Offshore banking is two words that man alludes to money laundering and corrupt activities. Despite its controversies, offshore banking is not always associated with financial fraud or conniving capitalists. Offshore banking refers to the use of foreign banking services that do not operate within one’s home territory.
In the US alone, there are reportedly more than 2.7 million US citizens with offshore bank accounts as private individuals and businesses value the benefits that offshore banking provides. Offshore banking is not exclusive to the mega-rich.
Companies that use offshore banking services do not necessarily seek to evade taxes—note the difference between tax evasion and tax structuring. Tax evasion is illegal, whereas tax structuring is having efficient techniques and arrangements designed to reduce direct and indirect tax costs.
Companies are poised to reap numerous benefits from offshore banking. For companies that aim to go global, offshore banking is an essential first step. Yet, the hassle involved in opening an offshore bank account may seem daunting to some.
The following are seven benefits of offshore banking:
- Tax Savings
- Asset Protection
- Interest Rates
- Political Stability
- Capital Controls
Offshore banking creates layers between individuals and the transactions they execute. These layers give individuals a degree of anonymity that is essential to maintain their privacy. Likewise, corporations that want to conceal their research and development efforts from competitors can also benefit from offshore bank accounts.
For instance, actress Emma Watson was discovered to have channelled money through offshore bank accounts to purchase a property. According to Watson’s spokesperson:
“UK companies are required to publish details of their shareholders publicly and therefore do not give her the necessary anonymity required to protect her safety, which has been jeopardised in the past owing to such information being publicly available.”A spokesperson for Emma Watson, 2016
Celebrities are under intense media scrutiny, and it does not help that others can easily retrieve their personal information. Given this lack of privacy, it is understandable that celebrities would turn to offshore banking to keep sensitive information away from public scrutiny.
Similarly, analysts believe that Apple created SixtyEightResearch, an offshore shell company, to conceal its development of autonomous cars from its competitors. Given how competitive the race for the world’s first self-driving car is, it is unsurprising that Apple would prefer to keep it under wraps.
Confidentiality and protecting one’s identity are some of the most significant benefits of offshore banking.
2. Tax Savings
If a private corporation does not require physical assets to operate, the company can technically be located in any part of the world where corporate taxes are business-friendly. By depositing funds in offshore bank accounts in countries with a lower tax rate than their home territory, business executives can keep costs low and thus protect their bottom line.
In 2017, American corporations such as Apple, Microsoft, and General Motors collectively held an estimated US$2.6 trillion in offshore bank accounts. These funds are taxed by the federal government only if they are repatriated back to America. Offshore banking is one way to avoid paying taxes on idle funds and is thus advantageous to firms with significant liquidity.
3. Asset Protection
In an economic or financial crisis, governments may be accorded sweeping powers to seize funds to bail out banks. In 2013, the Cyprus government forced its people to pay a one-off tax of 6.75% for those with less than 100,000 euros in their deposits, while those with more than 100,000 euros had to pay 9.9%. This levy was part of a bailout agreement negotiated with Brussels/
To protect themselves from possible seizures of their deposits to fund government bailouts, private individuals and corporations may diversify and split their liquid assets across offshore bank accounts. Doing so would minimise the risk that their liquid assets will be vastly reduced if the local government finds itself in a similar situation as that of Cyprus in 2013.
Banking laws may also give governments broad powers to freeze deposits held in local bank accounts. In the United States, the Bank Secrecy Act enables the federal government to take possession of funds and assets of individuals suspected of criminal activities.
The American government is not an exception in the powers it holds over the banking system. Canada, the United Kingdom, and the European Union have similar banking laws that permit asset forfeiture by governments. Therefore, it is understandable why private citizens and corporations flush with cash would prefer to spread their liquid assets across national boundaries.
4. Interest Rates
Sometimes, individuals and firms may turn to offshore banking due to the better interest rates that they enjoy from parking money overseas instead of repatriating and placing them with local banks.
For instance, the Bank of Japan has maintained negative interest rates since January 2016. In other words, financial institutions are charged for holding on to idle funds instead of loaning them to businesses and private individuals. Faced with pressures from the central bank, local banks may transfer some of these payments to their clients by raising transaction fees and other administrative charges.
With offshore banking, private firms and individuals have other options beyond local banks. When interest rates become unfavourable to them, they can shift their funds to an overseas bank account or simply hold off on repatriating money home.
By leveraging offshore banking, firms and individuals can benefit from the better interest rates on their deposits offered by foreign banks.
5. Political Stability
For investors and financiers living in politically unstable countries, it may be logical to move financial holdings offshore to reliably peaceful countries such as Switzerland, Germany, and Singapore.
For instance, a firm would not want to hold all of their cash in banks situated in a country experiencing hyperinflation or governed by corrupt oligarchs. In this case, offshore banking is a precautionary measure to keep their liquid assets out of the reach of greedy politicians and safe from inflationary pressures.
The potential of a civil war or a rebel insurgence in more volatile countries is also enough reason for individuals and businesses with significant asset volume to turn to offshore banking.
For more information on how political instability affects companies, watch this video:
6. Capital Controls
Even if you do not see any use for offshore banking now, it is still advisable to open an offshore bank account now. If a government restricts capital flow, having an offshore bank account means that you can act swiftly and shift your company’s liquid assets before capital controls kick in.
Some countries may explicitly require foreign investors to have a local bank account before they can invest in the local market. Since markets rise and fall on a whim, private firms should have a foot in the door by setting up offshore bank accounts. Whenever the market conditions are prime for entry, companies with an existing offshore bank account in that country will have a headstart to enter the market.
Offshore banking may have its detractors, but it is nevertheless an advantageous and legal practice for private firms and individuals alike. Whether it is to spread risks, protect your privacy, or to get the best interest rates for your company, offshore banking will provide a viable alternative to achieve them. However, not every business may benefit from having an offshore account, and hence, it is best to engage established business consultancy experts like Desfran. Spearheaded by one of the world’s leading management teams, our team of seasoned experts has years of experience in providing wealth management advice. We continuously stay on top of trends and movements in the financial markets to help your business grow by providing comprehensive customised solutions.
Contact Desfran today.