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1. INTRODUCTION
Any international business unit, whether manufacturing or trading is always looking for funds for
their operations. Every company cannot take funds from its home country due to strict regulations or
interest cost or taxes.
All over the world the business community is in search of locations where their investments are safe
and the funds can be taken out without any barriers and invested comfortably for any ventures in any
part of the world. Currently, Mauritius, Malta, Panama, Mans Island, Cyprus, Seychelles and
Hawaii are a few centres attracting offshore banks. Since 2003, the Government of India has
permitted banks to set up offshore banking operations in Special Economic Zones. Hence, the
system of offshore banking has become part of international business.
Offshore banks are banking units set up by foreign banks in territories where the restrictions and
regulations are limited and the intervention of the country of location is minimal. Offshore banking
units bring foreign currency funds from non-residents and the international money market, and
invest them in the host country or in projects set up by the host country in a third country. In short, it
is a hassle free and safer banking system for saving and borrowing funds for business.
Offshore financial centers (OFCs) are mostly situated in small countries or autonomous districts
such as islands in the Caribbean or micro-states elsewhere. These tiny, low-tax jurisdictions are
well-known for providing highly-specialized and distinctive international financial and corporate
services.
With their strengths in easy registration procedures, low risk, lax foreign exchange control and
favorable tax policies, these offshore jurisdictions have become popular destinations for individuals
and international businesses to park their assets.
1.1 FINANCIAL CENTRE
A financial centre is a global city that is home to a large number of internationally significant
banks, businesses, and stock exchanges.
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An international financial centre is a non-specific term usually used to describe an important
participant in international financial market trading. An international financial centre (sometimes
abbreviated to IFC) will usually have at least one major stock market.
1.2 OFFSHORE FINANCIAL CENTRES
An offshore financial centre, although not precisely defined, is usually a small, low-tax jurisdiction
specialising in providing the corporate and commercial services to non-residents in the form of
offshore companies and the investment of offshore funds.
The term offshore financial centre is a relatively modern neologism, first coined in the 1980s.
Although the terms are not synonymous, many leading offshore finance centres are regarded as "tax
havens", and the lack of precise definitions often leads to confusion between the concepts. In
Tolley's International Initiatives Affecting Financial Havens the author in the Glossary of Terms
defines an "offshore financial centre" in forthright terms as "a politically correct term for what used
to be called a tax haven." However, he then qualifies this by adding "The use of this term makes the
important point that a jurisdiction may provide specific facilities for offshore financial centres
without being in any general sense a tax haven."
In 2009 the International Financial Centres Forum (IFC Forum) was established by a group of
professional service firms and businesses with offices in the leading offshore centres. According to
its website, the IFC Forum aims to provide authoritative and balanced information about the role of
the small international financial centres in the global economy.
1.3 DEFINITION
Whether a financial centre is to be characterized as "offshore" is a question of degree. Indeed, the
IMF Working Paper cited above notes that its definition of an offshore centre would include the
United Kingdom and the United States, which are ordinarily counted as "onshore" because of their
large populations and inclusion in international organisations such as the G20 and OECD.
The more nebulous term tax haven is often applied to offshore centres, leading to confusion
between the two concepts. In Tolley's International Initiatives Affecting Financial Havens the author
in the Glossary of Terms defines an offshore financial centre in forthright terms as a politically
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correct term for what used to be called a tax haven. However, he then qualifies this by adding, The
use of this term makes the important point that a jurisdiction may provide specific facilities for
offshore financial centres without being in any general sense a tax haven. A 1981 report by the IRS
concludes, a country is a tax haven if it looks like one and if it is considered to be one by those who
care.
With its connotations of financial secrecy and tax avoidance, tax haven is not always an
appropriate term for offshore financial centres, many of which have no statutory banking secrecy,
and most of which have adopted tax information exchange protocols to allow foreign countries to
investigate suspected tax evasion.
Views of offshore financial centres tend to be polarised. Proponents suggest that reputable offshore
financial centres play a legitimate and integral role in international finance and trade, and that their
zero-tax structure allows financial planning and risk management and makes possible some of the
cross-border vehicles necessary for global trade, including financing for aircraft and shipping or
reinsurance of medical facilities. Proponents point to the tacit support of offshore centres by the
governments of the United States (which promotes offshore financial centres by the continuing use
of the Foreign Sales Corporation (FSC)) and United Kingdom (which actively promotes offshore
finance in Caribbean dependent territories to help them diversify their economies and to facilitate the
British Eurobond market).
Overseas Private Investment Corporation (OPIC), a U.S. government agency, when lending into
countries with underdeveloped corporate law, often requires the borrower to form an offshore
vehicle to facilitate the loan financing. One could argue that US external aid statutorily cannot even
take place without the formation of offshore entities.
1.4 SCRUTINY
Offshore finance has been the subject of increased attention since 2000 and even more so since the
April 2009 G20 meeting, when heads of state resolved to take action against non-cooperative
jurisdictions. Initiatives spearheaded by the Organisation for Economic Co-operation and
Development (OECD), the Financial Action Task Force on Money Laundering (FATF) and the
International Monetary Fund have had a significant effect on the offshore finance industry. Most of
the principal offshore centres considerably strengthened their internal regulations relating to money
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laundering and other key regulated activities. Indeed, Jersey is now rated as the most compliant
jurisdiction internationally, complying with 44 of the "40+9" recommendations.
In 2007 The Economist published a survey of offshore financial centres; although the magazine had
historically been hostile towards OFCs, the report represented a shift towards a much more benign
view of the role of offshore finance, concluding:
Although international initiatives aimed at reducing financial crime are welcome, the broader
concern over OFCs is overblown. Well-run jurisdictions of all sorts, whether nominally on- or
offshore, are good for the global financial system.
The Economist, "A survey of offshore finance: Places in the sun", 23 February 2007
The Channel Islands hold that funds generated offshore do indeed go through the Bank of England
allowing the UK to benefit from the success of the crown dependencies as offshore centres.
1.5 TAXATION
Although most offshore financial centres originally rose to prominence by facilitating structures
which helped to minimise exposure to tax, tax avoidance has played a decreasing role in the success
of offshore financial centres in recent years. Most professional practitioners in offshore jurisdictions
refer to themselves as "tax neutral" since, whatever tax burdens the proposed transaction or structure
will have in its primary operating market, having the structure based in an offshore jurisdiction will
not create any additional tax burdens.
A number of pressure groups suggest that offshore financial centres engage in "unfair tax
competition" by having no, or very low tax burdens, and have argued that such jurisdictions should
be forced to tax both economic activity and their own citizens at a higher level. Another criticism
levelled against offshore financial centres is that whilst sophisticated jurisdictions usually have
developed tax codes which prevent tax revenues leaking from the use of offshore jurisdictions, less
developed nations, who can least afford to lose tax revenue, are unable to keep pace with the rapid
development of the use of offshore financial structures.
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1.6 REGULATION
Offshore centres benefit from a low burden of regulation. An extremely high proportion of hedge
funds (which characteristically employ high risk investment strategies) who register offshore are
presumed to be driven by lighter regulatory requirements rather than perceived tax benefits. Many
capital markets bond issues are also structured through a special purpose vehicle incorporated in an
offshore financial centre specifically to minimise the amount of regulatory red-tape associated with
the issue.
Offshore centres have historically been seen as venues for laundering the proceeds of illicit activity.
However, following a move towards transparency during the 2000s and the introduction of strict
AML regulations, some now argue that offshore are in many cases better regulated than many
onshore financial centres. For example, in most offshore jurisdictions, a person needs a licence to act
as a trustee, whereas (for example) in the United Kingdom and the United States, there are no
restrictions or regulations as to who may serve in a fiduciary capacity. The leading offshore financial
centres are more compliant with the Financial Action Task Force on Money Laundering's '40+9'
recommendations than many OECD countries.
Some commentators have expressed concern that the differing levels of sophistication between
offshore financial centres will lead to regulatory arbitrage, and fuel a race to the bottom, although
evidence from the market seems to indicate the investors prefer to utilise better regulated offshore
jurisdictions rather than more poorly regulated ones. A study by Australian academic found that
shell companies are more easily set up in many OECD member countries than in offshore
jurisdictions. A report by Global Witness, Undue Diligence, found that kleptocrats used OECD
banks rather than offshore accounts as destinations for plundered funds.
1.7 CONFIDENTIALITY
Critics of offshore jurisdictions point to excessive secrecy in those jurisdictions, particularly in
relation to the beneficial ownership of offshore companies, and in relation to offshore bank accounts.
However, banks in most jurisdictions will preserve the confidentiality of their customers, and all of
the major offshore jurisdictions have appropriate procedures for law enforcement agencies to obtain
information regarding suspicious bank accounts, as noted in FATF ratings. Most jurisdictions also
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have remedies which private citizens can avail themselves of, such as Anton Piller orders, if they can
satisfy the court in that jurisdiction that a bank account has been used as part of a legal wrong.
