No one seems to fully agree on the origin of the word “offshore”, but it most likely developed in the UK. The Channel Islands (Jersey and Guernsey) entered the financial business shortly after the end of World War II. Their unusual constitutional status gave them independence in all internal affairs, including taxation and banking regulation. It didn’t take long for them to realize that they could offer a tax-free, safe haven for moderately wealthy middle-class Britons who were being persecuted by successive Labor governments desperate to pay off World War II debts.
During the 1970s, UK Labor governments raised taxes by up to 95% and restricted the export of foreign currency. While the super-rich had always looked to Switzerland, the Channel Islands provided a convenient, close-by, English-speaking alternative to tax-overburdened Brits looking to move more modest wealth “overseas.”
During the 1980s and 1990s, dozens of Caribbean island nations renounced their colony status and seceded from Britain (and, to a lesser extent, France). By becoming independent sovereign nation states, they also saw financial services as a way to make quick profits. With easy access from North America, they focused more on the US and Canadian markets, offering “no questions asked” banking for those who wanted to hide cash. We’ve all seen the movies about the so-called “Samsonite bench”.
Although left-wing or populist politicians still sometimes try to tarnish the image of offshore islands with the rubbing of money laundering, organized crime and tax evasion, the fact remains that these economies today are generally prosperous and international financial centers. well regulated they contribute in a significant and beneficial way to grease the works of world trade.
Today, most offshore centers prefer to be known as “international financial centers”, avoiding the names “offshore” or “tax havens”, which they believe have negative connotations. While that may be true, the word “offshore” lives on. But its author does not want to give in to political correctness and it turns out that he likes the word “offshore”. It has become part of the English language and we see no reason to change it. Most people know what we mean when we say “offshore banking” and people understand something specific…as opposed to “international finance” which could mean almost anything!
Anyway, back to our topic, although the word “offshore” was originally coined due to the small island nations involved in the business, today it is generally accepted as anywhere outside of its home country. For example, for the British, the US is abroad and vice versa. Landlocked Switzerland, Liechtenstein and Andorra do not have any coastline, but they fit perfectly into our modern definition of offshore banking.
Tax avoidance or tax evasion? An important difference to understand
According to an OECD (Organization for Economic Co-operation and Development) formulation, an offshore tax haven is a jurisdiction that actively makes itself available to avoid taxes that would otherwise be paid in a higher-tax jurisdiction. .
The key word here is “tax evasion”. There is another: “tax evasion.” Tax avoidance is legal, while tax evasion is a crime. Basically, tax avoidance is structuring one’s business affairs in such a way that the minimum amount of tax possible is paid, without breaking the law. An offshore jurisdiction is one that offers attractive instruments or opportunities for tax evasion, personal financial privacy, and asset protection.
In a judgment that formed the basis of US tax evasion law for decades, Judge Learned Hand wrote: “Anyone can arrange their affairs so that their taxes are as low as possible; they are not required to choose the pattern that best suits you”. pay the Treasury; there is not even a patriotic duty to raise taxes…” Gregory v. Helvering, 69 F.2d 809, 810-11 (2d Cir. 1934).
