investigates offshore financial centers in the Caribbean from the perspective of offshore economies, onshore economies, and international investors. Using multilateral data on the international positions of banks, we analyze the flow of funds that has been transferred from the major banking systems to offshore financial centers located in the Caribbean and vice versa. We highlight that Caribbean offshore financial centers have been predominantly used by persons, resident in the United States, which send and receive most of the offshore funds, a process called round-tripping. For the major player in the Caribbean, the United States, we find that increases in offshore funds have been associated with reductions in corporate income tax revenues. These costs, however, have to be put into relation with the potential benefits, in the form of higher lending by commercial banks located in the United States.
Along with the empirical analysis, we analyze the advantages and disadvantages of offshore financial centers from the perspective of offshore and onshore governments, and international corporations and investors. In particular, we provide a review of the international tax legislation, focusing on activities and investments in traditional offshore centers, treaty heavens, and special concession havens. Although the vast majority of offshore transactions seem to be perfectly legal, there exist concerns that particular corporations and individuals might misuse offshore financial centers. For this reason, we discuss as well the major international initiatives on countering the harmful practices in offshore centers and tax havens.Brei comments -
With the onset of the global financial crisis in 2008, the debate about offshore financial centers and tax havens has gained once again more attention. Over the past decades, a number of working groups have been formed by fiscal authorities and international institutions alike, with the objective of identifying and analyzing offshore jurisdictions and tax havens (see, amongst others, Gordon (1981), Edwards (1998), OECD (1987, 1998, 2001, 2009a, 2011), FATF (2000a, 2000b), FSF (2000a, 2000b), IMF (2000), US (2008a, 2008b)).
A long-standing concern has been that offshore financial centers and tax havens facilitate tax avoidance and evasion. Onshore governments have also been concerned that offshore centers amplify the opacity of financial institutions, building the ground for risk-shifting incentives. A number of international initiatives have been launched in the late 1990s, with the objective of improving the information exchange between offshore and onshore authorities. More recently these initiatives have been intensified in response to the financial and sovereign crises in the advanced economies (OECD (2012b)). Nevertheless, the use of offshore financial centers and tax havens appears to be highly demanded by international corporations, banks, investment funds, and individuals.
The decision of a country not to tax financial transactions, or to attract businesses by more favorable taxation, is a legitimate policy choice. Supporters of offshore centers argue that international tax competition is vital for the global economy, by providing companies an alternative to high-tax/high-spending regimes. In this regard, governments compete with each other and attract corporations and individuals by offering them a more business-friendly environment. The opponents argue that tax competition can be harmful, especially, when favorable fiscal and regulatory frameworks are coupled with strict secrecy provisions, and the unwillingness of an offshore center, or tax haven to cooperate with onshore governments in the identification of fraudulent transactions. Such a setting would inevitably favor the abuse of offshore centers and tax havens. It is thus essential that onshore and offshore authorities cooperate efficiently, and it is the key to success and sustainability of an offshore financial center.
It appears that the authorities of the major advanced economies tolerate the use of offshore financial centers and tax havens. In principle, national tax policies are against the use of offshore centers and tax havens. In practice, however, this policy is ambivalent, resulting from a conflict of the following objectives (Gordon (1981)): tax authorities try to (i) minimize unjustifiable tax avoidance and evasion; (ii) maintain the international competitiveness of domestic corporations; and (iii) preserve tax equity between investments at home and abroad. A potential erosion of income taxes in the onshore economies, therefore, has to be related to the potential benefits of the use of offshore centers, which might include higher after-tax profits of corporations, more favorable and flexible business conditions, and/or increased bank lending at home. Indeed, much of the funds that are sent offshore are channeled back to the country of origin, allowing financial and non-financial firms to offer their products in the onshore jurisdictions at lower costs (McCauley and Seth (1992), IMF (2005), Rose and Spiegel (2007)).
Against these backdrops we investigate in this paper those offshore financial centers that are located in the Caribbean from the perspective of the offshore economies, onshore economies, and international investors. Using information on the international positions of banks, we analyze empirically the flow of funds across Caribbean offshore centers and the major banking systems. We shed light on several interrelated topics.
