俄羅斯大公司開發離岸計畫的規模，原因和經濟後果 - 政大學術集成

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(1)國立政治大學商學院國際經營管理英語碩士學位學程 International MBA Program College of Commerce National Chengchi University 碩士論文. 治. 政 Thesis大 Master’s. 立. ‧ 國. 學 ‧. 俄羅斯大公司開發離岸計畫的規模，原因和經濟 y. sit. Nat. 後果. er. io. Scale, Reasons and Economic Consequences of Exploiting. al. n. v i n C by Offshore Schemes Large Companies h eRussian ngchi U. Student: Zorikto Balganov Advisor: Professor Jack Wu. 中華民國106年6月 June 2017.

(2) 俄羅斯大公司開發離岸計畫的規模，原因和經濟後果 Scale, Reasons and Economic Consequences of Exploiting Offshore Schemes by Russian Large Companies. 研究生：周子恩. Student: Zorikto Balganov. 指導教授：吳文傑. 立. Advisor: Jack Wu. 政治大. ‧ 國. 學. 國立政治大學. 商學院國際經營管理英語碩士學位學程. y. sit. Nat. A Thesis. ‧. 碩士論文. er. io. Submitted to International MBA Program. n. al National Chengchi University iv. n U i in partial fulfilment e n gofctheh Requirements. Ch. for the degree of Master in Business Administration. 中華民國 106 年 6 月 June 2017.

(3) Acknowledgements I would like to thank my thesis advisor Professor Jack Wu for his expertise and support during the writing. I am grateful for his valuable comments on this thesis.. Thanks to my beloved wife and daughter who stay with me in Taiwan and bear with my study. Without their encouragement, it would not have been possible to accomplish the study.. 治政大 to study abroad to have brighter future. 立. I also would like to thank my parents for providing me with great support. They motivate me. ‧ 國. 學. Finally, I must express my very profound gratitude to the TaiwanICDF that gave me such a great opportunity to pursue a Master’s in National Chengchi University.. ‧. Thank you all.. n. er. io. sit. y. Nat. al. Zorikto Balganov. Ch. engchi. i. i n U. v.

(4) Abstract Scale, Reasons and Economic Consequences of Exploiting Offshore Schemes by Russian Large Companies By Zorikto Balganov Offshore jurisdictions have become popular among corporations around the globe. They. 政治大. provide opportunities to reduce taxes by registering companies there. The Russian large firms. 立. have joined the trend, but exploit offshore schemes in different ways. They incorporate offshore. ‧ 國. 學. companies with their subsidiaries operating in Russia. The main purpose is to protect assets from hostile capture by other businesses or even the government. Thus, businessmen stay. ‧. hidden as end beneficiaries behind the offshore companies’ chain.. y. Nat. er. io. sit. The offshorization in the country has its enormous scale. Up to 90% of the largest companies are involved in offshore patterns. The government makes some efforts to force companies to. n. al. Ch. i n U. v. come back to the country, but they are not effective. To succeed, corporations should experience. engchi. the improved business climate and have an opportunity to defend themselves in fair courts. It is the government’s responsibility to make such appealing conditions.. As a result, nowadays, Russia suffers not only from less tax collection, but also from losing control over strategically important enterprises and even industries. Thus, the phenomenon threatens to the country's national security.. Keywords: Offshore financial center, Tax heaven, Tax avoidance, Russian large company, Deoffshorization. ii.

(5) TABLE OF CONTENTS 1. Introduction .......................................................................................................................... 1 1.1.. Background ................................................................................................................. 1. 1.2.. Research Area ............................................................................................................. 2. 1.3.. Research Problem ....................................................................................................... 3. 1.4.. Thesis Structure .......................................................................................................... 3. 2. Theoretical Foundations of Offshore Activity .................................................................... 5. 政治大 Organization for Economic Co-operation and Development ................................. 7 立. 2.1. Conceptual Framework and Definition ........................................................................... 5 2.1.1.. 2.1.2. International Monetary Fund .................................................................................. 8. ‧ 國. 學. 2.1.3. Tax Justice Network ............................................................................................... 9. ‧. 2.2. Classification ................................................................................................................. 10 2.2.1. Classical Jurisdictions .......................................................................................... 14. y. Nat. sit. 2.2.2. Respectable Jurisdictions...................................................................................... 14. er. io. 2.2.3. Low-tax Jurisdictions ........................................................................................... 15. al. n. v i n Ch 2.3. Offshores: Pros and Cons .............................................................................................. 18 engchi U. 2.2.4. Offshore Companies Classification ...................................................................... 16. 2.3.1. Advantages ........................................................................................................... 19 2.3.2. Disadvantages ....................................................................................................... 22 3. International Practice of Offshoring ................................................................................ 25 3.1. Scale .............................................................................................................................. 25 3.2. Reasons .......................................................................................................................... 29 3.3. Consequences ................................................................................................................ 31 3.4. Lists of Jurisdictions ...................................................................................................... 33 4. Offshore Schemes in Russian practice .............................................................................. 45 4.1. Scale .............................................................................................................................. 45. iii.

(6) 4.2. Reasons .......................................................................................................................... 48 4.3. Common Schemes in Use ............................................................................................... 49 4.3.1. Export-Import ....................................................................................................... 51 4.3.2. Agent .................................................................................................................... 53 4.3.3. Construction ......................................................................................................... 54 4.3.4. Manufacturing ...................................................................................................... 55 4.3.5. Transport ............................................................................................................... 56 4.3.6. Services ................................................................................................................. 57. 政治大. 4.3.7. Credit and interest ................................................................................................. 58. 立. 4.3.8. Royalty ................................................................................................................. 59. ‧ 國. 4.3.10.. 學. 4.3.9. Incorporation and dividends ................................................................................. 59 Prepayment ....................................................................................................... 60. ‧. 4.4. General Characteristics of Offshore Schemes ............................................................... 61 4.5. Consequences ................................................................................................................ 62. y. Nat. io. sit. 5. Offshore Business Cases from Russia ............................................................................... 65. n. al. er. 5.1. Alfa-Bank ....................................................................................................................... 65. i n U. v. 5.1.1. Company Profile ................................................................................................... 65. Ch. engchi. 5.1.2. Ownership Structure ............................................................................................. 66 5.1.3. Offshore Scheme in Use ....................................................................................... 67 5.2. T Plus Group.................................................................................................................. 70 5.2.1. Company Profile ................................................................................................... 70 5.2.2. Ownership Structure ............................................................................................. 70 5.2.3. Offshore Scheme in Use ....................................................................................... 71 5.3. Domodedovo Airport ..................................................................................................... 73 5.3.1. Company Profile ................................................................................................... 73 5.3.2. Ownership Structure ............................................................................................. 73 5.3.3. Offshore Scheme in Use ....................................................................................... 76. iv.

(7) 6. Discussion ............................................................................................................................ 78 6.1. Cases Discussion ........................................................................................................... 78 6.2. Scale .............................................................................................................................. 80 6.3. Reasons .......................................................................................................................... 82 6.4. Consequences ................................................................................................................ 83 6.5. Anti-Offshores Actions ................................................................................................... 85 6.5.1. International Efforts .............................................................................................. 85 6.5.2. De-offshorization in Russia .................................................................................. 88. 政治大. 7. Conclusion ........................................................................................................................... 93. 立. References ............................................................................................................................... 96. ‧ 國. 學. Appendix 1. Financial Secrecy Ranking Top 20 by TJN in 2015. .................................... 104 Appendix 2. Examples of Uses of Offshore Financial Centers. ........................................ 105. ‧. Appendix 3. Countries, Territories, and Jurisdictions with Offshore Financial Centers. ................................................................................................................................................ 108. y. Nat. sit. Appendix 4. Main countries-receivers of Russian FDI in 2009-2013. ............................. 109. er. io. Appendix 5. Direct investments to Russia over the main partner countries in 2012-2015. ................................................................................................................................................ 110. al. n. v i n Appendix 6. 16 typical schemesC ofh tax evasion by FTS. .................................................... 112 engchi U. v.

