There are a number of misconceptions about IFCs. As an industry group whose members eat, sleep, and breathe IFCs, we want to see these myths put to bed.
Myth: “Offshore centres are tax havens – they exist to dodge taxes!”
Reality: This is simply ill-informed. Taxes are still due and always will be due where the money is made, such as Corporation Tax, and where the money is distributed, such as Capital Gains Tax or Income Tax on dividends. IFCs do not reduce those liabilities, as no countries reduce the tax burden liable in their jurisdiction to account for taxes paid in IFCs.
IFCs do, however, provide a tax-neutral jurisdiction so that additional layers of activity, such as fund management, don’t incur additional taxes above and beyond what is ordinarily (and rightly) paid in the investor’s home country and country in which he or she is investing. And some of the sectors that use IFCs the most, such as pension funds, are tax-free altogether anyway. At most, IFCs could be said to avoid the imposition of double taxation – but people that use them still pay tax fully.
Myth: “There are hundreds of billions of dollars in offshore bank accounts!”
Reality: Money doesn’t sit, unused in offshore bank accounts – if nothing else, that wouldn’t be a good investment! Instead, it’s invested in other countries through IFCs to increase returns or reduce risks. So the money isn’t sitting in IFCs or doing nothing – it’s building factories, infrastructure, and housing around the world. Only by doing that can it do its job and provide for pensioners, savers, and insurance policy holders onshore.
Myth: “Offshore centres shelter clients from law enforcement and tax authorities.”
Reality: Offshore centres were among the first countries to sign Tax Information Exchange Agreements with the US and UK, and have continued that tradition of openness and cooperation to this day. All territories in which IFC Forum member firms are headquartered are in the early adopters group for the OECD Common Reporting Standard and signed up to FATCA: making them world leaders in sharing tax information with OECD countries such as the US and UK. Law enforcement and tax authorities around the world will know exactly who has money in these jurisdictions: making money laundering or tax evasion much harder than elsewhere.
Myth: “Tax competition hurts countries and public revenue.”
Reality: Large countries aren’t in competition with offshore centres – IFCs are merely tax-neutral jurisdictions that allow two large countries to compete more directly with each other, by offering the institutions required to channel capital between countries. British IFCs have particularly close ties to the UK, and therefore help the UK to compete internationally.
Ordinarily, if you pay tax on money in country X and live in country Y, the government of Y will give you a tax credit for all tax paid to the government of X, so you don’t have to pay it again. But IFCs don’t impose direct tax, so country Y doesn’t confer any tax credits, meaning your tax bill in country Y wouldn’t be reduced. As a result, by not imposing a tax themselves, IFCs effectively yield the tax base back to onshore countries: increasing, not reducing, their tax base.
Myth: “Offshore centres have lower regulatory standards.”
Reality: Offshore centres have amongst the highest regulatory standards in the world. All of them are early adopters of the OECD’s Common Reporting Standard. All subscribe to the FATF Recommendations, which they’ve been found to be in better compliance than most onshore jurisdictions. The academic study Global Shell Games found that four of the five countries with the highest regulatory standards were British IFCs. The World Bank found that every British IFC abided by global regulatory standards on every occasion, while the US failed on most occasions.
This shouldn’t be surprising. The Crown Dependencies and Overseas Territories combine British institutions with world-class legal, judicial, and law enforcement capabilities that are highly-specialised in financial services. IFC Forum’s goal is to ensure those global standards are implemented fully and fairly in all countries, not just in the British IFCs and the other countries that choose to.
Myth: “IFCs are mostly British colonies - the UK runs them and should pass laws for them.”
Reality: While the Crown Dependencies (CDs) and many Overseas Territories (OTs) are international financial centres, they are not run by the United Kingdom. All are all self-governing territories, with governments democratically elected by their inhabitants. They voluntarily choose to remain UK territories and are sovereign over all matters except their national defence and foreign affairs, over which the UK retains control.
This arrangement benefits the United Kingdom, as their position as dependencies or territories of the United Kingdom promotes British laws and institutions – and therefore the British economy – in a way that would not be promoted if they were independent.