The Offshore Attraction

statue of Chevalier de Bayard in Sainte-Anne-d’Auray, Brittany

At the mention of offshore investments there is usually a raised eyebrow and immediate expression of distrust. Portrayed in the movies as the realm of the super-rich with secrets to hide or as a blatant vaunting by criminals of ill-gotten gains, there is far more myth than reality in fact within the public understanding. To dispel some of this myth and replace it with fact there needs to be an understanding of the legitimate reasons for offshore accounts.

Taxes

The fact that taxes are often a primary consideration is a fact. What is not as true is that it is an attempt to illegally dodge taxes. There is nothing illegal about the common sense approach that paying taxes more than once on the same income does not make sense. When the investment in an offshore account produces income, that income is of no value until repatriated to the investor’s country of origin. That is taxed as income everywhere. The biggest tax savings is in that you are most often taxed only after you realize the gain and withdraw the investment, unlike many countries that tax you on the gain on paper even though the investment is still tied up and you cannot use those gains to pay taxes meaning you must have a separate income source to pay tax on money that is only theoretical to that point.

Another area of potential tax savings is when investing as a company or you are have a company manage your investments, both the company is taxed on profits it makes (which obviously correlates directly to higher fees for you) and you are taxed on your individual profits so you are both paying taxes on the same transactions. Attempting to avoid this double tax if the avoidance of it is not illegal is common sense. Most offshore accounts are set up in countries that are happy to settle for the economic activity and growth the presence of the investment company provides without interest in taxing it further so the corporate tax is drastically reduced or eliminated.

Confidentiality

Once again, there is some validity to the secrecy portion of the myth, just not for only the reasons commonly given. In the case of large investors or partnerships intending to make large moves in the financial sector want a certain amount of anonymity or confidentiality. It is simply a means of cost control in most cases. If a successful well known investor decides that want to take a position in a certain sector so begin buying it, many people tend to follow that persons lead and coattail the investment themselves. This drives the price of the stock or position up quickly and turns a profitable opportunity they researched out and spent time and money to find into a losing position quickly. It is not unreasonable for somebody to want to make an investment without sharing their hunch as a tip with the general public by making it common knowledge they are buying into a particular stock.

Diversification and Opportunity

To have a truly diverse portfolio, an investor cannot be told some markets or opportunities are off limits simply due to a place of residence. Some countries have laws or tax regulations that make investing in some markets completely impossible. This is done with the intent that the investors’ money all stays in the confines of that country. While the desire to keep the investments local is understandable, it is also very much denying those investors the ability to diversify to protect their portfolio.

This is common with regulations pertaining to particular markets as well. For example, in the Forex markets, regulations vary from country to country. Many places put limits on the amount of leverage available to an investor from a brokerage. If you reside in suck a country and are forced to make your position with a leverage capped at 50 you cannot compete and profit to the same level on the same currency pairing as somebody residing in a country without such a limit against investors leveraging 100 or 500. This makes the equal time and research of less value.