Offshore banking unveiled

Continuing this issue’s theme of offering a beginner’s guide to all things international, Alaric Nightingale explains the basics of banking offshore

This feature is not going to be clever or fancy. It is simply going to explain what offshore banking is, why thousands of people around the world do it legitimately, legally, and without being tax-dodging, immoral scoundrels. Like most of the other articles in this edition of Investment International, it is meant to cover the bases; to explain
the world of offshore banking and to tighten up readers’ understanding of the central issues involved.

First and foremost, a lot of people have the wrong impression of offshore banking, believing it something louche and illegal. Yes, if you want to abuse the system,
it can be both those things, but the truth is that the vast majority of offshore banking in the world’s more reputable finance centres is entirely legal, entirely legitimate in source, and an eminently sensible thing to do.

As Mark Trasler from HSBC International says, many people are patently missing attractive opportunities by not availing themselves of offshore banking products. “The mystery is why relatively few expats – less than one in three at the latest count – take advantage of this special ‘expat’ status to manage, protect and grow their finances.”

Why and how

So let’s start at the very beginning of the beginning: why and how do people end up with offshore bank accounts? Most commonly, people leaving their home countries are (effectively) transferred to offshore banks by the banks’ parent companies, which recognise the practical and fiscal advantages for expatriates basing their assets offshore.

“Typically, we tend to get a lot of business referrals from our parent, which has 21 million to 22 million customers in the United Kingdom,” says Steve Jones, marketing and product manager at Bank of Scotland International. “A proportion of those will move away to retire abroad, or leave on assignment for six, eight or 12 months of the year.”

At the moment – and this may well change in the future – the majority of offshore banks pay interest tax-free to their clients. This is unlike the UK and unlike many domestic banks, which levy a tax on savings on behalf of their governments.

If you decide to set up an offshore account then you need to establish, to your own complete certainty and satisfaction, your tax situation and status. An article for expats from hundreds of countries, living in hundreds of countries cannot do this for you, but we can offer some practical pointers for anyone.

First, many offshore banks have guides written for customers by large accountancy practices. These guides explain all the basics of leaving one’s home country. For example, Bank of Scotland International offers a report written by KPMG for British expatriates. Wherever you come from, wherever you’re going, this sort of thing
should be available to you.

Many banks will also have a referrals service – either formal or informal – pointing customers to international tax specialists. Anglo Irish Bank on the Isle of Man has purchased the Isle of Man trust operation of Ernst & Young, and wealthier Anglo Irish Bank customers should be able to avail themselves of the company’s expertise.

But using experts can be expensive. If you are unsure about your tax position, then try to obtain the appropriate information from the appropriate tax authorities. For the United Kingdom, the Inland Revenue has an entire section of its website devoted to tax issues for non-residents (www.inlandrevenue.gov.uk/menus/non-residents.htm).

Malcolm Corrigan says tax authorities should be told before changing country, not after people have moved away already. “Talk to the [Inland] Revenue well before
you go away. Don’t leave it to the last minute, and don’t wait until you’ve arrived in your foreign country. Once you’ve dealt with the Inland Revenue, you need to take advice in the country to which you are going – talk to a local accountant or an IFA. Even an IFA based in the UK should be able to help you to a degree.”

Of course, this is only part of the equation. Some other countries’ tax authorities may have information for incoming foreigners or ‘inpats’. Unfortunately, many countries’ tax authorities will not be so helpful, and it may be necessary to pay for an overview of your chosen country’s tax situation using a reputable firm of specialists.

A bank may be able to source such an expert. Alternatively, if you are going to be a non-resident because you are leaving your home country on assignment, there is every chance that your employer will either have the knowledge – or access to the knowledge – to help you sort out your tax situation.

However, once you’ve jumped through these hoops, the gains can be considerable. Trasler, of HSBC International, says: “There are the huge tax advantages and opportunities that come from being able to manage your finances outside your home territory.”

