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An offshore financial centre (OFC) is defined as 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."^[a][4]

"Offshore" is not always literal since many Financial Stability Forum–IMF OFCs, such as Delaware, South Dakota, Singapore, Luxembourg and Hong Kong, are landlocked or located "onshore", but refers to the fact that the largest users of the OFC are non-residents, i.e. "offshore".^[b] The IMF lists OFCs as a third class of financial centre, with international financial centres (IFCs) and regional financial centres (RFCs). A single financial centre may belong to multiple financial centre classes (e.g. Singapore is an RFC and an OFC).

The Caribbean, including the Cayman Islands, the British Virgin Islands and Bermuda, has several major OFCs, facilitating many billions of dollars worth of trade and investment globally.

During April–June 2000, the Financial Stability Forum–International Monetary Fund produced the first list of 42–46 OFCs using a qualitative approach. In April 2007, the IMF produced a revised quantitative-based list of 22 OFCs,^[c] and in June 2018, another revised quantitative-based list of eight major OFCs, who are responsible for 85% of OFC financial flows, which include Ireland, the Caribbean,^[d] Luxembourg, Singapore, Hong Kong and the Netherlands.^[5] The removal of foreign exchange and capital controls, the early driver for the creation and use of many OFCs in the 1960s and 1970s,^[e] saw taxation and/or regulatory regimes become the primary reasons for using OFCs from the 1980s on.^[4] Progress from 2000 onwards from IMF–OECD–FATF initiatives on common standards, regulatory compliance, and banking transparency, has significantly weakened the regulatory attraction of OFCs.

Tax-neutral is a term that OFCs use to describe legal structures where the OFC does not levy any corporation taxes, duties or VAT on fund flows into, during, or exiting (e.g. no withholding taxes) the corporate vehicle. Popular examples are the Irish qualifying investor alternative investment fund (QIAIF), and the Cayman Islands exempted company, which is used in investment funds, corporate structuring vehicles, and asset securitization. Many onshore jurisdictions also have equivalent tax neutrality in their investment funds industries, such as the United Kingdom, United States, and France. Tax neutrality at the level of these vehicles means that taxes are not paid at the OFC but in the places where the investors are tax resident. If the OFC levied a tax, this would in most cases reduce the tax paid in the places where investors are tax resident by that same amount, on the principles of avoiding double taxation of the same activity.

Research in 2013–14 showed OFCs harboured 8–10% of global wealth in tax-neutral structures, and acted as hubs for U.S. multinationals in particular, to avoid corporate taxes via base erosion and profit shifting ("BEPS") tools (e.g. the double Irish). A study in 2017 split the understanding of an OFC into 24 Sink OFCs, to which a disproportionate amount of value disappears from the economic system), and five Conduit OFCs, through which a disproportionate amount of value moves toward the Sink OFCs). In June 2018, research showed that major onshore IFCs, not offshore IFCs, had become the dominant locations for corporate tax avoidance BEPS schemes, costing US$200 billion in lost annual tax revenues. A June 2018 joint-IMF study showed much of the FDI from OFCs, into higher-tax countries, originated from higher-tax countries (e.g. the UK is the second largest investor in itself, via OFCs).^[5][7]

Definitions

Core definition

The definition of an offshore financial centre dates back to academic papers by Dufry & McGiddy (1978), and McCarthy (1979) regarding locations that are: Cities, areas or countries which have made a conscious effort to attract offshore banking business, i.e., non-resident foreign currency denominated business, by allowing relatively free entry and by adopting a flexible attitude where taxes, levies and regulation are concerned.” An April 2007 review of the historical definition of an OFC by the IMF, summarised the 1978–2000 academic work regarding the attributes that define an OFC, into the following four main attributes, which still remain relevant:^[4]

In April 2000, the term rose to prominence when the Financial Stability Forum ("FSF"), concerned about OFCs on global financial stability, produced a report listing 42 OFCs.^[8] The FSF used a qualitative approach to defining OFCs, noting that: Offshore financial centres (OFCs) are not easily defined, but they can be characterised as jurisdictions that attract a high level of non-resident activity and volumes of non-resident business substantially exceeds the volume of domestic business.^[8]