Similarly, although most offshore jurisdictions only make a limited amount of information with
respect to companies publicly available, this is also true of most states in the U.S.A., where it is
uncommon for share registers or company accounts to be available for public inspection. In relation
to trusts and unlimited liability partnerships, there are very few jurisdictions in the world that require
these to be registered, let alone publicly file details of the people involved with those structures.
Statutory banking secrecy is a feature of several financial centres, notably Switzerland and
Singapore. However, many offshore financial centres have no such statutory right. Jurisdictions
including Aruba, the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, Jersey,
Guernsey, the Isle of Man and the Netherlands Antilles have signed tax information exchange
agreements based on the OECD model, which commits them to sharing financial information about
foreign residents suspected of evading home-country tax.
1.8 EFFECTS ON INTERNATIONAL TRADE
Offshore centres act as conduits for global trade and ease international capital flows. International
joint ventures are often structured as companies in an offshore jurisdiction when neither party in the
venture party wishes to form the company in the other party's home jurisdiction for fear of unwanted
tax consequences. Although most offshore financial centres still charge little or no tax, the increasing
sophistication of onshore tax codes has meant that there is often little tax benefit relative to the cost
of moving a transaction structure offshore.
Recently, several studies have examined the impact of offshore financial centres on the world
economy more broadly, finding the high degree of competition between banks in such jurisdictions
to increase liquidity in nearby onshore markets. Proximity to small offshore centres has been found
to reduce credit spreads and interest rates, while a paper by James Hines concluded, "by every
measure credit is more freely available in countries which have close relationships with offshore
centres."
Low-tax financial centres are becoming increasingly important as conduits for investment into
emerging markets. For instance, 44% of foreign direct investment (FDI) into India came through
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Mauritius last year, while over two thirds of FDI into Brazil came through offshore centres. Blanco
& Rogers find a positive correlation between proximity to an offshore centre and investment for
least developed countries (LDCs); a $1 increase in FDI to an offshore centre translates to an average
increase of $0.07 in FDI for nearby developing countries.
1.9 OFFSHORE FINANCIAL STRUCTURES
The bedrock of most offshore financial centre is the formation of offshore structures typically:
offshore company
offshore partnership
offshore trust
private foundation
Offshore structures are formed for a variety of reasons.
Legitimate reasons include:
Asset holding vehicles. Many corporate conglomerates employ a large number of holding
companies, and often high-risk assets are parked in separate companies to prevent legal risk
accruing to the main group (i.e. where the assets relate to asbestos, see the English case of
Adams v Cape Industries). Similarly, it is quite common for fleets of ships to be separately
owned by separate offshore companies to try to circumvent laws relating to group liability
under certain environmental legislation.
Asset protection. Wealthy individuals who live in politically unstable countries utilise
offshore companies to hold family wealth to avoid potential expropriation or exchange
control restrictions in the country in which they live. These structures work best when the
wealth is foreign-earned, or has been expatriated over a significant period of time
(aggregating annual exchange control allowances).
Avoidance of forced heirship provisions. Many countries from France to Saudi Arabia (and
the U.S. State of Louisiana) continue to employ forced heirship provisions in their succession
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law, limiting the testator's freedom to distribute assets upon death. By placing assets into an
offshore company, and then having probate for the shares in the offshore determined by the
laws of the offshore jurisdiction (usually in accordance with a specific will or codicil sworn
for that purpose), the testator can sometimes avoid such strictures.
Collective Investment Vehicles. Mutual funds, Hedge funds, Unit Trusts and SICAVs are
formed offshore to facilitate international distribution. By being domiciled in a low tax
jurisdiction investors only have to consider the tax implications of their own domicile or
residency.
Derivatives trading. Wealthy individuals often form offshore vehicles to engage in risky
investments, such as derivatives trading, which are extremely difficult to engage in directly
due to cumbersome financial markets regulation.
Exchange control trading vehicles. In countries where there is either exchange control or is
perceived to be increased political risk with the repatriation of funds, major exporters often
form trading vehicles in offshore companies so that the sales from exports can be "parked" in
the offshore vehicle until needed for further investment. Trading vehicles of this nature have
been criticised in a number of shareholder lawsuits which allege that by manipulating the
ownership of the trading vehicle, majority shareholders can illegally avoid paying minority
shareholders their fair share of trading profits.
Joint venture vehicles. Offshore jurisdictions are frequently used to set up joint venture
companies, either as a compromise neutral jurisdiction (see for example, TNK-BP) and/or
because the jurisdiction where the joint venture has its commercial centre has insufficiently
sophisticated corporate and commercial laws.
Stock market listing vehicles. Successful companies who are unable to obtain a stock market
listing because of the underdevelopment of the corporate law in their home country often
transfer shares into an offshore vehicle, and list the offshore vehicle. Offshore vehicles are
listed on the NASDAQ, Alternative Investment Market, the Hong Kong Stock Exchange and
the Singapore Stock Exchange. It is estimated that over 90% of the companies listed on Hong
Kong's Hang Seng are incorporated in offshore jurisdictions. 35% of companies listed on
AIM during 2006 were from OFCs.
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Trade finance vehicles. Large corporate groups often form offshore companies, sometimes
under an orphan structure to enable them to obtain financing (either from bond issues or by
way of a syndicated loan) and to treat the financing as "off-balance-sheet" under applicable
accounting procedures. In relation to bond issues, offshore special purpose vehicles are often
used in relation to asset-backed securities transactions (particularly securitisations).
Illegitimate purposes include:
Creditor avoidance. Highly indebted persons may seek to escape the effect of bankruptcy by
transferring cash and assets into an anonymous offshore company.
Market manipulation. The Enron and Parmalat scandals demonstrated how companies could
form offshore vehicles to manipulate financial results.
Tax evasion. Although numbers are difficult to ascertain, it is widely believed that
individuals in wealthy nations unlawfully evade tax through not declaring gains made by
offshore vehicles that they own. Multinationals including GlaxoSmithKline and Sony have
been accused of transferring profits from the higher-tax jurisdictions in which they are made
to zero-tax offshore centres.
1.10 LIST OF MAIN OFFSHORE FINANCIAL CENTRES
The list of jurisdictions considered by the IMF to be OFCs is published online. Many offshore
financial centres are current or former British colonies or Crown Dependencies, and often refer to
themselves simply as offshore jurisdictions. By some measures, there are more countries that are
offshore financial centres than not but the following jurisdictions are considered the major
destinations for offshore finance:
Bermuda, which is market leader for captive insurance, and also has a strong presence in
offshore funds and aircraft registration.
British Virgin Islands, which has the largest number of offshore companies.
Cayman Islands, which has the largest value of Assets under management in offshore funds,
and is also the strongest presence in the U.S. securitisation market.
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Jersey is the most international of the British Crown dependencies, all of which can be
counted as offshore centres. Jersey has particularly strong banking and funds management
sectors and a high concentration of professional advisers including lawyers and fund
managers.
Luxembourg, which is the market leader in Undertakings for Collective Investments in
Transferable Securities (UCITS) and is believed to be the largest offshore Eurobond issuer,
although no official statistics confirm this.
New Zealand, the most remote jurisdiction, has the advantage of being a true primary
jurisdiction but with a tough but practical regulatory regime. It is well positioned for the
Asian market but retains close ties to Europe.
Singapore has recently risen in stature as a centre for wealth management and ranked fourth
in the world in the 2009 Global Financial Centres Index. The state is a hub for hedge funds
and its private banking industry is growing at a rate of 30 per cent annually.
The following prominent offshore centres now specialise in certain niche markets:
Bahamas, which has a considerable number of registered vessels. The Bahamas used to be
the dominant force in the offshore financial world, but fell from favour in 1970s after
independence.
Panama, which is a significant international maritime centre. Although Panama (with
Bermuda) was one of the earliest offshore corporate domiciles, Panama lost significance in
the early 1990s. Panama is now second only to the British Virgin Islands in volumes of
incorporations.

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2. OFFSHORE FINANCIAL CENTERS IN SINGAPORE, MALAYSIA AND
MAURITIUS
2.1 SINGAPORE
Singapore is an established financial centre. The financial service sector is supported by sound
economic and financial fundamentals and attractiveness as a base for financial institutions. This has
been aided by its geographical location in a fast growing area that bridges the gap between the time
zones of the North American and European financial markets, political and financial stability, a
skilled labour force and significant government incentives.
Singapore is the fourth largest foreign exchange trading centre in the world, the fifth largest trader in
derivatives and the ninth largest offshore lending centre. The Asian Dollar market (ADM) in one of
the premier offshore banking centres in Asia. The STOCK Exchange of Singapore (SES) is a leading
stock market in Asia, and the Singapore International Monetary Exchange (SIMEX) has grown into
one of the worlds leading derivatives exchanges.
There are three categories of commercial banks in Singapore:
Full banks
Restricted banks
Offshore banks
Full banks are allowed to carry out the full range of banking services under the Banking Act.
Restricted banks may engage in the same range of domestic branch and cannot accept Singapore
dollar savings accounts and Singapore dollar fixed deposits of less than Singapore $ 250,000 from
non-bank customers.