(8) List of Figures and Tables Figure 1: Research area. ............................................................................................................. 3 Table 1: Thesis structure ............................................................................................................. 3 Figure 1: Thesis conceptual framework ..................................................................................... 5 Table 2: Offshore notions ......................................................................................................... 10. 政治大. Table 3: Tax classification of offshore jurisdictions ................................................................. 13. 立. Table 4: Tax rates in various offshore jurisdictions .................................................................. 20. ‧ 國. 學. Table 5: Offshore wealth and tax evasion in 2014 ................................................................... 25. ‧. Table 6: Comparative analysis of different offshore jurisdictions ............................................ 33. y. Nat. er. io. sit. Table 7: World’s tax havens and offshore financial centers ..................................................... 35 Table 8. Oxfam’s ranking of the top 15 corporate tax havens. ................................................. 38. n. al. Ch. engchi. i n U. v. Table 9. States and territories not providing exchange of information for the taxation purposes with Russia ....................................................................................................................... 40 Table 10. CBR offshore zones list ............................................................................................ 43 Figure 2: Capital outflow and inflow in 1997-2016, bln USD ................................................. 47 Figure 3: Structure of an international holding ........................................................................ 50 Figure 4: Export offshore scheme ............................................................................................ 52 Figure 5: Import offshore scheme ............................................................................................ 52. vi.

(9) Figure 6: British agent offshore scheme ................................................................................... 53 Figure 7: Russian agent offshore scheme ................................................................................. 54 Figure 8: Construction offshore scheme: Type 1 ...................................................................... 55 Figure 9: Construction offshore scheme: Type 2 ...................................................................... 55 Figure 10: Manufacturing offshore scheme .............................................................................. 56. 政治大. Figure 11: Transport offshore scheme ...................................................................................... 57. 立. Figure 12: Services offshore scheme ........................................................................................ 57. ‧ 國. 學. Figure 13: Credit offshore scheme ........................................................................................... 58. ‧. Figure 14: Interest offshore scheme ......................................................................................... 58. y. Nat. er. io. sit. Figure 15: Royalty offshore scheme ......................................................................................... 59 Figure 16: Dividends offshore scheme ..................................................................................... 60. n. al. Ch. engchi. i n U. v. Figure 17: Prepayment offshore scheme .................................................................................. 61 Figure 18: Universal offshore scheme ...................................................................................... 61 Figure 19: Alfa-Bank ownership structure ............................................................................... 66 Figure 20: Alfa Group structure in 2012 .................................................................................. 68 Figure 21: "T Plus" group ownership structure ........................................................................ 71 Table 11. DME Ltd. and its controlled subsidiaries ................................................................. 75. vii.

(10) List of Abbreviations Bln – billion BVI – British Virgin Islands CBR – Central Bank of Russia EU – European Union FATCA – Foreign Account Tax Compliance Act FATF – Financial Action Task Force. 政治大. FDI – Foreign direct investment. 立. FTS – Federal Tax Service of Russia. ‧ 國. 學. FTSE 100 – Financial Times Stock Exchange 100 Index. ‧. G20 – International forum for the governments from 20 major economies GDP – Gross domestic product. y. Nat. io. n. al. er. IMF – International Monetary Fund. Ch. IRS – US Internal Revenue Service Mln – million. sit. ICIJ – International Consortium of Investigative Journalists. engchi. i n U. v. MNCs – Multinational companies/corporations OECD – Organization for Economic Co-operation and Development OFC – Offshore financial center RBC – RosBusinessConsulting RFC – Regional financial center RUR - Russian ruble SEZ – Special economic zone. viii.

(11) SJ – Secrecy jurisdiction SMIC – Salaire minimum de croissance, minimum wage in Russia TH – Tax haven TJN – Tax Justice Network UK – United Kingdom US – United States USD - US dollar. 政治大. USSR – Union of Soviet Socialist Republics. 立. VAT – Value-added tax. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. ix. i n U. v.

(12) 1. Introduction 1.1.. Background. After the USSR dissolution large state-owned enterprises were privatized in Russia. The privatization scheme was ill-conceived, and people were misled. As a result, many companies had fallen into the hands of limited number of individuals who became subsequently known as ‘oligarchs’. Managing significant assets, new owners became interested in assets security and multiplying capital since the business environment was not favorable in Russia. The country in. 治政 1990s was famous for the flowering of crime, corruption 大and property redistribution. Hence, 立 that time period is often called ‘the wild nineties’. As a way of business protection, large ‧ 國. 學. companies change their place of incorporation from Russia to overseas establishing offshore. ‧. headquarters that control their subsidiaries in the country. The current situation remains the same due to many benefits associated with such offshore schemes. Their advantages are the. al. er. io. sit. y. Nat. following:. v. absence or very low taxes on profits and dividends for non-residents;. . privacy: the companies’ owners remain unknown for public. Often, end beneficiaries. n. . Ch. engchi. i n U. are behind a chain of offshore companies and jurisdictions; . affordability and simplicity to open an offshore company. An incorporation can take only several days without a necessity to visit the offshore jurisdiction;. . positive image of an international business with the access to financing overseas;. . property protection under the international jurisdiction against raider seizures.. 1.

(13) As a result, up to 90% of large businesses in Russia are involved in various offshore schemes. The corporations primarily are seeking for assets protection from a hostile takeover, and then they are tending to avoid taxes and get an access to international funding.. On the other hand, Russian legislation limiting offshore schemes was lagging behind business practices. Recently, the government has intensified efforts to coerce business to change its place of incorporation back to Russia that is known as a ‘de-offshorization’ of national economy, but. 政治大. it seems that the laws are not being implemented properly. Therefore, the situation has not. 立. changed much yet.. ‧ 國. 學. As the consequences of business offshore activity for the government, the state budget suffers from insufficient funds to fulfill all social responsibilities, the massive capital flight continues,. ‧. and corruption remains one of the major obstacles to build a prospering society.. sit. y. Nat. Research Area. io. er. 1.2.. In the present thesis, the Russian large companies are those participating in the rating “RBC1:. al. n. v i n C (RBC 500 largest companies in Russia” They are the largest companies with various h e n500). gchi U. forms of incorporation (public and private enterprises, joint ventures) and rated based on the net revenue (or its equivalent for finance companies) (RBC 2017).. Additionally, the paper focuses on the Russian companies that are controlled by their offshore parent firms. Therefore, the research area of the study is an intersection of the Russian companies rated in the RBC 500 and those that are owned by offshore entities at the same time.. 1. RBC is a large Russian media group that holds an informational agency RosBusinessConsulting, including a. news web-portal, business newspaper RBC Daily, monthly business magazine RBC and RBC TV.. 2.

