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Tax Engineering

Offshore financial centers 

Financial centers are countries, territories or jurisdictions with very high concentration of financial institutions that contribute to large number of local or international operations with money, assets or commodities. The most world known financial centers count with highly developed communications and commercial infrastructure. This factor facilitates the execution of the operations.    

The world map of financial centers can be divided in two groups: offshore and onshore financial centers.  

What is an offshore financial center?  

Offshore financial center is a country where the legal framework provides favorable tax regimes for non-resident individuals and companies, offering them to eliminate or significantly reduce the tax burned. Often, offshore financial centers don’t require annual accounting submission or local representative. As a result, this fiscal policy attracts foreign investments from over the world and it is quite common for multinationals to have their main office in onshore and branch office in offshore financial center. 

The countries that represent this offshore group are: Costa Rica, Belize, Saint Vincent and the Grenadines, Hong Kong, Saint Kitts and Nevis and Panama. In its turn offshore financial centers can be grouped into two lists based on their main characteristics.  

Black list of offshore financial centers 2018  

Financial centers that were added to a black list in 2018 are those countries that created investment programs for non-resident individuals and companies offering them favorable fiscal regime with 0% tax rate. 

Also these countries have not signed yet or will never sign automatic exchange of information agreements. Some of them did sing an information exchange treaty but did not sign any or only few bilateral agreements. This lack of global collaboration against money laundering limits other countries from receiving the banking information regarding their citizens and places these financial centers in a black list. 

The countries that were listed in non-cooperating jurisdictions list in 2018 are: Samoa, American Samoa, Bahrain, Barbados, Grenada, Guam, Macao, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Trinidad and Tobago, South Korea, Tunisia, United Arab Emirates and Cape Verde.   

Grey list of offshore financial centers 2018 

The financial centers that were included in grey list also have advantageous investment programs, favorable laws and lax fiscal regimes for non-residents. Anyone who registers a company there or opens a bank account can create a tax plan and avoid paying taxes. Also, as commercial registries of these countries are private, it is much easier to hide the identity of the beneficial owners. However, what differentiates these financial centers from those listed in a black list is a compromise to fight against fraud and money laundering by signing automatic exchange of information treaty. However, they are not willing to cooperate with all the members and have signed bilateral agreements only with some countries.   

The offshore financial centers that were listed in a grey list in 2018 are: Andorra, Armenia, Aruba, Belize, Botswana, Cook Islands, Curacao, Hong Kong, Fiji, Macedonia, Montenegro, Peru, Serbia, Jordan, Liechtenstein, Maldives, Morocco, Saint Vincent and the Grenadines, Mauritius, Russia, San Marino, Seychelles, Switzerland, Taiwan, Thailand, Turkey, Uruguay and Vietnam.

Onshore financial centers 

While offshore financial centers offer favorable tax regimes that guarantee very low or even 0% tax rates, no auditing obligations and opacity of the beneficial owners onshore financial centers are known for its fiscal transparency and strict tax policies.    

Among offshore financial centers we find those that lead and manage the world’s economy. These countries don’t have favorable tax regimes with 0% tax rates, the annual presentation of accounts is obligatory and the information regarding the identity of the beneficial owners and their companies is available to the public. 

The world’s most important financial centers are: New York, London, Tokyo, Hong Kong, Singapore, being New York the leader of this league. However, according to the experts, in future there might be significant changes in this list due to the fast growing of two emerging economies, China and India.  

New York 

Since the end of the First World War New York has been the most important financial center being a safe heaven for all the world´s fortunes during the times of global crises. This financial center is specialized in trading of stock, commodities and shares. The most important and the largest by total market capitalization American stock exchanges are NYSE (The New York Stock Exchange) and NASDAQ (National Association of Securities Dealers Automated Quotations).   

London  

London has always been considered the crib of innovation in finance being the largest financial center in Europe. Due to its fast growth in 18th and 19th centuries its participation in world’s economy became crucial. The London Stock exchange is specialized in trading precious metals, FOREX, bonds and monetary operations. One of the strongest points of London is its banking sector.       

Tokyo  

Tokyo has the largest cosmopolitan economy in the world and it is the most prosperous financial center in Asia. All Japanese advanced enterprises specialized in intellectual development, information, technology and services are concentrated in Tokyo and almost 90% of all companies-members of Tokyo Stock Exchange market have their headquarters in the capital of Japan. Nikkei 225, the most important stock exchange market of the country, is characterized by a high daily currency exchange turnover and is specialized in financial and insurance services.  

Hong Kong 

The economy of Hong Kong is based on free market, low tax rates and the ability of the government to separate politics from finance. Hong Kong is not an offshore territory, as many think, but a free port where custom duties on imported goods are not charged. The Stock Exchange of Hong Kong (SEHK) is the fastest growing stock exchange in Asia and it specializes in capital management, banking services and insurance.  

Singapore  

Singapore is a highly developed and modern country that offers low taxation rates, security and the most transparent and corruption free economy in the world. Singapore Exchange market (SGX) is specialized in the exchange of currencies, banking services and wealth management of high fortunes.   

As we can see, the main difference between onshore and offshore financial centers lies in tax policy, political and financial stability and technological infrastructure. However, even though the major world banks and companies have their headquarters in onshore they also have very significant participations in offshore market attracted mainly by the tax savings and the non-obligatory reporting of annual accounts. Therefore, the combination of both, onshore and offshore financial centers, is essential for the growth of any international company.   

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