In 1973, with a view to facilitate Singapores goal to become an international financial centre
through the entry of more foreign banks, another category of same opportunities as the full and
restricted banks in business transacted, their scope of business in the Singapore dollar retail market is
slightly more limited. In the domestic market, offshore banks cannot accept any interest-bearing
deposits from persons other than approved financial institutions, nor can they open more than one
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branch. By the end of November 1998, there were 104 offshore banks in Singapore, all of which
were branches of foreign banks. By 2003 the number of banks crossed 120.
In Singapore, offshore banking is carried out by separate book-keeping entities known as Asian
Currency Units. ACUs do not have the right to incur assets and liabilities in Singapore dollars but
can engage in all types of banking transactions in other currencies. Various incentives have been
given to encourage the development of ACUs, the most important of which is that ACUs face a tax
on profits of only 10% compared with the standard corporate rate of 27% and are not subject to
reserve and liquidity requirements. ACUs have functioned in the region primarily as a centre for
routing capital from markets in Europe, North America and the Middle East to the fast growing
regions of Asia.
Important measures to promote offshore banking in Singapore include:
1973 Offshore banking licenses issued to seven foreign banks; corporate tax of ACU on
interest earnings from overseas loans reduced from 40% to 0%; interest received by non-
resident holders of approved Asian dollar bonds exempted from tax.
1976 Non resident deposits with ACUs and approved Asian dollar bonds held by non-
residents exempted from Singapore estate duty.
1979 Income earned from offshore general reinsurance business granted 10%
concessionary tax rate.
1980 Stamp duty on ACU offshore general reinsurance business granted 10%
concessionary tax rate.
1980 Stamp duty on ACU offshore loan agreements and Asian dollar bond certificates
abolished.
1983 ACUs granted 5 year tax holiday for all income derived from syndicated offshore
loans arranged in Singapore.
1989 A concessionary 10% tax rate was granted on income from international oil trading
activities.
1990 Monetary Authority of Singapore (MAS) raised the ceiling on foreign ownership of
shares in local banks to 40% from 20%.
1992 Stock Exchange of Singapore (SES) granted membership to seven foreign brokerage
houses, allowing them to trade directly on the local market.
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2002 Offshore transactions became equivalent to domestic transactions.
2006- offshore banks started investing huge money in other Asian countries like India, Sri
Lanka, Indonesia, Thailand and Vietnam.
With a view to creating a more level playing field for local and foreign banks, the maximum limit
for offshore banks for Singapore dollar credit facilities at any one time to non-bank residents was
raised from S$ 200 million to S$ 300 to S$ 1 billion, with a view to boosting Singapore as a
financial centre. In 2004, many of the investors and joint venture partners avail of offshore facilities
to invest in the mega projects of South Asia and South East Asia.
2.2 MALAYSIA
Malaysia established an International Offshore Financial Centre (IOFC) in Labuan in 01991. The
Offshore Banking Act 1990 provides a regulatory framework for offshore banking operations in
Labuan. As confidentiality is the hallmark of an offshore financial centre, an offshore bank has to
maintain strict secrecy in the affairs of its customers. Offshore banks are expected to observe a
strong self-regulatory code of conduct which places emphasis on knowing your customer.
The Labuan Offshore Financial Services Authority (LOFSA) established in 1996, is the single
regulatory authority with the following roles and functions:
To be responsible for setting national objectives, policies and priorities for the orderly
development and administration of the Labuan IOFC.
To be responsible for the promotion and development aspects and recommend new measures
to the government to speed up growth and development of the Labauan IOFC.
To supervise the activities and operations of the offshore financial service industry in Labuan
and to process applications to conduct business in the Labuan IOFC, specially in offshore
banking, offshore insurance and insurance related business, offshore trust and fund
management, incorporating and registering of offshore companies as well as for setting up of
Labuan trust companies.
To administer and enforce offshore financial services legislation and work with the offshore
players in Labuan to promote offshore financial services.
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The Labuan IOFC operates in a free exchange control environment. Offshore companies are given a
non-resident status for exchange control status. Offshore companies can continue to transfer funds
freely to and from their accounts outside Malaysia without approval from the central bank of
Malaysia. The foreign currency accounts held with the offshore banks are not considered as external
accounts and are not subject to exchange control measures. The offshore banks are also allowed to
issue financial and non-financial guarantees to residents in Ringgit. They can receive fees and
commissions related to guarantee in Ringgit. The holding requirement of one year is not applicable
to assets in Ringgit held in collateral by the offshore banks for credit facilities granted to residents.
The payments of existing loans and guarantees in foreign currency by Malaysian residents to the
offshore banks do not require prior approval from the Central Bank.
In Labuan no tax is imposed on the income of offshore companies that are non-trading companies,
and offshore trading companies enjoy a low tax regime with a rate of only 3% of their net income of
RM 20,000 (USD 8000). Other benefits and incentives include:
No tax on offshore companies carrying out offshore non-trading activities such as holding of
securities, shares, immovable properties and taking of loans and placing of deposits.
No withholding tax for dividends paid by an offshore company, distribution from an offshore
trust, royalties received from an offshore company by a non-resident, interest earned on
deposits with offshore banks, and interest earned on loans to Malaysians.
No inheritance, death, or estate duty.
Exemption from paying stamp duty on all offshore business transactions.
Double tax treaty agreements signed with over 40 other countries and investment guarantee
agreements with 50 countries.
2.3 MAURITIUS
Mauritius is fast becoming an international financial and business centre. Offshore transactions are
normally conducted with non-residents and in currencies other than the Mauritius Rupee. Mauritius
has focused its offshore business on specific areas such as investment funds, investment holdings
and international trading. The island is becoming an attractive destination for offshore fund
structuring and investment vehicles. Mauritius enjoys international exposure as a domicile for
emerging market funds, and is being considered as a gateway for investment into India, the Indian
sub-continent and the African region.
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In 1989, offshore banks were allowed to be set up in Mauritius and subsequently the incorporation of
offshore companies was allowed. In 1992, the offshore financial services sector was officially set up
with the proclamation of two acts of parliament, namely the Mauritius Offshore Business Activities
Act and the Offshore Trusts Act.
Offshore business can be conducted through the follo9wing entities: an ordinary status company, an
international company, a trust, or a partnership. The Mauritius Offshore Business Activities
Authority (MOBAA), set up in 1992 under the Mauritius Offshore Business Activities (MOBA) Act
1992, is entrusted with the task of licensing, supervising and developing non-banking offshore
business in Mauritius. The MOBA Act 1992 sets out the broad parameters for the conduct of
offshore business.
An offshore business activity is defined as an activity carried on from within Mauritius with non-
residents and in foreign currencies. The MOBA Act of 1992 provides fro a whole range of approved
offshore activities which include Offshore Funds Management; International Financial Services;
Operational Headquarters; International Consultancy Services, Shipping and Ship Management;
Aircraft Financing and Leasing: International Licensing and Franchinsing; International Data
Processing and Information Technology Services; Offshore Pension Funds; International Trading;
International Employment Services; International Assets Management; and Offshore Insurance.
Currently, eleven offshore banks of international standing operate in Mauritius. Both the volume and
range of business undertaken by offshore banks have registered sustained progress. Various factors
have registered sustained progress. Various factors have contributed to the attractiveness of
Mauritius as an OFC which include:
Exemption from compliance with the Exchange Control Act.
Freedom to conduct all legitimate banking and other financial business with non-residents.
Exemption from credit, interest rates and other restrictions normally applied to business of
domestic banks.
Low income tax rate of 5 percent on all offshore profits.
Free repatriation of profits without further taxation.
Exemption from stamp duty on documents relating to offshore business transactions.
Exemption from stamp duty on documents relating to offshore business transactions.
Exemption from customs duty on imported office equipment.
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No withholding tax on interest payable on deposits raised from non-residents by offshore
banks.
Double taxation avoidance treaty with a number of countries.
Expatriate staff is subject to a concessionary personal income tax rate.
No estate duty or inheritance tax is payable on the inheritance of shares in an offshore entity.
No capital gains tax.
2.4 OFFSHORE FINANCIAL CENTERS AND INDIA
A synthesis of the role and evolution of OFCs in select countries, their operative mechanisms,
regulatory framework and privileges delineated in the preceding sections highlight various factors
that contribute to the attractiveness of OFCs, Certain common facilities/exemptions/concessions
have been worked out to form offshore banking in India.
With the Government having announced the policy of promoting Special Econ9mic Zones (SEZs)
which would, inter alia, serve to attract world class investors, and at the same time contribute
towards the countrys export efforts, it is pertinent to take into account the factors highlighted above
that have contributed to successful OFCs around the world. This is very important, as it is necessary
to create a policy environment relating to finance and banking which is conducive as also
internationally competitive. The main requirements of such a policy are given below.
Conducive fiscal regime, such as minimal taxation or low tax jurisdiction with an extensive
web of bilateral tax treaties; no income tax, capital gains or wealth taxes on individuals,
stamp duty, customs duty, estate tax, inheritance tax, etc.
