STEP report underlines importance of OFCs

A study, commissioned by the Society of Trust and Estate Practitioners, concludes that offshore financial centres have a contributing rather than damaging effect on neighbouring industrialised countries.
 
The report, International Financial Centres and the World Economy, claims a large body of economic research over the last 15 years contrasts the popular view, and often repeated criticism of offshore financial centres, that low tax jurisdictions erode the tax base of industrialised economies and divert economic activity away from them.
 
The author of the report Professor James Hines of the University of Michigan states the evidence indicates that offshore centres contribute to financial development and stability in neighbouring countries, by encouraging investment, employment and other aspects of business development.
 
He also argues that offshore centres have salutary effects on tax competition, promote good governance and enhance economic growth elsewhere in the world.
 
In contrast to the belief that a fixed amount of investment and employment  is distributed among places in a zero-sum fashion, according to which more for one would mean less for another, modern economic conception understands that investment, employment and innovation in one location generally contributes to related activities elsewhere, the report explained. This applied to IFCs as well as other jurisdictions.
 
Consequently, Hines believes IFCs contribute to economic activity by improving the potential profitability of business operations elsewhere.
 
He calculates that for every dollar of capital invested by a typical US business in an offshore centre, extra growth worth 50 to 70 cents is generated in other developed countries.
 
The report also comes to the conclusion that a US company’s foreign investment stimulates domestic investment and that a company’s foreign employment growth is related to increased domestic employment.
 
Moreover, offshore financial centres improve the availability of credit and encourage competition in domestic banking systems, the report finds.
 
In terms of tax competition Hines argues low-tax offshore jurisdictions contribute to the efficiency of tax policies elsewhere, by making a distinction between highly mobile international investments that are easily diverted by differences in tax rates, and less mobile, largely domestic investments that industrialised countries are able to tax at high rates.
 
As IFCs impose very low taxes on local business profits the jurisdictions leave extensive after-tax profits to be taxed by others the, report argues.
 
Professor Hines refutes the popular view that offshore centres are the location of choice for anonymous accounts and other vehicles for international tax evasion.
 
While offshore centres such as the Cayman Islands adhere strictly to international money laundering standards and require ample amounts of documentation to incorporate a company or open a bank account, it is instead the large high tax countries such as the US or the UK with their more relaxed banking requirements that serve as easier locations for the establishment of anonymous accounts, Hines writes.