(14) Figure 1 illustrates that combination.. 政治大. Figure 1: Research area.. 1.3.. Research Problem. 立. The current paper describes how the Russian large companies listed in RBC 500 exploit various. ‧ 國. 學. legitimate offshore schemes. This is accomplished by studying both academic findings and. ‧. business cases demonstrating how particular firms are involved in the offshore activities. The study is conducted in a form of industrial report.. sit. y. Nat. n. al. er. io. The research problem is formulated as follows: “Evaluate the scale, state the reasons and. v. observe the effects of offshore activities conducted by the large companies in Russia”.. 1.4.. Ch. Thesis Structure. engchi. i n U. The paper structure is presented in Table 1. The study consists of seven chapters, includes 11 tables, 21 figures and 6 appendices. Table 1: Thesis structure Chapter 1. Chapter 2. . A short introduction to the investigated area. . A formulation of the research problem. . Offshore-related terms, definitions and classifications. . The pros and cons of offshore activity. 3.

(15) Chapter 3. Chapter 4. Chapter 5. . Lists of established offshore jurisdictions. . The economics of offshoring globally. . Common international offshore schemes. . The Russian economic data related to offshoring. . The offshore services market in the country. . Common Russian offshore schemes. . Three business cases of exploiting offshore schemes by. 政治大. . Chapter 7. 立. Cases’ discussion. 學. Chapter 6. ‧ 國. Russian large companies. . Anti-offshores actions in the world and in Russia. . Conclusions. ‧. n. er. io. sit. y. Nat. al. Ch. engchi. 4. i n U. v.

(16) 2. Theoretical Foundations of Offshore Activity The previous chapter generally introduced the offshore phenomenon occurred in Russia. The section also designated the research area and formulated the problem. In the next pages we will provide a conceptual framework and definitions of the notions related to the offshore activity formulated by some respectable international organizations and classify the most popular jurisdictions recognized as offshore in the world.. 政治大. 2.1. Conceptual Framework and Definition. 立. To begin, it is necessary to set out a conceptual framework and introduce the key terms and. ‧ 國. 學. definitions. The conceptual framework starts from the meaning of ‘offshore’ and introduction of offshore jurisdiction and customers that are resident companies willing to incorporate an. ‧. offshore company. The customers generate the corresponding demand for offshore services. Nat. io. sit. y. supported by mediators.. n. al. er. On the other hand, the market supply is provided by offshore jurisdictions. The mediators’. Ch. i n U. v. efforts are embodied in a variety of offshore schemes designed on a case-by-case basis (see Figure 1).. engchi. Figure 1: Thesis conceptual framework The practical realization of offshore schemes is an offshore activity or offshoring. At the level of national economies, the aggregate of offshore activities realized by all economic agents. 5.

(17) within a country is offshorization. The process opposite to offshorization is de-offshorization which implies concerted efforts of government and businesses to take back ownership and control over national assets. ‘Offshore’ is an adjective and adverb. Its literally means “away from or at a distance from the coast” (Cambridge Dictionary n.d.) or “located or based outside of one's national boundaries” (Investopedia n.d.). In business, offshore means “based in a different country with different tax. 政治大 processes or services) overseas” (Oxford Dictionary n.d.). In practice, it means “made, situated, 立 rules that cost less money” (Cambridge Dictionary n.d.) or to “move (some of a company's. ‧ 國. 學. or registered abroad, especially in order to take advantage of lower taxes or costs or less stringent regulation” (Oxford Dictionary n.d.).. ‧. In this regard, offshore company is a firm registered or incorporated outside the country where. y. Nat. sit. it has its main offices and operations, or where its principal investors reside. The moving of. n. al. er. io. various operations of a company to another country for reasons such as lower labor costs or. i n U. v. more favorable economic conditions in that other country is called an offshoring.. Ch. engchi. ‘Offshoring’ is close to ‘outsourcing’, but they are not the same (Klein 2005). ‘Outsource’ means to “to reduce costs by transferring portions of work to outside suppliers rather than completing it internally” (Investopedia n.d.), while ‘offshore’ relates to the relocation of own facilities.. In order to benefit of all the advantages of offshoring, a company should devise an offshore scheme. It is a strategic plan primarily how to minimize the amount of taxes that the company must pay. However, it is not the only purpose. Offshore schemes are as diverse as the goals they are supposed to reach that in each case are individual. The indispensable elements of any 6.

(18) offshore scheme are an offshore jurisdiction and a company incorporated there, and a resident country and a resident firm associated with the offshore partners.. Offshore jurisdiction or a territory, sometimes a country, is an internationally recognized financial center that offers various company formation advantages; benefits in the form of absence of a tax on profits, dividends or income; low taxes; less strict business regulation and reporting.. 政治大. One type of the offshore jurisdictions is offshore financial centers (OFCs). OFCs are small,. 立. “low-tax jurisdiction specializing in providing corporate and commercial services to non-. ‧ 國. 學. resident offshore companies, and for the investment of offshore funds” (Harari, Meinzer and Murphy 2012). Several countries and territories have been designated as OFCs by notable. ‧. institutions namely, the Organization for Economic Co-operation and Development (OECD),. y. Nat. sit. the International Monetary Fund (IMF) and the Financial Secrecy Index (managed by the Tax. er. io. Justice Network – TJN).. al. n. v i n C hEconomic Co-operation Organization for and Development engchi U. 2.1.1.. One of the prominent international organizations studying offshore jurisdictions is the Organization for Economic Co-operation and Development (OECD). It handles the concepts of tax heaven and OFC which are the countries or jurisdictions providing favorable business environment for non-residents.. The OECD 1998 report defined a tax haven as a jurisdiction which has: a) “no or only nominal taxes (generally or in special circumstances) and offers itself, or is perceived to offer itself, as a place to be used by nonresidents to escape tax in their. 7.

(19) country of residence; b) laws or administrative practices which prevent the effective exchange of relevant information with other governments on taxpayers benefiting from the low or no tax jurisdiction; c) lack of transparency” (OECD 1998). OFCs are “countries or jurisdictions with financial centers that contain financial institutions. 政治大 the size of the host economy” (IMF 2003). The difference between a tax heaven and OFC is 立 that deal primarily with nonresidents and/or in foreign currency on a scale out of proportion to. ‧ 國. 學. that the latter does not include low taxation or legitimacy of these actions.. 2.1.2. International Monetary Fund. ‧. The International Monetary Fund (IMF) does not define tax heavens, but only OFC. OFC is. Nat. sit. y. “any financial center where offshore activity takes place” (International Monetary Fund 2000). n. al. er. io. and has “three distinctive and recurrent characteristics: (i) the primary orientation of business. i n U. v. toward nonresidents; (ii) the favorable regulatory environment (low supervisory requirements. Ch. engchi. and minimal information disclosure) and; (iii) the low- or zero-taxation schemes” (Zoromé 2007). Therefore, “an OFC is a country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy” (Zoromé 2007). This definition is valuable with its specific benchmark to identify OFCs. By the International Monetary Fund (2000), “OFCs are usually referred to as:. -. jurisdictions that have relatively large numbers of financial institutions engaged primarily in business with non-residents; 8.