No withholding of income tax on non-resident depositors in OFCs.
Stringent banking secrecy rules.
Absence of exchange control or minimal control.
Exemption from several prudential regulations including reserve requirements limitations on
investments, limitations on acquisitions of immovable property, etc.
Minimum formalities for incorporation.
Adequate legal framework that safeguards the integrity of principal agent relations.
Conducive regulatory framework a separate banking act to provide a regulatory framework
covering the operations of banks and financial institutions in the SEZs. For instance, the
Offshore banking licence for the setting up of a branch or subsidiary.
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3. BENEFITS OF OFFSHORE FINANCIAL CENTRES
Today, offshore financial centers have tremendously influenced global financial markets leading to
increased international capital flow, greater market efficiency and aggressive competition, thereby
creating a cost-effective environment and upholding global transparency and co-operation standards
in trade and economy. In this regard, it is very much important for investors planning for overseas
investments or businessmen preparing for overseas business operations to have some basic
understanding about these centers and the way they operate.
The term offshore actually originated from a group of Islands that are located in the English
Channel called the Channel Islands. These islands are Crown Dependencies that were primarily used
by British nationals as centers for keeping their assets safe and secure. Since then, offshore financial
centers have been former or existing British colonies, overseas territories or countries that are
possessed by The Crown in Right of the United Kingdom. However, there are also various
independent nations that encourage offshore services within their territories.
Examples of some popular financial centers providing offshore services include Bahamas, Cayman
Islands, Bermuda, British Virgin Islands, Luxembourg and Panama. In fact, Panama Offshore
Services and Panama Banks are considered as one of the most reliable, professional and secured in
terms of quality of service. Apart from these, even advanced nations such as Germany, Singapore,
Switzerland, Australia and Hong Kong can also be considered as offshore.
In technical terms, an offshore financial center can be described as a jurisdiction that can provide the
necessary infrastructure and legal atmosphere, thereby facilitating the incorporation of offshore
companies in the country and allow these companies to invest offshore funds. Usually, these
jurisdictions are countries that follow liberal taxation policies and do not have any stringent rules
and regulations on offshore investment.
Mentioned below are some interesting aspects regarding offshore centers.
One of the most common misconceptions about offshore services provided by offshore centers is
that only rich and wealthy can benefit from these. On the contrary, this notion is far from being true.
With the market being extremely competitive, financial services such as those offered by Cayman
Banks and other financial centers can no longer be one dimensional. Due to this reason, these centers
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have expanded their operations in such a way that they serve multiple clienteles and are now
providing services that can benefit a wide range of customers.
Secondly, offshore financial centers are often believed to be deregulated, thereby ensuring a safe
haven for criminals and other offenders to transfer their wealth and other assets from one location to
another. Again, this is another belief that has never been correct. In fact, some of the offshore
services provided by banking institutions such as Swiss Internet Bank are renowned for their
security, confidentiality and measures they adopt in preventing financial crimes.
Lastly, there are many advantages one can avail through offshore services offered by offshore
financial centers and institutions such as Singapore Banks. Some of these services include asset
protection, banking, investment, insurance, securities and trade finance. Apart from gaining
maximum returns on their investments such as bank deposits, investors can benefit from tax
exemptions on securities, cash deposits and other investments. Also, these services provide a wide
range of global investment possibilities, thereby providing individuals with an opportunity to
diversify their investment portfolio.

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4. FUTURE OF OFFSHORE FINANCIAL CENTRES
The financial services industry is critical to the economic well-being of small international financial
services centres (OFCs) such as the Bahamas, Bermuda, the British Virgin Islands (BVI), the
Cayman Islands, the Channel Islands, Gibraltar and the Isle of Man. It is the major driver of the high
per capita GDP figures. Some of these jurisdictions have thriving tourism industries also. But these,
while welcome, tend for the most part to provide unskilled and low paying jobs.
Less well understood is the often beneficial role OFCs play in the allocation of global capital in
legitimate ways. The picture often painted of OFCs by the noisy media of shady places for shady
people overlooks that the bulk of the flows through OFCs are legal and are a natural part of
globalization.
After a volatile few years since early 2008, the financial services industry in OFCs is now slowly
recovering from the global financial crisis. For the most part, OFCs have dodged the misdirected
bullet that offshore was responsible for the meltdown. In Cayman, the hedge fund industry is
renergised and is growing again, Asian IPOs are doing well, captive insurance is hanging in, but the
debt side (securitization) is still quiet, albeit with some green shoots. Banking and fiduciary (trust)
businesses are essentially flat. Overall, the recovery in OFCs is patchy as yet and they cannot afford
to become complacent again on the basis it is soon to be happy days are here again. They must
continue to be vigilant to ensure their long term stability and success in the future.

4.1 SCENARIOS
First, some possible future scenarios for OFCs.
Scenario I doomsday
This outcome is the cataclysmic decline of these centres. One cause might be the major economic
powers implementing domestic policies and programmes that eliminate the need to use OFCs. This
would entail the introduction of well balanced regulatory and supervisory regimes and the reduction
of tax rates and other costs to levels that made it impossible for OFCs to compete. If this were left to
Ireland with its 12% tax rate, that might happen. But it seems remote in reality.
An alternative and alarming cause might be the effective implementation of international
agreements between the major economic powers not to compete on regulatory and tax matters, to
establish common standards of (over)regulation and standardised (high) tax rates, to create a unified
global tax and regulatory regime under the United Nations, OECD (Organisation for Economic
Cooperation and Development) or other international organisation and to pass domestic legislation
20
making it hard, if not impossible, for OFCs to be used legally. This outcome seems also rather
unlikely, however much the EU (and some in the USA) in particular might like it.
The final alternative would be the reintroduction of exchange/capital controls by all major
economic powers, whereby regulatory approval is required to move funds cross border. This was the
position in many countries post WWII until the late 1970s and early 80s, and many of us remember
that well. The result might well be ghost communities relying on fishing and tourism
reminiscent of the old gold and silver mining towns of the Western USA.
Scenario II Nirvana
This outcome is the continued and unchecked growth of such centres driven by increased
globalisation of financial markets, continued regulatory and tax arbitrage and competition between
sovereign states and the welcoming of the useful role played by OFCs. And the pejorative
distinction between onshore (good) and offshore (bad) disappears. The result will be thriving and
much-loved OFCS generating wealth for residents and non residents alike.
Scenario III the curates egg
This outcome is a mix of I and II, i.e. these centres will continue to exist, some will flourish and
others die on the vine, but with continued attempts by major economic powers and blocks to reduce
the advantages they can offer.
Scenario III is the most likely, and it will be interesting and challenging. Success will come to those
jurisdictions that can genuinely add value to international transactions and are recognised as so
doing. This in turn requires the right mix of a stable and transparent political, legal, judicial and
economic environment, no or limited direct taxation or a good network of double tax treaties, a good
risk based regulatory and supervisory approach, a flexible and adaptive approach to legislation and
regulation to provide the structures, products and supervision expected by the
market, a willingness to engage with international standard setters, foreign governments, regulators
and law enforcement and tax agencies to agree mutually satisfactory standards of regulation and
cross border assistance and law enforcement, modern infrastructure, a welcoming immigration
policy to attract the expertise needed and an educated and motivated local work force,

4.2 BACKGROUND
It is important to note that OFCs are typically places that facilitate international financial
transactions rather than create them. To put this in perspective, London and New York are
international financial centres and create the transactions; the Bahamas and the Cayman Islands are
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international financial services centres that play a role in their execution. It is a little like the
difference between the place where Toyota designs its cars and the place where the transmissions are
built.
Of course, the goal of a financial services centre should be to develop into a true financial centre
where products and structures are actually created as well as executed. To do that, it has to attract the
necessary expertise. Examples of places that are well on the way are Hong Kong and Singapore.
Dubais early promise may have been set back for some years by its domestic real estate bubble and
crash, but it is proving quite resilient.
The success of OFCs has depended on a variety of reasons. By and large, they all share a common
platform of political stability, no or limited taxation, no or very flexible exchange control, sensible
company, trust and regulatory and commercial laws, a commitment to confidentiality (subject to
appropriate gateways for disclosure) and a welcome mat for legitimate international transactions,
service providers and investors. Historically, many of the jurisdictions were or are in the UK fold as
territories of one kind or another, e.g. Bermuda, the Bahamas (now independent), the BVI, the
Cayman Islands, the Channel Islands, Gibraltar and the Isle of Man. Indeed, the UK encouraged
these territories in the early days to develop as financial services
centres to reduce the burden on the UK treasury. In similar vein, the Netherlands and the
Netherlands Antilles. Others are independent nations such as Liechtenstein, Luxembourg, Panama
and Liberia (the latter both noted particularly as ship registration centres).
