FTSE 100 (whose shares are traded on the London Stock Exchange and have the greatest capitalization), only two have no offshore
“daughters”.
By Gabriel Zucman (2015), at least $7.6 trillion of world's total financial wealth of $95.5 trillion was 'missing' (8%) in 2014 (Schwarz 2016). He estimated that the global tax revenue losses were $190 bln, $130 bln were lost through tax avoidance by US corporations (Zucman 2015).
The offshore wealth and tax evasion distribution in 2014 are presented in Table 5.
Table 5: Offshore wealth and tax evasion in 2014 Region Offshore wealth
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United States 1,200 4% 35
Asia 1,300 4% 34
Latin America 700 22% 21
Africa 500 30% 14
Canada 300 9% 6
Russia 200 52% 1
Gulf countries 800 57% 0
Total 7,600 8% 190
Source: Zucman, 2015.
As mentioned previously, international organizations classify offshores into tax havens (THs), offshore or international financial centers (OFCs or IFCs), and secrecy jurisdictions (SJs) depending on specialization and different degrees of favoritism. For instance, “the Cayman Islands is well known for being home to hedge funds, lawyers and service providers. Bermuda is a world center for reinsurance. Gibraltar is home to e-gaming and motor insurance” (Fletcher 2016).
More often, the term ‘offshores’ relates to THs, since the idea of avoiding or reducing taxes was born with taxing itself. Then, many jurisdictions had transformed into OFCs, around the mid-1970s, with the developing financial services that currently include international lending, deposits and foreign direct investments (FDI). For instance, OFCs’ share in FDI is estimated at 30% in the world (Palan and Nesvetailova 2014). Today about 70 countries offer foreign investors the packages of offshore services. Dynamics of growth of this capital were the following: the 1980s - about $500 billion, the 1990s - about $1 trillion, at the end of 1996 the
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capital reached $4-5 trillion, and in 1997 grew up to $6 trillion (Zhivetin 2017).
Top-10 tax havens control 56% of the world market of offshore services (Economic Pravda 2016). According to rating, on the first place in top-10 there was Switzerland. More than 51%
of the operated assets in Switzerland are from abroad. The second place is by Hong Kong. The third position is taken by the US which have the largest share (19,6%) of the offshore services market.
The emergence of offshore jurisdictions was caused by the following:
- competition among territories to attract businesses by avoiding taxes and to stimulate their local economies;
- developing own currencies as an alternative to Euro-dollar;
- “historic and distortionary regulations on the financial sectors of industrial countries during the 1960s and 1970s” (International Monetary Fund 2000) that forced MNCs and banks to look for financial services overseas.
The ancestor of modern offshore zones was Switzerland (Zaburskaya, Pabst and Butakova 2013). First of all, the mode of the open sea register was legislatively fixed in Panama as well as an order of opening of confidential bank accounts in Switzerland, family funds in Liechtenstein, holding companies in Luxembourg and the Netherlands. The resident status for the first time was considered by English court in the 19th century, thereby having created a precedent on which a company is considered as a resident of the place where it has a registered office and where its directors live and control the company (Gurgulia 2015).
Starting from attracting and developing favorable conditions for banks, by the end of 1990s
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OFCs became more popular among corporate and individual clients with much less offshore banking. Now, offshores companies can be used for many purposes from reducing paying taxes or “taking advantage of a different legal regime to hiding the owner’s identity. They are often used as a means а owning another company” (Fletcher 2016) or for building a chain of firms with legitimate or illegitimate intents.
The small countries that offer offshore services benefit from “income generating activities and employment in the host economy, and government revenue through licensing fees, etc.”
(International Monetary Fund 2000). For such economies offshore services could be the main industry.
Currently, as a part of globalization, offshore jurisdictions are competing for capital in a global scale supported by countries-market makers (US and UK). For example, the US initiative to compel Switzerland authorities to transfer information about US citizens was essentially activities to discredit Switzerland as a country with strong bank secrecy. The purpose was not to increase tax collection, but to redirect offshore capitals from Switzerland to other jurisdictions under the US control (Katasonov 2014).
With regard to offshore business, it should be noted that all countries now, depending on the parameters of their involvement, appear on the world market either as offshore jurisdictions-exporters of related services, either as onshore jurisdictions-importers or in both entities simultaneously. Naturally, the onshore jurisdiction, which has one or two offshore centers on its territory, loses less than the one on the whole territory of which the same high-tax business regime is established for all (Gurgulia 2015).
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