In June 2000, the IMF accepted the FSF's recommendation to investigate the impact of OFCs on global financial stability. On the 23 June 2000, the IMF published a working paper on OFCs which expanded the FSF list to 46 OFCs, but split into three Groups based on the level of co-operation and adherence to international standards by the OFC.^[9] The IMF paper categorised OFCs as a third type of financial centre, and listed them in order of importance: International Financial Centre ("IFC"), Regional Financial Centres ("RFC") and Offshore Financial Centres ("OFC"); and gave a definition of an OFC:

A more practical definition of an OFC is a center where the bulk of financial sector activity is offshore on both sides of the balance sheet, (that is the counterparties of the majority of financial institutions liabilities and assets are non-residents), where the transactions are initiated elsewhere, and where the majority of the institutions involved are controlled by non-residents

— IMF Background Paper: Offshore Financial Centres (June 2000)^[9]

The June 2000 IMF paper then listed three major attributes of offshore financial centres:^[9]

A subsequent April 2007 IMF on OFCs, established a quantitative approach to defining OFCs which the paper stated was captured by the following definition:^[4]

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.

— IMF Working Paper: Concept of Offshore Financial Centers: In Search of an Operational Definition (April 2007)^[4]

The April 2007 IMF paper used a quantitative proxy text for the above definition: More specifically, it can be considered that the ratio of net financial services exports to GDP could be an indicator of the OFC status of a country or jurisdiction. This approach produced a revised list of 22 OFCs,;^[c] however, the list had a strong correlation with the original list of 46 OFCs from the IMF's June 2000 paper.^[4] The revised list was much shorter than the original IMF list as it only focused on OFCs where the national economic accounts produced breakdowns of net financial services exports data.

By September 2007, the definition of an OFC from the most cited academic paper on OFCs,^[10] showed a strong correlation with the FSF–IMF definitions of an OFC:^[11]

Offshore financial centers (OFCs) are jurisdictions that oversee a disproportionate level of financial activity by non-residents.

— Andrew K. Rose, Mark M. Spiegel, "Offshore Financial Centers: Parasites or Symbionts?", The Economic Journal, (September 2007)^[11]

Link to tax havens

The common FSF–IMF–Academic definition of an OFC focused on the outcome of non-resident activity in a location (e.g. financial flows that are disproportionate to the local economy), and not on the reason that non-residents decide to conduct financial activity in a location. However, since the early academic papers into OFCs in the late 1970s, and the FSF-IMF investigations, it has been consistently noted that tax planning is only one of many drivers of OFC activity. Others include deal structuring and asset holding in a neutral jurisdiction with laws based on English common law, favourable/tailored regulation (e.g. investment funds), or regulatory arbitrage, such as in OFCs like Liberia, that focus on shipping.

In April–June 2000, when the FSF–IMF produced lists of OFCs, activist groups highlighted the similarity with their tax haven lists.^[12] Large projects were carried out by the IMF and the OECD from 2000 onwards, on improving data transparency and compliance with international standards and regulations, in jurisdictions that had been labeled OFCs and/or tax havens by the IMF–OECD. The reduction in banking secrecy, was partially credited to these projects as well as global advances in combatting illicit finance flows, and Anti-Money Laundering legislation and regulations. Academics who study tax havens and OFCs are now able to distinguish between those jurisdictions which are used in BEPS activity, and those which are simply tax-neutral, pass-through jurisdictions such as the Cayman Islands, British Virgin Islands and Bermuda.^[13]

Many leading OFCs have recently implemented recommended legislation to reduce or eliminate BEPS. Jurisdictions such as the Cayman Islands, British Virgin Islands and Bermuda found that over 90% of their business companies were out of scope because their core industry does not cater to BEPS strategies.^[14]