But there is often a certain randomness as to why some centres developed particular areas of
speciality. Often it was a mixture of timing, luck, spotting an opportunity, geographical convenience,
personal connections or even a fortuitous double tax treaty (Barbados and the Netherland Antilles),
rather than a logical analysis of the market and a targeted approach. For instance, Bermuda
developed as the leading captive insurance domicile due to lack of capacity and high premiums in
the US corporate market and its geographical convenience to the US Northeast and Midwest where
many of these major corporations were based. It was also quite well placed for the London
reinsurance market. Bermudas expertise in this area provided the base for it to expand into the open
market reinsurance business when the traditional US and
European reinsurers were not meeting the needs of the market. The Channel Islands and the Isle of
Man were well placed geographically, particularly for UK (and being within the Sterling area for
exchange control purposes), European and, more recently, Middle East sourced business. The BVI
became the offshore corporate Delaware in the late 1980s built on the instability of Panama during
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and immediately after the Noriega era. Many of the Panama service providers established operations
in the BVI as a stable and low cost alternative to Panama and actively marketed it as such.
The Cayman Islands first developed as an offshore banking centre in the 1970s, following perceived
political instability in the Bahamas during the lead up to and post independence. The principal
reason originally for the development of the Eurodollar market (as it was called) was the
introduction of US domestic regulations that made it far more cost effective for banks and
corporations to borrow and lend US$ outside the US. That market continues today (but for very
different reasons) and the total footings of Cayman licensed banks are now around US1.6 trillion.
The Cayman Islands diversified from the banking base into general financial and capital markets,
fiduciary (trust/private client), captive insurance (initially largely due to some missteps by
Bermuda), mutual funds and general corporate business. Today, it is probably best known for being
the major offshore banking and hedge fund domicile and one of the leading captive insurance
domiciles.
To build an OFC takes time. And it can be threatened very easily as the business is of essence quite
easy to move. It does not have bricks and mortar or much physical equipment. The Bahamas lost
considerable business in the late 1970s and early 80s in the run up and post independence due to
aggressive nationalism. Panama suffered greatly during and after the Noriega years. Interestingly,
both the Bahamas and Panama defied predictions and are once again doing quite well. They would
make two very interesting case studies. The Netherlands Antilles had an extremely helpful double
tax treaty with the US that made it a major centre for US corporate borrowing in international
markets. So successful indeed, that the US eliminated the benefits with the stroke of a pen (a fate
that awaits any such treaty where one side benefits far
more that the other). The Netherlands Antilles have struggled as a financial services centre ever
since. Little remembered is that the BVI once had double tax treaty with the UK. That also received
the UK pen treatment. But the BVI did recover and has become the leading offshore corporate
domicile.

4.3 INTERNATIONAL THREATS
OFCs have been wrestling with the alphabet soup of international initiatives for some time.
Acronyms like BIS (Bank for International Settlements), EUSD (European Union Savings
Directive), FATF (Financial Action Task Force), FSB (Financial Stability Board), IAIS
(International Association of Insurance Supervisors), IMF (International Monetary Fund), IOSCO
(International Organisation of Securities Commissions), OECD and UNODC (United Nations Office
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on Drugs and Crime) roll off the tongue. Despite these, or because of them as some would claim,
many but not all, OFCs have thrived. The initiatives continue apace, particularly with respect to
cross border assistance, principally exchange of information in an ever-broadening range of areas,
including tax.
It is trite to say that responsible OFCs wish to deter abuse of their financial services, to punish those
who do and to cooperate cross border with other jurisdictions with equivalent standards and
legitimate interests. It is equally trite to say that such OFCs wish to implement and maintain sound
and effective regulatory regimes that provide the right framework for financial transactions and
balance the interests of suppliers and buyers of financial products and service providers. The stated
goal of most major jurisdictions is to provide a global environment where legitimate capital can flow
cross border into investments and financial products free from arbitrary barriers or controls. OFCs
that implement the various international initiatives are lead to believe they will not be discriminated
against, will be allowed to participate and thus will benefit economically. But the reality to-date is
rather different.
A few years ago, a Commonwealth Secretariat paper concluded that three OFCs (Barbados,
Mauritius and Vanuatu) could not show tangible benefits from implementing the recent international
taxation and anti money laundering/countering the financing of terrorism initiatives. A similar
review has not been carried out in Cayman. Anecdotal evidence is not so much that Cayman has
suffered; rather it has not thrived as well as it could have absent the often burdensome and costly
compliance requirements that have distracted Government and the industry from continuing the
innovative developments for which Cayman has become known . The final communiqu from the
Commonwealth Ministers meeting in 2007 specifically recognized the heavy compliance costs for
OFCs and called for a more inclusive process in setting international standards. Some lip service has
been paid to this suggestion and, for instance, OFCs are now having greater participation in the
development of international standards and in the peer review of effective implementation. A good
example is Caymans (and other OFC) membership of the OECD Global Forum on Taxation that is
working on increasing cross border transparency in tax matters. Another is the participation by
Bermuda in the IAIS development of its Multilateral Memorandum of Understanding.

Five particular points:
First, there is still no meaningful level playing field. The reason is anti competitive behaviour.
Many jurisdictions that pay lip service to free market economics only mean it when it applies to
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others, i.e. others should open their markets to their products, but not vice versa. And in financial
products OFCs can pose a major competitive threat. So, for instance, the UK and the US are
not keen to see OFCs thrive too much, but they recognize that, for their own financial service
industries to be competitive and to secure inward foreign investment, they must allow their service
providers to use OFC domiciled structures and permit investment from OFCs, otherwise they risk
their service providers migrating to OFCs or losing inward foreign investment. Serious
competition also exists between the UK (London) and the US (New York).
The UK and the US are benign compared with others. Some major EU members maintain dirigiste
economic models that are under serious financial pressure from the weight of an ageing entitlement
society. Their fear of leakage of capital and revenues is such that their goal is to eliminate OFCs.
So, while loudly trumpeting their support for globalization of financial services and the desirability
of opening all markets to services and products, they continue to impose unequal, burdensome and
anti competitive regulation on OFCs and continue to maintain barriers to their residents using
OFCs and to OFC financial products being sold in their local markets. The EU is becoming
increasingly aggressive post the financial crisis, and the recent Alternative Investment Fund
Managers Directive bears all the marks of misguided protectionism (if the EU can get away with it).
The BRIC countries have been less aggressive in the past, as they tended to benefit from large
amounts of inward investment from OFCs. But recently some of these,
particularly India an less so China, have become more questioning of the use of OFCs as they fear
that they are losing tax revenues (and control of capital) through OFC structures for both inward and
outward investment.
Second, the acronym standard setters referred to above and driving the international initiatives are
the creatures of and funded and staffed by the very same major countries that have no real interest in
a level playing field open to OFCs.
Third, there is the natural tendency of bureaucracies to be self-serving and self-justifying,
particularly where they are unaccountable. The international standards setters (and the EU
Commission) are just that. Their staff has little interest in finishing a project and, if it appears near to
finishing, will develop a new or expanded programme. This is clearly evident in the international tax
initiatives of the OECD and EU, and from the efforts of the FATF to avoid
abolition. And they have every interest in preserving their tax free benefits packages. The most
recent example is the manoeuvring of the OECD, through the Global Forum on Transparency and
Exchange of Information for Tax Purposes, to become the judge, jury and executioner in tax
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information exchange compliance and to push the frontier beyond bilateral agreements to
multilateral arrangements encompassing automatic/spontaneous supply of tax information.
Fourth, there is widespread specific legislative and regulatory action to reduce or even eliminate
the use of OFCs. The EU continues to push for an expansion of the Savings Directive (automatic
reporting) to include broader types of income and cut through to the underlying beneficial owners
of companies, trusts and partnerships. The Directive on Alternative Investments (even in its watered
down form) presents and attempt to build Fortress Europe for the fund industry. The OECD and
the FATF continue with their name and shame lists and effective implementation reviews of
OFCs (while ducking attacking the deficiencies in major onshore jurisdictions). The UK Revenue
has issued a voluntary code of conduct for UK banks under which they agree to abide by the spirit
as well as the letter of the tax law. France has established the Evafisc to monitor offshore accounts.
US has eliminated the benefit of offshore sweep accounts for corporate customers of US banks and
the avoidance of dividend withholding tax through the use of synthetic instruments (derivatives). It
has also enjoyed considerable success in its battle with Swiss banks that (may) have assisted US
taxpayers to evade their US tax obligations by indicting certain of those banks and/or their officers.
It is significantly expanding reporting obligations regarding foreign accounts and other offshore
investments of US taxpayers (FATCA) and is considering expanding the automatic reporting of
interest income earned by foreigners in US bank accounts and taxing reinsurance premiums paid to
offshore affiliates.
There is now heightened debate over corporations deferring tax by holding profits in OFCs, transfer
pricing, carried interest and unrelated business income, all of which could have an adverse impact on
OFCs.
