Offshore Financial Centre - Definition

Definition

Whether a financial centre is to be characterized as "offshore" is a question of degree. Indeed, the IMF Working Paper cited above notes that its definition of an offshore centre would include the United Kingdom and the United States, which are ordinarily counted as "onshore" because of their large populations and inclusion in international organisations such as the G20 and OECD.

The more nebulous term “tax haven” is often applied to offshore centres, leading to confusion between the two concepts. In Tolley's International Initiatives Affecting Financial Havens the author in the Glossary of Terms defines an “offshore financial centre” in forthright terms as “a politically correct term for what used to be called a tax haven.” However, he then qualifies this by adding, “The use of this term makes the important point that a jurisdiction may provide specific facilities for offshore financial centres without being in any general sense a tax haven.” A 1981 report by the IRS concludes, “a country is a tax haven if it looks like one and if it is considered to be one by those who care.”

With its connotations of financial secrecy and tax avoidance, “tax haven” is not always an appropriate term for offshore financial centres, many of which have no statutory banking secrecy, and most of which have adopted tax information exchange protocols to allow foreign countries to investigate suspected tax evasion.

Views of offshore financial centres tend to be polarised. Proponents suggest that reputable offshore financial centres play a legitimate and integral role in international finance and trade, and that their zero-tax structure allows financial planning and risk management and makes possible some of the cross-border vehicles necessary for global trade, including financing for aircraft and shipping or reinsurance of medical facilities. Proponents point to the tacit support of offshore centres by the governments of the United States (which promotes offshore financial centres by the continuing use of the Foreign Sales Corporation (FSC)) and United Kingdom (which actively promotes offshore finance in Caribbean dependent territories to help them diversify their economies and to facilitate the British Eurobond market).

Overseas Private Investment Corporation (OPIC), a U.S. government agency, when lending into countries with underdeveloped corporate law, often requires the borrower to form an offshore vehicle to facilitate the loan financing. One could argue that US external aid statutorily cannot even take place without the formation of offshore entities.