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Offshore Finance Jurisdictions – A History Of

The origin of low financial jurisdictions can be found during the middle ages when trade wars arose between different countries and regions competed amongst themselves for economic dominance. A clear example can be seen in the story of the Channel Islands initial development as an offshore tax haven. Indeed we can spot some common underlying themes in its development, which are shared with other low tax financial centres.

The firstly it is common that direct central control, in this case the Crown of England, remains loose and weaker in ties of geography and historic allegiance than the mainland. The Channel Islands whilst traditionally part of Duchy of Normandy since 1204, in actual fact following the loss of the rest of the monarch’s lands in mainland Normandy – were governed as separate possessions of the English crown. The separate jurisdictions of Guernsey, Jersey, Alderney and Sark are still all subordinate fiefs of the Duchy, and were never consolidated after the loss of the majority of Normandy in 1204 by King John. Control by Britain whilst solid today was often in the intervening years far from certain. Today the historic differences and separate legal status allows them to function as an offshore finance. Until recently it could be argues Jersey and Guernsey were arguably tax havens.

Likewise the Isle of Man with its turbulent history of passing between Viking, Welsh, English and Scottish dominance has evolved a separate legal status. Indeed to one extent or the other the island has always provided an offshore tax haven location for the more wealthy. This was firmly fixed after 1866, when the Isle of Man obtained a measure of at least nominal home rule. At the present day the benefits can be seen in the Isle of Mans rise as a prosperous community, with its evolving offshore finance centre and low tax jurisdiction status.

In both the case of Gibraltar and Malta a complex, shifting history of allegiance and various form s of legal independence has allowed them to develop offshore finance centres and low tax regimes.

Into the modern period it is commonly accepted that the definition of a tax haven and/or low tax jurisdiction was first formed around the time of just after World War I. For example Lichtenstein was hands-on in the mid 1920’s in trying to attract foreign investments and established its Offshore Trust Law. Further a field Bermuda created Offshore Company Laws about ten years later and began some of first moves in endeavouring to be a Corporate Tax Haven. Most tax havens were associated with individual avoidance of tax, or at least the reduction of tax liabilities. However, in the post war years, companies became over-burdened by taxation. This is when Corporate Tax Havens and the offshore tax industry were born. Companies could take advantage of tax treaties between their home nation and the offshore tax jurisdiction to reduce their liabilities. This worked for a while, but the technicalities that permitted this were eliminated as the home jurisdictions once they realised the amount of revenue they were potentially losing.

During the 1980’s, the IBC – International Business Corporation – was created in some Corporate Tax Havens. A key driving force were the financial jurisdictions that wanted to entice foreign companies, established offshore company legislation and vehicles that were not subject to local taxation. These were of course very attractive to overseas companies and corporations. The first offshore financial centres to establish the IBC were Gibraltar and certain offshore finance centres in the Caribbean such as the Bahamas and the British Virgin Islands. Recently in well published moves these have been amended when the OECD – the Organisation for Economic Co-operation & Development – took taxation matters into hand and exerted pressure upon the offshore financial centres to change they way of working with these overseas companies.

Quite what the future holds for low tax offshore finance jurisdictions remains obscure, however it is fair to say the days of the tax haven as a vehicle to avoid tax are over. For more articles in a similar view please visit: Our Blog section.