(20) -. financial systems with external assets and liabilities out of proportion to domestic financial intermediation designed to finance domestic economies; and. -. more popularly, centers which provide some or all of the following services: low or zero taxation; moderate or light financial regulation; banking secrecy and anonymity.”. 2.1.3. Tax Justice Network Tax Justice Network (TJN) is an international organization that conducts the independent. 政治大 that enable people or entities escape (and frequently undermine) the laws, rules and regulations 立. investigations on avoiding taxes. It defines a tax haven as a jurisdiction that “provides facilities. ‧ 國. 學. of other jurisdictions elsewhere, using secrecy as a prime tool” (Tax Justice Network n.d.). The organization uses this term interchangeably with a ‘secrecy jurisdiction’ pointing out the. ‧. conspiracy aspect. Based on that, TJN ranks countries by a so-called ‘Financial secrecy index’. sit. y. Nat. (FSI) (Appendix 1). The FSI ranks jurisdictions according to their secrecy and the scale of their. io. n. al. er. offshore financial activities.. i n U. v. In 2012, Tax Justice Network has supported the report by James S. Henry about the global. Ch. engchi. offshore industry. By Henry (2012), offshores are not the actual physical areas, but “nominal, hyper-portable, multi-jurisdictional, often quite temporary locations of networks of legal and quasi-legal entities and arrangements that manage and control private wealth.” It is a set of capabilities including “secrecy, tax minimization, access, asset management, and security” provided to the “world’s wealthiest individuals and companies”. With these services, the offshores’ clients become citizens of “a brave new virtual country”.. In our study, we tend to define offshore jurisdictions as the areas with exceptionally favorable legitimate and economic conditions for non-residents in the field of taxation, registration,. 9.

(21) administration, financing, and secrecy that results in abnormally high share of financial services provided for such users (Rose and Spiegel 2007). It is similar to the IMF’s definition which, in turn, raises the question of how to interpret the degree of ‘abnormality’. The IMF suggests to calculate a particular indicator to assess the scale of offshore finances called the “ratio of net exports of financial services to GDP” (Zoromé 2007). However, it is not enough to identify offshores, because in the case of large economies like UK it is not evident (Zoromé 2007).. 政治大. The aggregation of the offshore notions by the respectable international organizations is. ‧ 國. OECD. Offshore Financial Center. . IMF. ‧.  . sit. Nat. Tax haven. n. al. TJN . . er. io. Secrecy jurisdiction. 2.2. Classification. 學. Table 2: Offshore notions. y. 立. presented in Table 2.. Ch. engchi. i n U. v. The classification is applicable both to offshore jurisdictions and offshore companies.. Offshore jurisdictions can be classified in different ways, for instance, by geographical location, by economic conditions granted to non-residents or by their influence and political subordination to the global powers.. In general, there are some offshore cohorts that can be distinguished in the world. They include the following territories: •. “the British Crown dependencies of Jersey, Guernsey and the Isle of Man, and British. 10.

(22) Overseas Territories including the Cayman Islands, Bermuda, British Virgin Islands, Turks and Caicos and Gibraltar, and recently independent British colonies such as Hong Kong, Singapore, the Bahamas, Cyprus, Bahrain and Dubai” (Palan and Nesvetailova 2014); •. the US themselves (Shaxson 2015);. •. the Benelux countries: Belgium, Netherlands and Luxembourg, as well as Ireland, Switzerland (Palan and Nesvetailova 2014);. •. 政治大. the ‘European bolt holes’ such as the Channel Islands, Monaco and Liechtenstein. 立. (Henry 2012);. “treasure islands” like Nauru, St. Kitts, Antigua and Tortola (Henry 2012);. •. internal territories as offshores called “onshore-offshores” such as the US states of. ‧. ‧ 國. 學. •. Delaware, Alaska, Nevada and South Dakota (Henry 2012) and also Russian Republic. y. Nat. al. er. io. sit. of Ingushetia in 1994 (Russia Today 2013).. n. By Katasonov (2014), there are three groups of offshore jurisdictions based on their locations and political subordination:. Ch. engchi. i n U. v. 1) Anglo-Saxon core (Islands of the Caribbean, Channel Islands, Ireland); 2) Benelux countries (Belgium, Netherlands, Luxembourg), and Switzerland; 3) other areas: peripherals, including Cyprus.. IMF suggests three types of offshore jurisdictions based on the scale of their offshore services:. -. IFCs “such as London, New York, and Tokyo” with “large domestic economies and deep and liquid markets”;. -. Regional Financial Centers (RFCs) that have “relatively small domestic economies”. 11.

(23) As examples of RFCs, they are Hong Kong, Singapore and Luxembourg; -. OFCs themselves that “provide more limited specialist services” (International Monetary Fund 2000).. This taxonomy is a subject for consideration, because the difference between these types of jurisdictions could be subtle depending on financial operations of firms. The same offshore company could be registered in one jurisdiction, borrow money in another, have a subsidiary in. 政治大. the third country and fund its operations in the fourth one.. 立. TJN classifies secrecy jurisdictions based on their political subordination in five groups:. ‧ 國. 學. 1) US and its satellites like Panama;. ‧. 2) UK and its overseas territories including Cayman Islands, Jersey, BVI, and Bermuda;. sit. y. Nat. 3) EU including Luxembourg, Germany, Belgium, Austria, Cyprus, and Gibraltar inside. io. al. er. the EU, as well as Switzerland, Liechtenstein, Monaco, and Andorra;. n. 4) Asian havens - notably Singapore and Hong Kong, but also Macau and Malaysia/Labuan;. Ch. engchi. i n U. v. 5) uncategorized others like Dubai and Mauritius (Tax Justice Network n.d.).. The most logical assumption is to classify offshore zones by economic conditions granted to non-residents. The first group of jurisdictions is the territories giving a liberation opportunity from payment of taxes. They are often called “pure offshores” or classical (Basargin 2008). For example, the BVI, the Cayman Islands.. The next class of jurisdictions is those that provide the mode of privacy and quite low rates of a corporate tax. In this sense, a popular location was Cyprus which is not a classical offshore. 12.

(24) any more today: in Cyprus the rate of a corporate tax became 10%. However, Cyprus continues to recognize services of nominal shareholders and directors in the registered companies for ensuring confidentiality to the real owners.. The third group of jurisdictions is prestigious, generally, European countries in which a rate of corporate tax is high. But there is a favorable taxation for holdings. The Netherlands, Austria, Switzerland, Liechtenstein, Luxembourg, Great Britain and others treat such jurisdictions, in. 政治大 For example, in Austria at registration of a joint-stock company (AG) in the presence of two 立. particular. At the same time, these jurisdictions also provide confidentiality to business owners.. ‧ 國. 學. and more shareholders the register of shareholders remains closed. In the Netherlands, a trust company can act as a director and/or a shareholder of the registered company (Basargin 2008).. ‧. Table 3: Tax classification of offshore jurisdictions. y. sit. n. al. BVI, Cayman Islands. Low taxes. Confidential. Ch. Privacy. Examples. er. No taxes. io. Classical. Features. Nat. Type. engchi. i n U. v. Cyprus. Netherlands, Austria, No taxes for holdings and trusts Prestigious. Switzerland, Liechtenstein, Confidentiality Luxembourg, Great Britain. Source: Basargin, 2008. In our thesis, we tend to classify offshore jurisdictions in a similar way – by economic conditions granted to non-residents. Thus, there are three types of jurisdictions namely: 1) ‘classical’; 2) respectable; 3) low-tax.. 13.