Last, and most importantly, reputational pressure is now getting real traction and is producing
results in key areas. Continual political and special interest group pressure and media focus on
finding scapegoats for the financial crisis, and disclosure of the use of OFC structures by major
financial institutions and multinationals is having an adverse impact on OFCs. The goal is to make
it unacceptable to engage even in lawful tax planning and avoidance. The UK media has given
considerable critical attention to UK banks with offshore operations. France has pressured its major
banks to close their operations in paradis fiscaux. The EU Parliament adopted a resolution in 2011
demanding inter alia sanctions on financial institutions that operate with tax havens. The European
Investment Bank (EIB) has amended its lending policies so that loans will not be made to entities
domiciled in jurisdictions that do not meet international tax information exchange standards. And the
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US President and the Congress continue to proclaim loss of tax revenues to OFCs by both tax
evasion and legal tax avoidance planning and the need to do something about it. The latest
example of this is the Presidents Framework for Business Tax Reform is the latest salvo in this
effort, ably supported by the Stop Tax Haven Abuse and similar moves lead by Senator Levin. In the
meantime, a number of publicly listed holding companies domiciled in OFCs and with significant
USconnections have moved their domicile to jurisdictions that have full double tax treaties with the
US. And finally, many US citizens living overseas are finding increasingly difficult to obtain normal
banking services for their legitimate needs!

4.4 OFC DEFENCES/ACTIONS
There is a dangerous brew of self-interested behaviour by large countries and their client
international standard setters. So what to do certainly OFCs cannot safely ignore these
developments and pressures?
First, OFCs must ensure that their regimes meet currently accepted and applied international
standards and are effectively implemented. In particular, OFCs must become more transparent and
better at prompt and effective enforcement of their laws and regulations. Currently, they shoot
themselves in the foot by defending outdated regimes and by encouraging Luddite attitudes
in certain professional circles, make themselves an easy target for critics and lose high quality
business for reputational reasons. Further, OFCs should learn which battles to fight. It may seem
counterintuitive not to object to a financial transactions tax. But if everyone were to implement one,
such a tax at a competitive rate would be a very useful additional source of revenue for
OFCs.
Second, OFCs must continually upgrade and improve their laws, regulations, infrastructure and
Government and professional services to remain competitive in the financial services arena. For
instance, OFC stock exchanges could start offering derivatives trading and settlement if the onshore
rules become too burdensome.
Third, OFCs must continue to engage with the key major jurisdictions and standard setters to
shape and inform the development and implementation of fair international standards that create an
inclusive and non-discriminatory playing field open to all legitimate OFCs and recognizes the
equivalency of their regimes.
Fourth, they must develop and implement networks of well crafted and mutually beneficial
agreements with relevant jurisdictions for cross border assistance in terms of information exchange
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and law enforcement, subject to appropriate safeguards for legitimate confidentiality, due process
and the rule of law.
Fifth, they must remain vigilant and ensure their advance intelligence is as good as possible to
ensure proactiveness rather than reactiveness.
Sixth, better and more proactive political, media and educational campaigns are essential. There
have been some successes as seen in academic papers and conferences showing the benefits
provided by OFCs and commentary in the responsible media. However, these successes are still
overwhelmed by extensive media coverage of strongly critical and inaccurate statements about OFCs
from foreign politicians, regulators, standard setters, adverse lobbying groups, charities and church
groups (even the Vatican).
Seventh, OFCs should join together (recognising they are also competitors) in building a cohesive
group to conduct this engagement. Lonely tilting at windmills will not succeed. There has been
remarkably little progress in this cooperation. Even the Channel Islands, Guernsey and Jersey, seem
only sporadically to coordinate their efforts effectively.
Eighth, OFCs need to seek out new sources of quality business in, for example, Asia, South
America and the Middle East where the threats to their existence are considerably less. And where
legitimate facilitators of globalcapital allocation are still welcome.
Last, but perhaps most importantly, OFCs should strive to have real economic activity carried out
and value added within their jurisdictions by the vehicles domiciled therethat means warm bodies
in seats in physical offices in the OFCs making substantive decisions. And not simply delegating all
those functions to third party service providers. This requires the appropriate local
infrastructure and the right immigration policies and procedures to welcome the necessary expertise
and to provide an educated and motivated local labour force. But this is probably the best defence
against the lack of economic substance argument levied against OFCs.
This is a long term and many dimensional project and the challenges are formidable. To survive and
thrive, Governments and the private sector in OFCs must devote the necessary resources and energy
to the task.

4.5 DOMESTIC THREATS
OFCs must also pay heed to domestic issues.
OFCs must ensure that they continue to provide a stable and reliable political, legal, judicial,
economic and social environment. International investors have little interest in locating their
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investment structures and transactions in jurisdictions where there are concerns about corruption,
disregard for the rule of law and xenophobic hostility.
It is imperative that the local community understands and supports its financial services industries
and benefits from it. There is frequently insufficient effective engagement between the domestic
stakeholders, who tend to take each other for granted. Unless the financial services industry is
understood, trusted and supported by Government and the community, industry positions on issues
such as a sensible application of the immigration regime, targeted legislation to enhance financial
products and the regulatory regime, reasonable revenue raising measures and improved human and
financial resources for relevant Government departments and agencies risk being seen as narrowly
self interested and may fall on fallow ground.
We see local expressions of dissatisfaction with the financial services industry (even in
Switzerland) and questions raised about the industrys contribution to the broader community as a
whole. These criticisms are broadly unjustified and unwise. OFCs typically do not simply rent out
their legal and regulatory system and infrastructure to foreigners and without any benefit resulting to
the local community. One only has to look at other small islands in the Caribbean and elsewhere to
see the value of the financial services industry.
It is this industry, not tourism, that has given Bermuda, the BVI, Channel Islands and the Cayman
Islands such high per capita GDP. After all, places such as the Dominican Republic and Jamaica
dwarf Cayman in terms of its total tourism activity; not so in per capita GDP.
It appears that Governments and the financial sector in some OFCs have become complacent; if
so, they must both work harder to ensure that the broader community understands and remains
convinced that the financial services industry is critical to the well-being of the Islands. Without
strong and committed local support, the preservation and expansion of the industry in an
increasingly challenging and competitive international environment becomes a daunting task.
4.6 WINNERS AND LOSERS
So what might OFCs expect for the future?
The pendulum is still swinging against OFCs for the moment. But unless the world goes back to
the dark economic ages, the rhetoric (even from the French and Germans) should reduce and some
semblance of balance will return.
The world is full of global businesses and families. And their number and wealth (despite wealth
destructors such as Bernie Madoff and Allen Stanford) should increase over time. The real growth
will probably be in the new BRIC worlds and not so much the traditional (old) world of the G7/8.
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Expanding taxation and burdensome regulation will make proper planning for corporations and
wealthy families even more important and also lead togreater demand for tax and regulatory
advantaged and pleasant places to live and domicile, and where there is access to quality
professional services and advice.
Global economic competition inevitably means tax and regulatory competition. No-one has yet
created the perfect tax or regulatory regime, so competing regimes (within broad agreed norms) are
perfectly proper, just as there are many ways to make a safe automobile. Individuals and
corporations are still entitled legally to maximise their wealth. Indeed, corporations have an
obligation to their shareholders to do so.
Legitimate tax and regulatory planning will always have a place. OFCs with high standards of
sensible regulation, appropriate transparency, cross border assistance arrangements and good
infrastructure and providing quality valueaddedservice have a valuable and vital role to play in this
scenario.
The barriers to entry as an OFC are ever increasing. The cost of developing the infrastructure and
meeting international standards is significant and success cannot be achieved overnight or
guaranteed.
There are probably now too many OFCs. Competition is increasingly fierce, and jurisdictions and
structures are increasingly fungible.
Darwins theories argue for survival of the fittest. The OFC survivors will be those who are stable,
transparent and soundly regulated, meet international standards, have an established infrastructure
and track record (in all its aspects), tax/regulatory efficiency, professional expertise and support
services, a solid and diverse base of business, and the ability quickly to adapt and innovate in the
ever changing global environment and to add real value to legitimate international transactions and
capital flows in an efficient and cost effective way.

CONCLUSION
So applying all this, what is the future for OFCs? Do they thrive as a financial services centre or go
back to tourism, fishing and rope making (with meager handouts from aid agencies) until global
climate change finally sinks them? Many (but not all) OFCs meet the foregoing tests for being
survivors and need not suffer death by a thousand cuts. But to really thrive as financial services
centres, OFCs must learn better from history and from their and others mistakes and work more
effectively to be fully accepted as legitimate participants in the global financial world. These are
challenges indeed.
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5. CASE
5.1 OBAMAS AND OFFSHORE FINANCIAL CENTERS
President Obama has had a dislike for offshore financial centers since he was a Senator. He co-
sponsored a bill called the Stop Tax Haven Abuse Act and it appears that his administration will
pursue the bill in the near future. President Obama pledged to crack down on tax havens
during his election campaign. He has vowed to investigate and put pressure on banking secrecy in
over thirty-four jurisdictions that practice a high level of protection that may lead to tax evasion and
fraud. The then Senator Obama was a cosponsor of the Stop Tax Haven Abuse Act, which was
introduced on February 17 2007. A House bill was developed simultaneously, but no action was
taken on either bill. Obama aides have indicated that the bill may be resurrected.