Conduit and Sink OFCs

While from 2010 onwards, some researchers began to treat tax havens and OFCs as practically synonymous, the OECD and the EU went in a different direction depending on their desired outcome. By 2017, and after many years of regulatory changes in OFCs and some onshore IFCs, the OECD's list of "tax havens" only contained Trinidad & Tobago, which is not a prominent international financial centre. Signally, EU members are routinely not screened by activists including the EU itself. Oxfam, which has entities and activities in jurisdictions such as Lichtenstein, Luxembourg, Netherlands and Delaware, has become a prominent critic of OFCs and has produced reports with the Tax Justice Network, to try to depict their point of view. These are widely discredited by professionals and academics and prominent TJN leaders resigned complaining that the reports were not compiled by knowledgeable tax experts and were manufactured to present a desired outcome, which detracts from good faith efforts to curb BEPS, aggressive tax planning and illicit funds flows.

In July 2017, the University of Amsterdam's CORPNET group ignored any definition of a tax haven and followed a quantitive approach, analyzing 98 million global corporate connections on the Orbis database.^[15][16] CORPNET used a variation of the technique in the IMF's 2007 OFC working paper,^[4] and ranked the jurisdictions by the scale of international corporate connections relative to the connections from the local economy. In addition, CORPNET split the resulting OFCs into jurisdictions that acted like a terminus for corporate connections (a Sink), and jurisdictions that acted like nodes for corporate connections (a Conduit).

CORPNET's Conduit and Sink OFCs study split the understanding of an offshore financial centre into two classifications:^[15][16]

• 24 Sink OFCs: jurisdictions in which a disproportionate amount of value disappears from the economic system (e.g. the traditional tax havens).
• 5 Conduit OFCs: jurisdictions through which a disproportionate amount of value moves toward sink OFCs (e.g. the modern corporate tax havens)
  (Conduits are: Netherlands, United Kingdom, Switzerland, Singapore, and Ireland)

Sink OFCs rely on Conduit OFCs to reroute funds from high-tax locations using the BEPS tools which are encoded, and accepted, in the Conduit OFC's extensive networks of bilateral tax treaties. Because Sink OFCs are more closely associated with traditional tax havens, they tend to have more limited treaty networks.

CORPNET's lists of top five Conduit OFCs, and top five Sink OFCs, matched 9 of the top 10 havens in the Hines 2010 tax haven list, only differing in the United Kingdom, which only transformed their tax code in 2009–12, from a "worldwide" corporate tax system, to a "territorial" corporate tax system.

Our findings debunk the myth of tax havens^[f] as exotic far-flung islands that are difficult, if not impossible, to regulate. Many offshore financial centers^[f] are highly developed countries with strong regulatory environments.

— Javier Garcia-Bernardo, Jan Fichtner, Frank W. Takes & Eelke M. Heemskerk, CORPNET University of Amsterdam^[15]

All of CORPNET's Conduit OFCs, and eight of CORPNET's top 10 Sink OFCs, appeared in the § IMF 2007 list of 22 OFCs. However, this theoretical work has been brought into question. Many of the "sink" jurisdictions by CORPNET's standards have proved to be conduit jurisdictions. When Economic Substance legislation was brought in, practically all of the companies in places like the Cayman Islands and British Virgin Islands were out of scope because BEPS is not a relevant industry in those jurisdictions. Those jurisdictions concentrate more on investment funds, which are self-evidently conduit vehicles where investors are not taxed in the OFC but in full where they are tax resident.^[14]

Lists

FSF–IMF 2000 list

The following 46 OFCs are from the June 2007 IMF background paper that used a qualitative approach to identify OFCs;^[9] and which also incorporated the April 2000 FSF list which had also used a qualitative approach to identify 42 OFCs.^[8]

(*) Groups are as per the IMF June 2000 categories:

(‡) Dominica, Grenada, Montserrat and Palau were not on the FSF April 2000 list of 42 OFCs but were on the IMF June 2000 list of 46 OFCs.