(25) 2.2.1. Classical Jurisdictions In ‘classical’ jurisdictions’, companies are exempt from taxation in the country of registration if they do not receive income from local sources. In order to replenish the budget, the governments of these countries register companies without charging them any taxes. As a rule, these are small island states (Okunev 2017). The examples are British Virgin Islands, Belize, Cayman Islands, Bahamas, Marshall Islands, Malta, Panama, Mauritius, Dominica, Saint Kitts and Nevis, Saint Vincent and the Grenadines, Seychelles, Costa Rica, the Republic of Nauru.. 政治大 2.2.2. Respectable Jurisdictions 立. ‧ 國. 學. The respectable offshore jurisdictions include the internal territories of a number of Western countries. For example, American state of Delaware, some cantons in Switzerland, Guernsey. ‧. and Jersey, the Isle of Man, or individual European states in which the corporate tax rate is high. y. sit. io. n. al. er. Great Britain, etc.. Nat. enough. But there are other attractive tax regimes like the Netherlands, Austria, Liechtenstein,. i n U. v. In the most respectable offshore companies, the privacy of the company's owners is ensured.. Ch. engchi. At the same time, the vast majority of prestigious offshore jurisdictions are members of the European Union, on the territory of which general directives and other normative acts are applied. For example, the law mandates banks to disclose information about their customers (Okunev 2017).. However, countries such as Switzerland, Liechtenstein, Austria and the Netherlands apply such rules with reservations, as a result of which local offshore companies have a high degree of security of information, including with regard to the disclosure of such information to third parties and government authorities. In these jurisdictions, annual preparation and submission. 14.

(26) of financial statements to registration or tax authorities are required.. The main cases in which the use of respectable jurisdictions is justified are as follows:. -. holding structures;. -. outside and intra-group financing/royalty payments schemes;. -. trade operations in the EU, export-import;. -. asset protection and real estate sales.. 政治大 2.2.3. Low-tax Jurisdictions 立. ‧ 國. 學. Low-tax jurisdictions are that grant foreign founders the right to pay taxes from activities carried out outside jurisdiction at a reduced rate.. ‧. Registered companies are residents in the country of registration. Therefore, they are required. y. Nat. sit. to become a tax resident, keep accounts, file accounts and pay local taxes. Such companies are. n. al. er. io. "transparent" for banks and partners and can take advantage of the double taxation treaties. The. i n U. v. examples are Bulgaria, Hong Kong, Cyprus, Singapore, Estonia.. Ch. engchi. However, as financial services are becoming increasingly diverse as a result of the liberalization of trade and technology, the concept of an offshore zone is shifting from the traditional focus on tax evasion toward the wide range of financial services, operations and the kinds of legal persons, such as offshore companies, funds, LLC, offshore banks and investment companies (mutual funds, securities trading companies, holdings, hedge funds, etc.).. Features of offshore zones include providing specialized financial and legal services, such as: risk management, asset management, asset protection, tax planning, transfer of property by. 15.

(27) inheritance and real estate, insurance, and investment and trading platforms through offshore banks and institutions. The role of offshore zones, thus, far from being limited to the taxes.. 2.2.4. Offshore Companies Classification Van Koningsveld (2015) studied the criminal use of offshore centers. He identifies in passing four kinds of offshore companies (Unger 2017).. 1. International business companies are best known and resemble the offshore company in. 政治大. its classic form. This type of offshore companies is generally considered as the most. 立. often used in cases of money laundering, tax fraud, corruption and other criminal. ‧ 國. 學. activities.. 2. Non-resident companies were introduced shorty after World War II with the rise of. ‧. MNC and the start of international tax planning. Because offshore companies in this. y. Nat. n. al. er. io. the country of incorporation, this type lost popularity.. sit. form were only exempted from taxes when the companies were managed abroad from. i n U. v. 3. Exempt companies were introduced as an alternative for non-resident companies.. Ch. engchi. Exempt companies can be managed from abroad, in principle are subject to tax obligations in the country of incorporation, but are exempted under certain conditions. For instance, under Gibraltar's Exempt Company program, more than 8,000 offshore firms do not have to pay income tax (TransLegal n.d.). The exempt companies are popular on Cayman Islands. An exempted company (or limited duration exempted company) is the normal form of choice for collective investment vehicles registered there. 4. Zero Tax Companies show a book profit and pay dividends to investors, but do not pay taxes. One of the favorite ways for companies to slash their tax bills is by setting up 16.

(28) foreign subsidiaries to make raw materials and components in countries with low tax rates.. On the example of Cayman Islands, the differences between a non-resident company and an exempted company are as follows (LOWTAX n.d.): . an exempted Caymans company does not have to use Ltd or Limited in its name;. . it may issue bearer shares in addition to registered shares, but they must be held by an authorized depositary;. 立. 政治大. it has to hold one directors' meeting a year in Cayman (but may use proxies);. . it does not have to hold a shareholders' meeting in Cayman;. . it need not file a list of shareholders annually, and does not even have to keep such a. ‧ 國. y. Nat. io. sit. it may obtain a Certificate of Tax Exemption (i.e. against any future Cayman taxation).. er. . ‧. list;. 學. . al. By Gurgulia (2015), the following types of offshore companies are distinguished: non-resident,. n. v i n C h foreign sales, international, exempt, qualified, domiciliary, service, hybrid offshore companies engchi U. and partnerships, as well as international business companies. Depending on the organizational and legal form, companies of a closed type, a Russian analogue of a closed joint-stock company, an open type company with limited liability, unlimited companies, holdings, corporations and other forms provided for by the law of each separate jurisdiction, are allotted. To conclude, the offshore jurisdictions classification is similar to the offshore companies’. However, the types of territories are more important since they provide the basic foundations of offshore activity in a form of favorable legislation. The companies’ categories play their roles in designing particular offshore schemes customized to the needs. 17.

(29) 2.3. Offshores: Pros and Cons The essence of offshore activity is the sale of financial services to provide economic entities with preferential tax treatment. The concept of taxation is based on the principles of territoriality and residency, depending on the law applicable in a particular jurisdiction. In countries of common law, the principle of residency is used (Gurgulia 2015).. Therefore, offshore schemes are not illegal. There are three main motives for using offshore. 政治大 tax evasion; 3) connected with the commission of crimes. 立. In any offshore scheme there are five parties being involved:. 學. ‧ 國. jurisdictions: 1) not related to the commission of crimes; 2) due to the objectives of facilitating. ‧. 1) a company willing to incorporate an offshore firm – resident company;. sit. y. Nat. 2) a country where the company does the actual business – resident country;. io. al. er. 3) an offshore company that becomes a counterpart to the resident firm;. n. 4) an offshore jurisdiction and law firms located there that help non-residents to register an offshore company.. Ch. engchi. i n U. v. Three of them, except the resident country, benefit from the scheme. Offshore jurisdictions are interested in capital attraction. Eventually, the issue of offshore schemes becomes a confrontation between developed and developing countries that do not have enough power to struggle with this phenomenon. It is a ‘Harmful Tax Competition’ (by OECD) between developed and developing countries, but also is recognized as an element of global competition for capital (Grigorieva 2016). Therefore, offshore activity has a dual nature combining international and national interests.. 18.

(30) From a company’s point of view that exploits an offshore scheme, the following positive and negative sides of such activity are manifest.. 2.3.1. Advantages The offshore services imply providing the following benefits to businesses:. -. no or low taxation;. -. secrecy of ownership;. -. protection of the assets;. -. image of an international company;. -. ease of doing business.. 學. ‧ 國. 立. 政治大. sit. y. Nat. characterized by:. ‧. These advantages are possible due to the specific business environment in offshore jurisdictions. -. favorable taxation of non-residents;. -. simplicity and reasonable timeframes of incorporation. It leads to low cost of the. n. al. er. political stability;. io. -. Ch. engchi. i n U. v. offshore company at its purchase and annual maintenance; -. simplified reporting procedures. It means that local legislation does not require the publication and submission of financial statements to regulatory authorities;. -. legislative support for anonymous ownership of a company.. The most obvious advantage of using offshore companies is avoiding taxes. For example, in Russia the corporate income tax rate is 20%, but in the BIV there is no such tax (see Table 4).. 19.