Since the recent scandals with banks like UBS and the investigation into tax evasion coupled with
the recession and the financial fall out, Senate Permanent Subcommittee on Investigations has placed
a priority on international investigations of individuals with connections to offshore financial
centers. Similar pressure is happening in other countries.
The Stop Tax Havens Abuse Act would restrict the use of offshore financial centers by imposing that
transactions between US persons and offshore jurisdictions be taxable. It will also raise the
reporting requirements and increase the penalties for tax evasion with the use of offshore
jurisdictions. The Committee feels that an additional $50 billion in additional tax revenue will be
gained. Within the Act is a provision that would force taxpayers to prove that they do not have
control over any offshore entities with which they contract and the act takes a guilty until innocent
approach. The Act presumes that a US citizen has control of entities including trusts, corporations,
limited liability companies and partnerships created or domiciled in a so-called Offshore Secrecy
Jurisdiction if the US person directly or indirectly formed, transferred, received assets or is a
beneficiary of that entity. The objective of the Stop Tax Havens Abuse Act creates taxable income
for all transfers to offshore entities and presumes that income from these transactions remains
unreported. The thirty-four jurisdictions include almost every Offshore Financial Center such as
Guernsey, the Isle of Man, Switzerland, the Cayman Islands, the British Virgin Islands, the Cook
Islands, the Bahamas, Bermuda, Hon Kong, Jersey, Belize and Costa Rica.

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5.2 CASE FOR AN INDIAN OFFSHORE FINANCIAL CENTRE
Section 18 of the Special Economic Zones (SEZ) Act, 2005, provides for an International Financial
Services Centre (IFSC), with resident units to be treated as SEZ units for levy of income tax and
excise as well as Customs exemptions and concessions.
The Act envisages an IFSC within an SEZ, which does not mean that IFSC units' operation would be
confined to only SEZs. Although the Act became effective in 2006, the proposed IFSC is yet to
materialise, with many continuing to question the need for such a centre.
The million-dollar question is whether such a centre makes business sense for India. The cynics cite
decreasing relevance of such centres in liberalised financial markets, while the votaries bank on
mammoth business transactions in other centres, employment generation prospects, foreign
exchange inflow and global capital at global cost for players in domestic tariff area (DTA).
Given the different offshore financial jurisdictions traditional, regional or international and
varying regulatory frameworks, the answer would lie in the IFSC model, regulatory framework,
operational flexibility and concessions or exemptions India chooses to adopt.
Pragmatism suggests that India has nothing to lose provided concerns on money laundering and
confidentiality as postulated by the International Monetary Fund (IMF) and Organisation for
Economic Cooperation and Development (OECD) are addressed.
Success stories of Hong Kong, Singapore or even the newer Labuan Offshore Financial Centre in
Malaysia should be a good reason for India to establish an IFSC. Dubious offshore centres in the
Caribbeans should not be a deterrent.
The IMF define such hubs as "centres where the bulk of financial sector transactions on both sides of
the balance sheets are with individuals or companies that are not residents" . Apart from the well-
established offshore financial centres such as London, New York, Japan, Hong Kong and Singapore,
new centres have come up in Mauritius, Malaysia, Shanghai and Dubai.
The total cross-border assets of select offshore financial centres, as per an IMF report, were about
$4.6 trillion in 1999, i.e., 50% of the total cross-border assets, of which $0.9 trillion was in the
Caribbean, $1 trillion in Asia, and most of the remaining $2.7 trillion by the IFSCs in London, US
and Japan.
In India too, the proposed IFSC will go a long way in boosting the country's economic growth by
facilitating higher foreign capital inflow and adding vibrancy to its financial market, foreign
exchange earnings, SEZs, creating employment and, most importantly, making global capital
available at global cost.
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If the Reliance and Tata groups can deal with financial institutions in London and New York, an
IFSC in India will only bring such financial institutions to our own backyard.
Indeed, India faces the daunting task of placing itself on a par with established centres such as
Amsterdam, Berlin, Frankfurt, Milan, London, New York, Zurich, Paris and Rome. But it's difficult
to fathom a specific reason for India to fail as well, given its convenient time zone, skilled human
capital, stable political system and conducive business environment.
5.3 NEW INDIAN HEAD-ACHE FOR OFFSHORE FINANCIAL CENTRES
Mauritius a popular OFC and intermediary jurisdiction for investments into India is worried that
companies set up there to take advantage of the countrys lack of capital gains tax and the significant
benefits under its tax treaty with India will come under increasing scrutiny if the form over
substance doctrine becomes law under new general anti-avoidance rules (GAAR) proposed by the
Indian government.
In fact Mauritius is so worried that this could end its reign as the leading offshore financial centre for
investment into India that although its authorities have indicated a willingness to renegotiate its tax
treaty to include a limitation of benefits clause it is reported that they have also demanded that
structures set up before April 1, 2013 be left untouched.
Blurred Lines.
In practice the new GAAR means that the real intention of the parties, the purpose of the
arrangement, and the effect of the transactions will be taken into account to determine the tax
consequences of the transactions, regardless of the legal structure used by the taxpayer. It will
also grant the tax authorities considerable administrative discretion in applying the rules, potentially
creating uncertainty about where accepted tax planning ends and abusive tax avoidance begins.
Real Commercial Substance.
It is expected that an arrangement will be deemed to have been created with the main purpose of
avoiding capital gains tax in India if the legal ownership ostensibly resides with the intermediary
holding company but the beneficial ownership rests with the foreign investor. Such arrangements
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typically are characterized by all of the funding for the investment in India coming from the foreign
investor and simply being routed through the offshore holding company.
The test of substantive commercial substance can however be satisfied if the holding company
conducts business in the jurisdiction where it is incorporated, if its board of directors meets in that
jurisdiction, and if it carries out business with adequate personnel, capital, and infrastructure of its
own.
This presents a real problem for such companies as typical holding companies are set up to hold
assets and not engage in active business.
Who Has the Burden of Proof?
Under existing law the Indian tax authorities have the burden of demonstrating a lack of commercial
substance. It was originally proposed that the taxpayer would have the burden of showing
commercial substance, but this was changed while the Finance Bill was being debated in Parliament.
Under existing rules, a taxpayer can provide a tax residence certificate to obtain benefits under one
of Indias tax treaties unless the treaty contains more onerous requirements, such as having to satisfy
a limitation on benefits clause. The GAAR will give the Indian tax authorities discretion to
determine whether the offshore holding company has substantive commercial substance.
State of Play.
In announcing the budget, former Finance Minister Pranab Mukherjee assured taxpayers that
detailed guidance would be issued on the application of the GAAR to allay the concerns of foreign
investors and ensure that the provision is not applied indiscriminately. A committee was
immediately set up to formulate guidance for implementing the GAAR.
5.4 MAKINGMUMBAI AN INTERNATIONAL FINANCIAL CENTRE
Implications for India and Mumbai
Given that an IFC in Mumbai must be rooted in (and serve) Indias financial system, rather than be
an artificial offshore appendix, the call for creating an IFC in Mumbai at this time is implicitly a
metaphor for (and synonymous with) deregulating, liberalizing and globalising, all parts of the
Indian financial system at a much faster rate than is presently the case. Raising the issue of an IFC in
34
Mumbai now suggests that the pressing need for a new, more intensive phase of deregulation and
liberalization of the financial system has been anticipated by Indias policy-makers and regulators
and that the IFC is a device to accelerate movement in that direction. An IFC will not be created
quickly in Mumbai, nor will it succeed, if action on further deregulation and liberalisation is not
taken in real time.
In sustaining its trajectory as an emerging, globally significant, continental economy, the HPEC
believes that India has no choice but to: (a) become a producer and exporter of IFS; and (b) capture
an increasing share of the rapidly growing global IFS market. To achieve these two goals, its
financial centre in Mumbai must compete to become a successful IFC. Incremental growth in the
global IFS market is now being driven by the growing demands of China, India and ASEAN. With
its strengths in human capital, a globally powerful IT services industry, and
its own hinterland, India has many natural advantages for competing successfully in this market. In
evolving as an IFC, Mumbai will probably grow in two distinct phases:
1. In the first phase (20072012) Mumbai must connect Indias financial system with the worlds
financial markets through IFS. That is what IFCs like Frankfurt, Paris, Sydney, Tokyo and a
host of smaller IFCs do now in respect of their national economies.
2. In its second phase (20122020) Mumbai must develop the capacity to compete with the three
established GFCs for global IFS business that goes beyond meeting Indias needs. After 2020,
HPEC would hope that Mumbai would hold its own in competing with the other GFCs and acquire
increasing global market share.
Indias financial services industry will not become export-orientated, nor derive significant IFS
export-revenues, if Mumbai fails to become an IFC. That will compromise not just export earnings
from IFS, but the quality, efficiency and range of domestic financial services offered in India as
well. For Mumbai to become an IFC, Indias policy-makers and financial operators need to
understand fully the nature of and opportunities in: the global IFS market; the activities undertaken
in GFCs; and the gap in capabilities that now exists between Mumbai and established GFCs.

