The Channel Islands are well-known as a place where individuals and companies from Britain often choose to invest their hard-earned cash. They are an example of an offshore financial centre; but what exactly is an offshore financial centre and what are the benefits of placing your money there? Are there any pitfalls to watch out for?
What is an ‘offshore financial centre’?
The term ‘offshore’ simply refers to the fact that the country or territory in question is not the one in which the investor usually lives. Ironically, one of the most important offshore financial centres is landlocked Switzerland; others include Luxemburg, Bermuda, the Cayman Islands, the Bahamas and, of course, the Channel Islands.
Independent of Europe; dependent on finance
The Channel Islands are not part of the European Union (and not even part of the United Kingdom). This gives them an element of protection from European financial regulation, enabling them to have more autonomy over their own economies.
In addition, since the 1960s the Channel Islands have relied heavily upon financial services to provide national income. Jersey in particular is heavily dependent on the financial service industry.
Taken together, this gives the Channel Islands both the ability and the motivation to provide a favourable environment for potential investors. This most visibly translates as lower tax rates, making the Channel Islands one of the so-called ‘tax havens’.
Tax benefits and other positives
Looking at Guernsey as an example, individuals and companies pay only a 20% basic rate of tax on investments. Better still for offshore investors, non-resident companies are classified as tax-exempt and pay just £600 a year in tax. Should external regulators succeed in closing this particular tax loophole, foreign investors can still legally set themselves up as an international company, paying a maximum of 30% tax. Guernsey also attracts the banking sector by offering tax-free interest on deposit accounts.
As well as tax benefits, some individuals choose to invest offshore to keep their transactions secret, using statutory confidential banking laws. Although this may seem dishonest, secrecy can be an important factor when, for example, a high-profile, wealthy person wants to buy a large volume of shares without pushing up their price by announcing the fact. However, regulation has succeeded in changing these practices and such laws are now only found in countries such as Singapore and Switzerland.
Are there any negatives?
As with all investment strategies, there are potential pitfalls that investors need to be aware of. Probably the most off-putting factor in offshore investing is the prohibitive costs involved in getting started. The legal and registration fees involved in setting up a corporation can be very steep and favours bigger companies.
The tax benefits are also shrinking all the time, mainly due to the increasing sophistication of onshore tax collection, which means that investors have to remain aware of changing tax laws to avoid being penalised for tax evasion.
The myths about offshore banking
Many people have been influenced by popular myths about offshore banking. Most of these tales suggest that the regulatory environment in offshore banks is looser than in mainland financial institutions and that financial transactions are shrouded in secrecy. There is an implication that tax havens harbour individuals and companies involved in dishonest tax practices and even money laundering.
While this may have been the case in the past, it is now generally accepted that since the turn of the century offshore financial centres have become just as well-regulated, if not more so, than their onshore counterparts. For example, they employ robust anti-fraud measures and comprehensive identification is compulsory when opening an account. It seems that investors prefer to entrust their money to well-regulated financial markets
So Brits, and other nationals, invest in offshore centres mainly to save money by taking advantage of lower rates of tax on investments. Although some may see this as dishonest, or even illegal, it is more accurate to understand tax havens as an ongoing compromise between international regulation and national freedom.