(31) Table 4: Tax rates in various offshore jurisdictions Existence of agreement s with Russia. 立. Hong Kong. 4. Dutch. 51. Nat. io. foreign country , %. 25. 20. 0. 0. 20. 17.5. No. 0. 28. 25. 政治大. Yes. 5 Federal Law No. 146-FZ of November 26, 2002. 0. No. 15. 20. No. 15. 20. a Yes. l C h Federal. n. foreign country, %. Interes t on loans. 0. y. 2. ‧ 國. BVI. Royalt y. VAT rate for sales on the territor y of a. ‧. 40. Dividend s (min rate). Income tax rate receive d in the territory of a. 學. Austria. Tax rate on income received by a foreign company in Russia, %. sit. Number of agreement s on avoidance of double taxation. 20. er. Jurisdiction. n U engchi 10. 0. iv. Law No. 40-FZ of February 2, 1997 Dominica. 1. No. 15. 20. 20. 0. 0. Cyprus. 28. Yes.. 5. 0. 0. 10. 15. 15. 20. 20. 0. 7.5. Federal Law No. 167-FZ of July 17, 1999 Liechtenstei. 3. No. 20.

(32) n Luxembourg 41. Yes. 10 Federal Law No. 64-FZ of March 19, 1997. 0. 0. 29.85. 15. Netherlands. Yes. Federal. 0. 0. 25.5. 19. 10. 25-30. 7.6. 35.2. 18. 52. 5. Law No. 104-FZ of July 18, 1998. 政治大. No. 20. y. Nat. 0. 15. io. Source: Kaverina et al., 2007.. n. al. 20. er. 36. ‧ 國. Estonia. Yes. E Federal Law No. 38-FZ of February 2, 1997. ‧. 48. 學. Switzerland. sit. 立. Ch. engchi. i n U. v. The next benefit is a high level of confidentiality that allows to conceal real business owners. Some jurisdictions establish a register of directors and shareholders closed for third parties. The privacy feature also allows to issue of bearer shares without mention the owner of company. To enhance the conspiracy, the beneficiary can use a nominal service and a general power of attorney that permits to perform administrative actions on behalf of the company.. Financial stability and freedom in using various instruments are other advantages of exploiting offshore companies. Since the companies are incorporated overseas, they act as foreign firms, thus obtain the opportunities inherent for them. For instance, an access to international and. 21.

(33) investment markets, an option to open accounts in global banks that leads to the ease of current transactions around the world. In some jurisdictions, the possibility of issuing shares to the bearer is provided. Besides, it is easier to buy-sell shares in the business through offshore firms due to advanced corporate governance services offered by registrars.. The consequence arising from the fact that a Russian company is owned by an offshore firm is that this entity is essentially not Russian, but more a foreign organization. It means that the. 政治大 interests. The issue is especially serious in Russia where judges could be bribed to make a 立. Russian affiliate can appeal to international court in order to defend its economic and trading. ‧ 國. 學. favorable decision.. Overall, with the offshore firms, Russian companies can significantly reduce the risks. ‧. associated with the harmful business environment within the country in economic and political. er. io. sit. y. Nat. fields.. 2.3.2. Disadvantages a. n. iv l C n Among the disadvantages the most h notorious is a tightUattention to offshore jurisdictions and engchi companies incorporated there by international competent authorities. It could hurt business, particularly, company’s image. Many well-known companies and financial institutions have a distrust of the offshore companies and avoid doing business with them. Besides, classic offshores are blacklisted in many countries, among which there is Russia, and many banks refuse to open accounts for classic offshore companies, because of the bad reputation of such zones. It leads to the lower degree of trust on the part of banks and partners.. Also the drawback is in not fully operational, and often not signed agreements on the avoidance of double taxation. This leads to the impossibility to carry out the necessary payments for 22.

(34) licensing and for the internal needs of the company as well as pay dividends. It can also lead to the problems with tax authorities of the state where the company operates. Therefore, beneficiaries should be carefully advised about the more appropriate jurisdictions to conduct business in.. Another risk is to lose business that depends on local authorities and the actions of a nominal director. In that sense, the case of Cyprus in 2013 is remarkable. At that time, Cyprian. 政治大 ‘confiscation of deposits of Cypriot banks’. The deposits were supposed to use in one of the 立. government decided to froze the assets in non-liquid banks. By Katasonov (2014), it was a. ‧ 國. 學. following ways: a) non-refundable grants; b) loans; c) investment (acquisition of shares). The situation did not seem like extraordinary. The similar circumstances were in New Zealand. ‧. which government was pushing an analogous mechanism to address the problem of Cyprus. y. sit. io. n. al. er. banks.. Nat. banking bankruptcy investors divested part of their savings, which will be used to rescue the. i n U. v. In dealing with offshore schemes, there are also tax and financial barriers. The laws of some. Ch. engchi. countries approve "black" lists of companies, deprived of tax benefits in collaboration with offshore jurisdictions. More and more states pass laws opposing the activities of the classic offshore companies on the grounds that such jurisdiction is used for money laundering and tax evasion.. In many ways, the pros and cons of offshores depend on professionalism of companies engaged in incorporation of firms and their knowledge of laws. There are many possible scam companies in this industry. Thus, their business reputation and trust are the main indicators of high professionalism.. 23.

(35) Eventually, there are more advantages than disadvantages of using offshore schemes. Therefore, the offshore services are more demanded now in the world, and many offshore jurisdictions has become popular nowadays.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 24. i n U. v.

(36) 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. 政治大. to incorporate their affiliates in locations with favorable tax, regulating and privacy policies. A. 立. “huge, secretive offshore industry” (Henry 2012) became a ‘dark side of globalization’ where. ‧ 國. 學. 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. sit. y. Nat. from the United States. Out of 100 companies within the FTSE 100 (whose shares are traded. al. n. “daughters”.. er. io. on the London Stock Exchange and have the greatest capitalization), only two have no offshore. Ch. engchi. i n U. v. 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. Europe. Offshore wealth. Share if financial. Tax revenue loss. in billion USD. wealth held offshore. in billion USD. 2,600. 10%. 78. 25.

(37) 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. 立. Source: Zucman, 2015.. 政治大8%. 7,600. 190. ‧ 國. 學. As mentioned previously, international organizations classify offshores into tax havens (THs),. ‧. offshore or international financial centers (OFCs or IFCs), and secrecy jurisdictions (SJs). sit. y. Nat. depending on specialization and different degrees of favoritism. For instance, “the Cayman. io. al. er. Islands is well known for being home to hedge funds, lawyers and service providers. Bermuda. n. is a world center for reinsurance. Gibraltar is home to e-gaming and motor insurance” (Fletcher 2016).. Ch. engchi. i n U. v. 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 mid1970s, 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. 26.

(38) 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.. 政治大. The emergence of offshore jurisdictions was caused by the following:. 立. competition among territories to attract businesses by avoiding taxes and to stimulate. ‧ 國. 學. -. their local economies;. developing own currencies as an alternative to Euro-dollar;. -. “historic and distortionary regulations on the financial sectors of industrial countries. ‧. -. sit. y. Nat. io. al. n. and banks to look for financial services overseas.. Ch. engchi. er. during the 1960s and 1970s” (International Monetary Fund 2000) that forced MNCs. i n U. v. 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. 27.

