What is offshore in economics? Is it legal?
In economics a term “Offshore” can be defined as tax-free investments made by a natural or legal person in a country other than its country of residence. Offshore investments are also known as investments in tax havens or extraterritorial jurisdictions. What advantages and disadvantage do you have in offshore? Is it legal? Am I avoiding or evading taxes?
The causes that have led large companies and businessmen to transfer their money to offshore financial centers are: the tax burden of developed countries, wars and socio-migratory changes. The free movements of capital between countries and the access to Internet have contributed to the commercial expansion around the world providing companies and investors with the key tools to protect their money and save on taxes.
Transferring your funds to offshore is legal. The legality of the structures is based on the principle of "tax avoidance" taking advantage of all legal resources to avoid paying taxes. We should not confuse the definitions "tax avoidance" with "tax evasion". "Tax evasion" is the illegal behavior of a natural or legal person of not paying taxes. As we will see in the next section, countries such as the US, France, Italy, Spain, Chile, Argentina, Colombia and Germany are adopting measures so that taxpayers don´t transfer their funds to offshore and can not protect their assets or save on income taxes.
Why are anti-offshore measures being taken?
The global crisis and tax evasion has caused many countries to adopt anti-offshore measures. The anti-offshore measures could be defined as the laws that create the states to prevent taxpayers from opening accounts, companies, foundations or Trusts abroad. An example of anti-offshore measure would be, for example, the law of automatic exchange of information.
The purpose of the information exchange treaty is to eliminate the criminal activities from the banking circle and to increase the recollection of taxes. Please note that the automatic exchange treaty affects only personal and corporate bank accounts but does not affect any company that doesn´t have a corporate bank account opened in a country that has signed a bilateral agreement. Which means that in this case the financial information of this offshore company will not be reportable.
Right now the treaty of automatic exchange of information is causing many problems to the countries due to the fact that it is not a treaty in which banking information will be reported automatically among all the countries who signed it. In order to receive the information about the citizens who own accounts in other countries, the governments of these country should not only be members of the treaty but must sign a bilateral agreement between them in particular. If both countries have not signed the bilateral agreement, there will not be any kind of automatic exchange of information even if both of them are members of the treaty.
What advantages does offshore offer?
The essential advantages that offshore territories offer are the following:
- There is no need to pay taxes: investors who decide to transfer their money to offshore will not pay a single tax. Tax havens have created very ingenious laws to attract international investors and what better way not to make them pay taxes for not being residents. An investor who has opened a bank account, partnership, virtual tpv, trust or foundation in a tax haven will not be taxed for it.
- Protecting money and wealth: offshore territories are essential tools to protect money and your investments, having your money out of the reach of your country of residence limits how much you can attach your current accounts or property abroad. The main reason is that your country of residence could not act comfortably outside of your jurisdiction.
- Freedom of movement of capital: in tax havens the money can move without limits, provided that the investor can justify that the money does not come from a criminal activity. There is no limit on cash payments and there is no discrimination based on nationality. In tax havens all nationalities are admitted and any person can open an account or company without any type of restriction.
- Confidentiality: offshore territories are more confidential than their country of residence, business registers are not public and only the corporate veil will be lifted in the case of activities related to money laundering. Bank accounts are more confidential than those in your country of residence and only the law of automatic information exchange will apply if both countries have signed a bilateral agreement. If the country has not signed the information exchange law, the bank will not report any information.