IMF 2007 list

The following 22 OFCs are from an April 2007 IMF working paper that used a strictly quantitative approach to identifying OFCs (only where specific data was available^[c]).^[4]

(†) In on both the April 2000 FSF list of 42 OFCs, and the June 2000 IMF list of 46 OFCs.
(Top 5 Conduit OFC) The IMF list contains all 5 largest Conduit OFCs: Netherlands, United Kingdom, Switzerland, Singapore and Ireland
(Top 10 Sink OFC) The IMF list contains 8 of the 10 largest Sink OFCs: missing British Virgin Islands (data was not available), and Taiwan (was not a major OFC in 2007).

IMF 2018 list

The following eight OFCs (or also called pass through economies) were co-identified by an IMF working paper, as being responsible for 85% of the world's investment in structured vehicles.^[5]

Comparison of the IMF 2018 eight major pass through OFCs,^[5] with other OFC rankings (as discussed elsewhere in this article):

IMF Major OFC (alphabetical)[5]	Conduit Sink OFC Ranking[15]	Global Tax Haven BEPS Ranking[2]	Global Shadow Bank OFI Ranking[17]
Bermuda†	Top 5 Sink OFC	9	n.a.[g]
British Virgin Islands	Top 5 Sink OFC	2	n.a.[g]
Cayman Islands†	Top 10 Sink OFC	2	1
Hong Kong†	Top 5 Sink OFC	8	5
Ireland†	Top 5 Conduit OFC	1	3
Luxembourg†	Top 5 Sink OFC	6	2
Netherlands†	Top 5 Conduit OFC	5	4
Singapore†	Top 5 Conduit OFC	3	8

(†) In the April 2000 FSF list of 42 OFCs, the June 2000 IMF list of 46 OFCs, and the April 2007 IMF list of 22 OFCs.
(Top 5 Conduit OFC) The IMF list contains three of the largest Conduit OFCs: Netherlands, Singapore and Ireland
(Top 5 Sink OFC) The IMF list contains four of the five largest Sink OFCs: missing Jersey (fourth largest Sink OFC), but includes the Cayman Islands (tenth largest Sink OFC).

FSF 2018 Shadow Bank OFC list

Shadow banking is a key service line for OFCs. The Financial Stability Forum ("FSF") produces a report each year on Global Shadow Banking, or other financial intermediaries ("OFI"s).^[h] In a similar method to the various IMF lists, the FSF produces a table of the locations with the highest concentration of OFI/shadow banking financial assets, versus domestic GDP, in its 2018 report, thus creating a ranked table of "Shadow Banking OFCs".^[17] The fuller table is produced in the § Shadow banking section, however, the 4 largest OFCs for shadow banking with OFI assets over 5x GDP are:^[17]

Countermeasures

Offshore finance became the subject of increased attention since the FSF–IMF reports on OFC in 2000, and also from the April 2009 G20 meeting, during the height of the financial crisis, when heads of state resolved to "take action" against non-cooperative jurisdictions.^[18] Initiatives spearheaded by the Organisation for Economic Co-operation and Development (OECD), the Financial Action Task Force on Money Laundering (FATF) and the International Monetary Fund have had an effect on curbing some excesses in the offshore financial centre industry, although it would drive the OFC industry towards a § Focus on tax for institutional and corporate clients. The World Bank's 2019 World Development Report on the future of work supports increased government efforts to curb tax avoidance.

Tax services

Early research on offshore financial centers, from 1978 to 2000, identified reasons for nonresidents using an OFC, over the financial system in their own home jurisdiction (which in most cases was more developed than the OFC). Prominent reasons in these lists were:^[4]

The third reason, Manage around currency and capital controls, dissipated with globalisation of financial markets and free-floating exchange rate mechanisms, and ceases to appear in research after 2000. The second reason, Favourable regulations, had also dissipated, but to a lesser degree, as a result of initiatives by the IMF–OECD–FATF post–2000, promoting common standards and regulatory compliance across OFCs and tax havens.^[22][20][19] For example, while the EU–28 contains some of the largest OFCs (e.g. Ireland and Luxembourg), these EU–OFCs cannot offer regulatory environments that differ from other EU–28 jurisdictions.^[23]

These earlier regimes are no longer relevant in today's World. OFCs each tend to have one or more core business areas which dominate their industries. Substantially, but not exclusively, Cayman and the BVI are investment funds jurisdictions, as well as structured finance and holding company vehicles for large assets (such as infrastructure, commercial real estate), or SPVs for investment into jurisdictions with less certain legal and judicial infrastructure, such as China, Russia or India. Bermuda has a large reinsurance industry and Cayman's insurance industry is also now competitive.

