subject: Offshore Bank Accounts Usually Located In Low Tax Jurisdictions [print this page] An offshore financial institution (or bank) is defined as one that is based in a country that is not the country of permanent residencye of the depositor. Similarly, an offshore bank account is an account held with an offshore bank. These deposits offer depositors several financial and legal advantages.
Institutions that are based in a tax haven (or low tax jurisdiction) country usually offer these benefits. That country has typically also enacted banking legislation specifically designed to attract foreign depositors. The country benefits by attracting banking business to its shores.
Depositors benefit from low or no taxation being levied on earnings from those deposits, privacy (or secrecy regarding the size and nature of their deposits) and easy access to their funds (in terms low regulation and solid political and financial stability).
One of the first jurisdictions to promote itself as a low tax banking center was the Channel Islands. Because the Channel Islands are geographically separate from the United Kingdom, the term offshore banking center was born. Other notable low tax financial centers include Switzerland, Luxembourg, the Cayman Islands, Bermuda, the Bahamas and Andorra.
A vital privacy element involves deposits being held in the form of a numbered, not named, account. The name of the owner of the deposit account is, of course, known by the institution but that information is closely guarded. Very few people within the institution can link a specific individual as the owner of a numbered account. Moreover, the institution is not required to disclose those ownership details to regulators. That secrecy is protected by legislation.
International finance is often associated with money laundering, drug smuggling and other criminal activity as well as terrorism. The secrecy offered by these financial centers are a two-edged sword. Even though they are designed to protect legal deposits, they can also unwittingly protect illegal money flows. These suspicions grew markedly after the terrorist attacks on New York and Washington DC on 11 September 2001. Regulation has generally been tightened since then.
Even though individuals are not usually subjected to income or other taxes by the tax haven jurisdiction on earnings generated by deposits held in that jurisdiction, those earnings can be subjected to income, capital and other taxes levied by the country of residency of the individual. For example, individuals subject to US income tax are required by US law to declare any offshore deposit accounts to the Internal Revenue Service (IRS). Similar disclosure requirements have been enacted by other nations.