(39) 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. 政治大 (International Monetary Fund 2000). For such economies offshore services could be the main 立. employment in the host economy, and government revenue through licensing fees, etc.”. ‧ 國. 學. 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. y. Nat. sit. compel Switzerland authorities to transfer information about US citizens was essentially. n. al. er. io. activities to discredit Switzerland as a country with strong bank secrecy. The purpose was not. i n U. v. to increase tax collection, but to redirect offshore capitals from Switzerland to other. Ch. engchi. 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 jurisdictionsexporters 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).. 28.

(40) 3.2. Reasons Nowadays, digital technologies make a company’s functions more virtual than real. Corporations benefit from the global approach that was unimaginable 100 years before. One of the modern manifest opportunity is to avoid tax which is a basic concept of any government. However, from a company’s point of view, it is a way to increase revenue by lowering taxes which is called a ‘tax optimization’.. 政治大 registered there, but not conducting the actual business, is exempt from paying taxes. The firm 立. The optimization has become possible due to wide spread of offshore jurisdictions. A company. ‧ 國. 學. only has an office in such places with the small number of staff. On the other hand, the jurisdictions benefit from collecting registration and annual fixed fees, providing jobs for locals. ‧. and accumulating funds. Many of such locations are small island territories for which offshore. sit. y. Nat. services are the essential source of funding. Therefore, there is a competition among them to. io. n. al. er. attract wealthy clients both individuals and corporations by particular offerings.. i n U. v. By IMF (2000), OFCs can be used in a variety of ways (more details are in Appendix 4), namely:. Ch. engchi. . obtaining offshore banking licenses;. . establishing offshore corporations or international business corporations (IBCs);. . incorporating insurance companies;. . as special purpose vehicles;. . tax planning;. . tax evasion and money laundering;. . asset management and protection.. These are services for wealthy clients to satisfy their needs in: 29.

(41) 1) “anonymity for them, their families, and their business and political dealings; 2) the ability to minimize the net present value of future taxes, net of tax avoidance costs; 3) investment management, for those who still believe in it; 4) ability to easily access and manage their wealth from anywhere on the planet; 5) secure places to hang out, hide out and enjoy life; 6) iron-clad financial security for their huge stocks of anonymously-owned, largely-. 政治大. untaxed private assets” (Henry 2012).. 立. ‧ 國. 學. “Offshore investment funds, meanwhile, are often vehicles that pool together money from many investors, such as pension funds, university endowments and rich individuals before investing. Nat. y. ‧. it, usually in mainstream financial markets” (Fletcher 2016).. al. the potential to reduce a tax bill;. -. minimal maintenance requirements;. -. avoid being listed in public records;. -. strong lawsuit and asset protection;. n. -. er. io. sit. Overall, offshore services are tightly associated with their benefits as follows (Cassell 2016):. Ch. engchi. i n U. v. In general, the purposes that offshore corporations could be used for, can be divided into legal and illicit. For instance, the legal reasons are tax avoidance or to enjoy relaxed regulations. Tax avoidance or tax mitigation is legal, but immoral (Workman 1982). Among the illicit services are “money laundering and tax evasion. Tax evasion is illegal because it allows a person or business to intentionally avoid paying taxes” (VOA News 2016). However, often the line between tax mitigation and tax evasion is unclear. If a person wishes to avoid paying taxes, he 30.

(42) does it “either to hide income or as part of a complex scheme intended to conceal the true nature of a transaction” (Workman 1982) that could be interpreted as a kind of money laundering anyway.. Who are the main customers of offshores? By Henry (2012), those are 6.5 billion wealthy people varying “from 30-year old Chinese real estate speculators and Silicon-Valley software tycoons to Dubai oil sheiks, Russian Presidents, mineral-rich African dictators and Mexican. 政治大 art, yachts or real estate that allows to avoid ‘unnecessary’ bureaucratic procedures and 立 drug lords”. The offshore schemes are also beneficial in dealing with luxury goods as pieces of. ‧ 國. 學. publicity (Becketko 2016).. Among the firms, they are MNCs that reduce paying corporate taxes. By IRS, in the period. ‧. 1994-2004 US firms more than tripled their profits overseas by moving 60% of it to THs (US. y. Nat. sit. Internal Revenue Service 2008). Even the established tech giants like Amazon and Google are. n. al. er. io. not averse to exploiting offshore schemes in order to mitigate taxes (Shaxson 2015). The famous. i n U. v. case is related to Apple’s business that is being moved from one low-tax European haven to another (Mendelsohn 2017).. Ch. engchi. Except tax avoidance, another popular offshore technique is “one called transfer pricing, employed by pretty much every multinational” (Shaxson 2015). The idea is to shift the major part of costs to a subsidiary located in tax haven that results in no paying taxes and transferring wealth from taxpayers to shareholders. The details how the scheme works are provided in Chapter 4 as an example of Russian companies practices.. 3.3. Consequences The effects of global offshoring are mixed. From business point of view, offshore activity is 31.

(43) beneficial. However, from a government’s point of view, it is a negative phenomenon. It strengthens the economic difference between developed and developing countries, leaving the latter less opportunities for growth. In general, the aftermath depends on one’s perspective. If looked at from the point of view of businesses incorporating offshore headquarters, the activity is full of adequate opportunities. The future success relies on the right match between these capabilities and companies’ needs. 政治大 more customizable ‘blueprint’ that involves a good knowledge of corporate and tax legislations 立 regarding their particular businesses. In other words, there is no general offshore scheme, but a. ‧ 國. 學. in the countries of doing business as well as international law. Besides, the mediators that help to design an offshore scheme are evaluated by their reputation since the offshore services are. ‧. often related to secrecy.. Nat. sit. y. From the state’s perspective which the capital flee from, offshoring is a negative phenomenon.. er. io. It results in the following.. al. n. v i n First, the country loses significantCtax that the government is lacking of fiscal hrevenue. e n g cIt means hi U earnings to finance social expenditures. Due to the latter, the rate of accumulation in GDP is decreasing and, accordingly, the opportunities for investment in fixed assets are reduced, which inhibits the process of expanded reproduction. Often, such countries that are deprived of tax revenues are developing ones, while these capitals are transferred to developed nations. It further increases the difference between these countries leaving less opportunities for the developing nations to improve living standards.. Second, there are prerequisites for money laundering in the country. Offshoring is a legal activity, however, it is often used for illegal purposes. For example, for laundering proceeds of 32.

(44) crime.. Offshore company is like an ax or a knife: they are convenient to cut meat or chop wood, and at the same time it is possible to kill a person with this tool. The offshore company works in the same way: it can be used for good purposes (including for the state's purposes) or to the detriment of both owners and the state. Therefore, offshore companies must be used exclusively within the legal framework, for good purposes at least for the owner.. 政治大. From the standpoint of countries where the capital is heading to, offshoring is a positive activity.. 立. They prosper from capital inflow and providing local services to support the industry. Often,. ‧ 國. 學. there is a requirement for non-residents to have a local office of a newly incorporated firm with minimum necessary employees. It is understandable, because many offshore territories are. ‧. limited in their sources for economic development. Pacific or Caribbean Island States are such. y. Nat. n. al. er. io. following section.. sit. examples that are lacking of any resources. Other offshore jurisdictions are presented in the. 3.4. Lists of Jurisdictions. Ch. engchi. i n U. v. The offshore jurisdictions are commonly separated in two groups depending on the openness of shareholders list: 1) those that keep it closed; 2) those that maintain it open. For example, Bahamas, Virgin Islands and Saint Vincent do not provide the information on directors and shareholders, except for by a court decision (Table 6).. Table 6: Comparative analysis of different offshore jurisdictions. 33.