Urban infrastructure and governance in Mumbai
The lure of the burgeoning Indian market has already attracted a large number of foreign financial
firms to Mumbai. They have, in turn, located an increasing number of high-level expatriate staff in
the city, creating intense competition and driving up prices quite dramatically for limited
accommodation and lifestyle facilities that are not yet world class. A Mumbai-IFC that provides IFS
35
only to the Indian market will not face the same pressures from foreign firms and expatriates to
remedy the privations that they presently have to suffer: i.e. inadequate infrastructure, massive
congestion, rampant pollution, along with poor standards of urban governance and law enforcement.
In HPECs view the present state of play can be tolerated reluctantly even as Mumbai grows as an
IFC in its first phase, connecting India to the rest of the world. But that can only last for the next five
years or so.
In its second phase of growth, if Mumbai is to be a successful GFC that exports to global markets
competitively, it will have no choice but to match London, New York and Singapore in terms of
attracting the requisite high-level human talent to the city. If it fails to do so it will not succeed as a
GFC. To match these global cities in the span of the next 5-10 years for their world class quality of
infrastructure and their global standards of governance, Mumbai needs to make a start now.
The individuals that Mumbai must attract (and who matter most) to be globally competitive in
providing IFS whether Indian or not and whether working for Indian or foreign firms are affluent,
mobile, and multi-culturally inclined in terms of their habits, tastes and preferences. They demand
world class facilities to live, work and play, as well as world standards of infrastructure and urban
governance. They have ample choice in terms of where they (and their families) choose to be
located, and how their time is allocated. Whether they choose to locate in Mumbai will be influenced
by the attractions of Mumbai as a global city in which they can live, work and play in a manner
similar to what they can do in other GFCs. This reality may involve
the creation of facilities to support lifestyles that could result in increasing social tension in the city;
that risk will need to be managed sensitively and adroitly.
For Mumbai to become an IFC that can operate on a par with the three established GFCs, it will
eventually need to attract a large population of individuals who are an integral part of the globally
mobile (globile) finance workforce that already exists. Perhaps 2530% of them will be of Indian
origin. The remainder will be expatriates from around the world representing every
country that has significant trade and investment links with India (and Asia). Most of them will be
working for foreign financial firms that will include, inter alia: commercial and investment banks,
asset management companies, insurance companies, securities and commodities brokerages, bills
discounting houses, private equity firms, venture capitalists, hedge funds, as well as the financial
media and financial reporting agencies (such as Bloomberg, Reuters, major global financial
publications) and exchanges even external and global regulatory agency representatives from
over a hundred different countries.
36

The choice
India has already become a large purchaser of IFS from the rest of the world; much larger than is
realised in policy-making or commercial circles, leave alone by the public at large. As its economy
grows, its demand for IFS will increase in a non-linear fashion. India can, of course, choose to
continue buying IFS from abroad indefinitely. But the amounts it will need to spend for that purpose
are staggering. They represent a waste of resources on purchasing services that India could provide
more competitively for itself. Moreover, an inability to meet its own needs and those of its trading
and investment partners for IFS will compromise Indias growth. Oddly enough, India does not
need to rely on foreign providers for IFS. Quite the contrary: India has several significant strengths
that give it an edge in providing IFS not just to itself but to the rest of the world on a competitive
basis. Indeed, there is no city in the world that can become an IFC on the scale of London or New
York, within a 20-year horizon, in the way that Mumbai can. This reflects Indias unique strengths
of: democracy, open-mindedness, cultural comfort with foreigners living and working inMumbai,
use of English, a wellplaced time zone, high quality labour force, a 200 year tradition of speculation
and risk taking, and a hinterland advantage.
But such a future for Mumbai is far from guaranteed. At present, India is absent from the global IFS
space, owing to weaknesses in financial sector policy, financial market structure, financial regime
governance, legal system infirmities, as well as in the urban infrastructure and governance of
Mumbai. The situation is worse than initial conditions were for manufacturing and software exports
in 1991.
India does not have a low market share in the global IFS market: it has a zero market share.
Looking ahead, the growth of IFS demand in India is inevitable, given the sheer growth of cross-
border flows. The pressure of IFS demand that will flow from cross-border transactions of $12
trillion per year will inevitably trigger the emergence of rudimentary IFS capabilities in one way
or another. The question that India faces is whether incremental evolution towards a limited range of
IFS capabilities is adequate, or whether there is a more promising future for India in exporting IFS.
If decision-makers fail to tackle the policy issues outlined in this report, Indian IFS demand will fuel
the growth of Wall Street, Singapore, DIFC and the City of London; often through the aegis of
Indian financial firms that will graduateinto multinationals and relocate their IFSoperations outside
the country. The maturity of Indian finance in 2006, in terms of coping with competition and
globalisation, is comparable to where Indian manufacturing stood in 1991. The exportof financial
37
services from India in 2006 sounds about as unlikely today as the exportof automobile components
or softwaresounded in 1991. The outlook for export ofautomobile components or software in 1991
was nothing but bleak. Yet India managedto find the energy to unleash revolutionary changes in
policy.
Such radical changes now need to be replicated in finance, if export competitiveness in the rovision
of financial services(domestic and international) is desired and to be achieved. Visionary thinking
needs to be applied to issues of financial architecture, the role of the central bank, and regulatory
philosophy.
In parallel, Mumbai needs to become a first-world city that can attract the brightestminds of the
world by being an attractive place to live, work and play.If India is able to meet these
twinchallenges, then IFS exports could outstripIT service exports by 2025. The benefitsto the Indian
economy, from taking the IFC path, are much greater than thedirect revenues that would accrue from
sale of IFS to local and foreign customers.
Indias experience with manufacturing hasdemonstrated that outward orientation and export
competitiveness are the best tools for producing world class quality for the domestic market. An
Indian financial sector that can export IFS will do a better task of financial intermediation for India.
That is likely to generate an acceleration of GDP growth as growing investment resources (now
exceeding 30% of GDP) are more efficiently allocated.
These benefits need to be weighed carefully by Indias leadership against the political capital that
needs to be expended in overcoming the technical and realpolitik constraints of: (a) changing the
financialsystem in India with a second, moreintensive set of reforms; and (b) urban governance in
Mumbai.This report has tried to bring objectivity and professional competence to sketchingthe
trajectory, should Indias leadershipdecide to take the IFC path. It strives to deliver a nuanced
appreciation of the likelycosts and benefits of the path to an IFC, based on understanding of which
policymakerscan make a reasoned choice.


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CONCLUSION
In future, however, the tax havens will need to take as much note of attitudes in large developing
countries as in the OECD stalwarts. They understand that the balance of power in global economic
governance is shifting, which is why they have lately been trying to forge high-level regulatory and
political relationships in Asia and Latin America.
They are relieved that China, with Hong Kong and Macau under its wing, seems less hostile to
offshore finance than Western governments currently are. India and Brazil, though more critical,
take a pragmatic approach. India became aware of the dangers of trying to interfere with a popular
tax haven last year when it sought to rewrite a tax treaty with Mauritius that had caused large
amounts of inward investment into India to be routed via the island. Financial markets went into a
deep dive at the prospect and India had to moderate and delay its move.
Harmonisation of financial rules looks as far away as ever. And where there are differences in
national tax rates, regulatory standards and confidentiality laws, there will be opportunities for
international financial centres to offer legitimate arbitrageor, as their detractors see it, for
secrecy jurisdictions to provide boltholes that allow elites to undermine their home countries
policies. Offshore financial centres are not ready to sink into the sea yet.

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BIBLIOGRAPHY
The Future of Offshore Financial Centres- Rereading The Tealeaves From A Cayman
perspective by Timothy Ridley Paper presented to the UCCI/UWI/ICCI Caribbean
Conference 21-23 March 2012
Moran Harari, Markus Meinzer and Richard Murphy (October 2012) "Financial Secrecy,
Banks and the Big 4 Firms of Accountants" Tax Justice Network
Offshore Financial Centre: http://www.mbaknol.com/international-finance/offshore-
financial-centers-ofcs/
Offshore Financial Centers What You Need to Know to Benefit From Them:
http://www.globaltrialbank.org/offshore-financial-centers-what-you-need-to-know-to-
benefit-from-them.html
Obamas and Offshore Financial Centers
http://assetprotectionworld.com/obamas-and-offshore-financial-centers/
Case for an Indian Offshore Financial Centre
http://economictimes.indiatimes.com/policy/case-for-an-indian-offshore-financial-
centre/articleshow/5888043.cms
New Indian Head-Ache for Offshore Financial Centres
http://franhendy.com/2012/07/17/new-indian-head-ache-for-offshore-financial-centres/
Sunshine and shadows
http://www.economist.com/news/special-report/21571559-offshore-financial-centres-will-
always-be-controversial-they-will-stay