First, we discuss the identification of offshore financial centers and tax havens and quantify regulatory and fiscal differences for a number of offshore and onshore jurisdictions. Along we compare major macroeconomic indicators across Caribbean offshore centers and the other jurisdictions in the region, which do not host an offshore financial center. Not surprisingly, we find that offshore centers offer more favorable taxation to non-resident corporations and individuals, compared to our sample of onshore jurisdictions, with an average corporate income and capital gain tax rate for non-residents of 1% in the offshore centers, compared to tax rates that range from 25 to 35% in the onshore economies. Moreover, offshore centers provide stronger bank secrecy implied by fewer bilateral tax treaties and tax information exchange agreements. The differences in bank regulation are much less important. From a comparative perspective in the Caribbean, it appears that offshore centers have benefited from the presence of the financial center relative to non-offshore jurisdictions. For example, over the period 1997-2010, their average annual GDP per capita amounted to close to 21,000 US dollars, compared to an average of 4,000 dollars in the other small island economies, being highest in the Bahamas (70,000 US dollars) and the Cayman Islands (51,000 US dollars).
Second, we investigate the flow of funds that has been channeled through five Caribbean offshore centers (Bahamas, Bermuda, Cayman Islands, Netherland Antilles and Panama) over the period 1983-2010, using information from the locational international banking statistics of the Bank for International Settlements (BIS). As a matter of fact, we examine the origins and destinations of the flow of funds, and we identify net sending and receiving regions. We focus our analysis on round-tripping, a process during which funds from one country are sent abroad, to be subsequently re-invested in the origin country. It has been documented that multinational enterprises increasingly use round-tripping for different reasons, being it Indian multinationals in Mauritius, or US banks in the Cayman Islands. From a global perspective, we highlight that the Caribbean offshore financial centers host the majority of international funds located in traditional offshore financial centers. Out of the approximately 4.6 trillion US dollars of BIS-reported international bank claims, located in offshore financial centers at end-2010, a significant share of 38% has been on the books of banks that are resident in the Cayman Islands, followed by the Bahamas with a share of close to 10%. The United States have been the main user of the Caribbean offshore facilities, sending and receiving the majority of Caribbean offshore funds. Third, we investigate how an onshore economy might be affected when domestic corporations conduct businesses offshore, by quantifying the impact of the transfer of funds, from the United States to the Caribbean, on corporate income tax revenues and commercial bank lending in the United States. It appears that the use of offshore financial centers has been associated with reductions in US corporate income tax revenues. This negative effect for the onshore economy, however, has to be related to the positive effect, namely, the increase in commercial bank lending.
And lastly, we discuss in detail the advantages that are offered by offshore financial centers to international corporations and individuals, making a distinction between tax motivated and non-tax motivated offshore transactions. The discussion focuses as well on international differences in the taxation of repatriated foreign-source income in onshore economies. Although the vast majority of offshore transactions seem to be perfectly legal, we discuss a number of anti-abuse measures, introduced in onshore jurisdictions, aimed at countering the unacceptable use of offshore centers. Along we provide some case studies of how corporations have used existing loopholes in the international tax system to avoid, or to evade the payment of income taxes. The paper is organized as follows. Section 2 identifies those jurisdictions that are classified as offshore financial centers and tax havens, and it compares a number of indicators on tax and regulatory systems across offshore and onshore economies. Section 3 quantifies some of the offshore financial activity from a global perspective and, for the Caribbean, from a multilateral perspective. Section 4 investigates the potential effects of round-tripping on corporate tax revenues and bank lending in the United States, and Section 5 examines the transactions that take place offshore from a qualitative perspective. The final section concludes.'Importing Energy, Exporting Regulation' by James W. Coleman in Fordham Law Review considers other flows -
This Article identifies and addresses a growing contradiction at the heart of United States energy policy. States are the traditional energy regulators and energy policy innovators — a role that has only grown more important without a settled federal climate policy. But federal regulators and market pressures are increasingly demanding integrated national and international energy markets. Deregulation, the rise of renewable energy, the shale revolution, and new sources of motor fuel precursors like crude and ethanol have all increased interstate energy trade.
The Article shows how integrated national energy markets are driving states to regulate imported fuel and electricity based on how it was produced elsewhere. That is, states that import energy are now exporting their energy regulations to cover production in their trading partners. But exported regulation has its own problems: it threatens to splinter interstate markets, undercutting the federal push for integrated and efficient energy markets; and it violates the Constitution’s dormant commerce clause. Indeed, these innovative exported regulations are now caught up in litigation across the country.
The Article argues that, to preserve states’ role, while also maintaining a national energy market, Congress should empower the Federal Energy Regulatory Commission to immunize non-discriminatory state laws from commerce clause scrutiny if, and only if, they do not threaten to splinter interstate energy markets. The project considers how these federal regulators might assess state energy laws in three salient areas: regulation of imported electricity, regulation of imported fuel, and regulation of energy export and supply chains.