(45) IBC. 2. 2. Yes. No. No. No. Belize. IBC. 1. 1. Yes. No. Yes. No. Virgin. IBC. 1. 1. Yes. No. 立. 1. 1. Yes. No. Yes. No. Saint. IBC. 1. 1. Yes. No. Yes. No. Samoa. IBC. 1. 1. Yes. No. Yes. No. Cayman. Exempt 1. 1. Yes. No. Yes. No. Yes. No. Yes. al. n. Islands Cyprus. PLC. 1. Ch 1. e n g cYesh i. y. sit. er. Vincent. ‧. IBC. io. 學. Seychelles. Nat. ‧ 國. Islands. 政治 Yes 大No. i n U. v. (Ltd) Hong Kong. PLC. 1. 1. Yes. Yes. No. Yes. 2. 2. Yes. Yes. No. Yes. 1. 1. Yes. Yes. Yes. Yes. 1. 1. Yes. Yes. Yes. Yes. (Ltd) Ireland. PLC (Ltd). Gibraltar. NRC. Liechtenstein AG. 34. statements. provision of financial. Requirements for the. shares to bearer. and shareholders Possibility of issue of. information on directors. Availability of. directors. Possibility of corporate. directors. Minimum number of. shareholders. Minimum number of. Company type. Jurisdiction Bahamas.

(46) Mauritius. GBC1. 1. 1. Yes. No. No. Yes. GBC2. 1. 1. Yes. No. Yes. No. Panama. SRL. 1. 3. Yes. Yes. Yes. No. Delaware. Corp. 1. 1. No. No. No. Yes. (USA). LLC. 1. 1. Yes. No. No. No. Source: Lebedev, 2013.. 政治大 offshores. Depending on methodology, the list of offshores includes from 14 to 69 territories 立 There are particular lists of jurisdictions designated by various international organizations as. ‧ 國. 學. (International Monetary Fund 2000) (see Appendix 6). The combining list of the world’s OFCs and THs by OECD, FSF-IMF 2000 and TJN 2005 is presented in Table 7. It consists of 81. ‧. jurisdictions, among which 49 are recognized as offshores at least by two organizations.. Nat. io. al. 2. Anguilla 3. Antigua & Barbuda. FSF-IMF 2000. ■. n. 1. Andorra. OECD. er. Jurisdiction. sit. y. Table 7: World’s tax havens and offshore financial centers. Ch. TJN 2005. ■. ■. n U e n■ g c h i ■. ■. i■v. ■. 4. Aruba. ■. 5. Australia. □. 6. Austria. □. 7. Bahamas. ■. ■. ■. ■. ■. ■. 8. Bahrain. ■. ■. ■. 9. Barbados. ▼. ■. ■. 10. Belgium. □. 11. Belize. ■. ■. ■. 12. Bermuda. ■. ■. ■. 13. British Virgin Islands. ■. ■. ■. ■. 35.

(47) 14. Canada. □. 15. Cayman Islands. ■. ■. ■. 16. Cook Islands. ■. ■. ■. ■. ■. 17. Costa Rica 18. Cyprus. ■. ■. ■. 19. Dominica. ■. ■. ■ ■. 20. Dubai 21. Finland (Aland). □. 22. France. □. 立. □. 33. Israel (Tel Aviv). ■. ■ ■ ■. al. 34. Italy (Campione d'Italia & Trieste). ■. ■. Ch. ■. engchi U □. 35. Jersey. ■. 36. Korea. □. sit. □ □. n. 32. Isle of Man. io. 30. Iceland 31. Ireland. ■ ■. □. Nat. 29. Hungary. ■ ■. er. 28. Hong Kong. ■. ‧. ■ ■. 26. Grenada 27. Guernsey, Sark & Alderney. ■. 學. 25. Greece. ‧ 國. 24. Gibraltar. 政□ 治大 ■ ■. y. 23. Germany (Frankfurt). v ni. ■. ■ ■ ■. ■. ■. ■. ■. 37. Latvia 38. Lebanon 39. Liberia. ■. ■. 40. Liechtenstein. ■. ■. ■. 41. Luxembourg. □. ■. ■. 42. Macao. ■. ■. 43. Malaysia (Labuan). ■. ■. 36.

(48) 44. Maldives. ▼. 45. Malta. ■. ■. ■. 46. Marshall Islands. ■. ■. ■. 47. Mauritius. ■. ■. ■. 48. Monaco. ■. ■. ■. 49. Montserrat. ■. ■. ■. 50. Nauru. ■. ■. ■. 51. Netherlands. □. 52. Netherlands Antilles. ■. 立. ■ ■ ■. ■. 學. 55. Palau. ■. 政■ 治大 ■ ■ □. 56. Panama 57. Portugal (Madeira). ■. ■. 60. Saint Lucia. ■. ■. ■. ■. io. 61. Saint Vincent & the Grenadines 62. Samoa. 64. Sao Tome e Principe 65. Seychelles. n. 63. San Marino. al. Ch. ■. er. ■. Nat. 59. Saint Kitts & Nevis. ■. sit. 58. Russia (Ingushetia). ■. e n■ g c h i ■. 66. Singapore. i n U. v. ■. ■ ■. ‧. ‧ 國. 54. Northern Mariana Islands. ■. y. 53. Niue. ■. ■ ■ ■ ■. ■. ■. ■. ■. 67. Somalia. ■. 68. South Africa. ■. 69. Spain (Melilla). □. 70. Sweden. □. 71. Switzerland. □. ■ ■. ■. 72. Taiwan (Taipei) 73. Tonga. ■. ▼. ■. 37.

(49) □. 74. Turkey (Istanbul) 75. Turkish Rep. of Northern Cyprus. ■ ■. 76. Turks & Caicos Islands. ■. ■. 77. United Kingdom, London. ■. 78. Uruguay. ■. 79. US Virgin Islands. ■. ■. 80. USA (New York). □. ■. 81. Vanuatu. ■. 政治大. ■. ■. ■ – Tax Haven OECD, TJN 2007 /Offshore Financial Centre FSF/IMF 2000. □ – OECD member country with potentially harmful preferential tax regime as distinguished. 立. ‧. ‧ 國. 學. by OECD 2000. ▼ – No longer regarded a tax haven according to the OECD 2006. Source: TJN, 2007.. OECD has its own black list of territories that have not concluded agreements with OECD. sit. y. Nat. countries on the exchange of tax information in the context of the OECD's fight against. io. al. n. as Guatemala, Republic of Nauru, Republic of Niue.. Ch. engchi. er. "harmful tax competition". The list was first released in April 2002 and includes countries such. i n U. v. By Oxfam Fund (2016), there are “15 the world’s worst corporate tax havens” as listed in Table 8. By the organization that is struggling for justice and against poverty and inequality, these jurisdictions “facilitate the most extreme forms of corporate tax avoidance, driving the race to the bottom in corporate taxation” (Oxfam Fund 2016). Interestingly, the Oxfam list includes such honorable countries like Netherlands, Switzerland and Singapore.. Table 8. Oxfam’s ranking of the top 15 corporate tax havens.. 38.