Offshore financial centre

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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]

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