In August 2013, Gabriel Zucman showed OFCs housed up to 8–10% of global wealth in tax–neutral^[j] structures.^[24] Often conflated are the reasons why private equity funds and hedge funds set up in OFCs, such as Delaware, the Cayman Islands, British Virgin Islands, and Luxembourg, and which the Investment Manager often sets up there as well. The former is to benefit from investment funds specific legislation designed for larger institutional, sovereign, High Net Worth or Development/NGO investors who are presumed to either be sophisticated in themselves or have access to sophisticated advice on account of their size. In this way, these funds are not open to retail investors whom are normally investors in jurisdictions that cater for greater investor protection. The zero tax rate, as in many onshore funds, is so that the profits are taxed in the countries where the investors who earned the profits are tax resident. Any tax that was levied on the fund itself would have to be deducted from the onshore tax on those profits in order that the same profit is not taxed twise.

On the other hand, the investment manager is often set up in low tax OFCs to facilitate the personal tax planning of the manager.^[23][25]

In August 2014, Zucman showed OFCs being used by U.S. multinationals, in particular, to execute base erosion and profit shifting ("BEPS") transactions to avoid corporate taxes.^[26] Zucman's work is widely quoted yet also frequently criticised as being confused and counterfactual.^[27]

Demonstrating that most BEPS activity occurs in US and EU IFCs, in Q1 2015, Apple executed the largest BEPS transaction in history, moving US$300 billion in intellectual property ("IP") assets to Ireland, an IMF OFC, to use the Irish "Green Jersey" BEPS tool (see "Leprechaun economics"). In August 2016, the EU Commission levied the largest tax fine in history, at US$13 billion, against Apple in Ireland for abuse of the double Irish BEPS tool from 2004 to 2014. In January 2017, the OECD estimated that BEPS tools, mostly located in OFCs, were responsible for US$100 to 240 billion in annual tax avoidance.^[28] However, it is notable that developing countries often suffer from kleptocracy and serious corruption regarding national wealth, and BEPS is very much a secondary concern.

In June 2018, Gabriel Zucman (et alia) produced a report stating that OFC corporate BEPs tools were responsible for over US$200 billion in annual corporate tax losses,^[29] and produced the a table (see below) of the largest BEPS locations in the world, which showed how synonymous the largest tax havens, the largest Conduit and Sink OFCs, and the largest § IMF 2007 list of OFCs had become.^[2]

In June 2018, another joint-IMF study showed that 8 pass-through economies, namely, the Netherlands, Luxembourg, Hong Kong SAR, the British Virgin Islands, Bermuda, the Cayman Islands, Ireland, and Singapore; host more than 85 per cent of the world's investment in special purpose entities.^[5] It is important that these entities are tax neutral because any taxation at the OFC entity would have an equivalent reduction in the home or investor countries.

Zdroj:https://en.wikipedia.org?pojem=Offshore_finance
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Missing Profits of Nations. Appendix: Table 2: Shifted Profits: Country-by-Country Estimates (2015)^[2]

Zucman Tax Haven	Rank by Profit Shifted	Corporate Profits ($bn)	Of Which: Local ($bn)	Of Which: Foreign ($bn)	Profits Shifted ($bn)	Effective Tax Rate (%)	Corp. Tax Gain/Loss (%)
Ireland*†Δ⹋	1	174	58	116	-106	4%	58%
Caribbean*‡Δ⹋	2	102	4	98	-97	2%	100%
Singapore*†Δ⹋	3