As you’ll see from the table on page 30, offshore accounts are typically paying up to 0.75 per cent extra. Not much, you may think, but it amounts to a tidy sum over the years, and can save you administrative hassle as we have tried to explain.

Does tax matter?

Do you need to bother with such trifling ‘details’ like tax? Absolutely, utterly, completely, yes. Isn’t the whole point of moving offshore that one simply doesn’t declare one’s offshore assets? Absolutely not.
This is a very dangerous approach that is likely to end costing money and heartache in the future, not just for you, but potentially for your heirs who may have to ‘come clean’ about undeclared assets when your estate is transferred.

Furthermore, there are many information-exchange programmes in place (or planned) between offshore and domestic tax collectors, and you should structure your assets in such a way that you can present them to any investigating tax authority without fear of having acted illegally.

That said, tax is only one (albeit attractive) reason for using offshore banks. The fact is that offshore banks should be able to provide you with specialist staff who speak your own language.

Joanna Lawrence, marketing manager at Alliance & Leicester International, says: “Offshore banks such as ALIL can provide a concentration of specialist knowledge. For example, we have considerable expertise in making international payments and expediting foreign-currency exchange – we can also send funds in any currency, anywhere in the world.”

Of course, you may wonder about placing your assets into a domestic bank in your new country. That may be a fair point and will be the practical solution for many people.
But some expatriates could face a language barrier that is compounded when they need to do something complex.

Another common drawback for expatriates is that domestic banks may well not offer multi-currency services, which can be a nuisance for anyone who wishes to keep their savings in one or more currency and exchange them for particular transactions.

As Malcolm Corrigan of Abbey National Offshore notes, many expatriated customers have bank accounts and debit card facilities in more than one currency.“With our gold tracker accounts, customers who live in Spain often have them in two currencies. For example, they might want one for their big long-term liabilities and another for smaller liabilities such as utility bills and so on.”

There can also, explains Joanna Lawrence of ALIL, be an issue of charging. “Many foreign banks charge to make both withdrawals and deposits – this is very common in Spain, for example, and it can considerably increase the cost of running an account.”

That said, offshore banks do make charges for specific services that they have to pay for such as electronic transfers. In the end, though, expats are split down the middle. Half of them will use offshore banking services exclusively, while an equally large number use offshore accounts for their main money management, and transfer sums over
for day-to-day expenses.

Mark Gaywood, of Anglo Irish Bank, says his bank’s customers tend not to use local banks, whereas customers of many offshore banks – ALIL, Bank of Scotland, Abbey National Offshore – will tend to transfer assets across to a domestic bank for day-to-day use.

Leave it at home

Another common question we are asked here at Investment International is why people leaving a country shouldn’t simply leave their assets at home and draw upon them
as required.

Well, as Lawrence of ALIL has explained, offshore banks are more expert when it comes to fulfilling specific needs involving international transactions such as asset transfers. But there is more to it than that. Because offshore banks pay interest gross, it should be much more straightforward for you to arrange your tax affairs.

For example, you might be able to reclaim taxes if you are paid income into a UK account. But it probably makes more sense to reduce the amounts you have in your UK account by placing the money offshore, and subsequently only having to declare income and pay the taxes domestically once – and not having to reclaim.

In short, offshore banking should be a staple diet of many expatriate and international investors’ lives, not something to be looked upon as peripheral or specialist. Wayne Riches, client relationship manager at Britannia International, says: “The perception with offshore banking is that it is elitist. People feel they need volumes of money, but they can open an account with us for £500 upwards.”

“The fact is that most of the people who benefit from offshore banking have simply moved abroad permanently, have retired abroad, or they’ve moved with a high-profile job.”

And all finance centres – big and small – are being affected. Most have promised to start willingly and actively shopping tax dodgers from between 2004 and 2010 (so long as there is a ‘level playing field’ which is virtually impossible to achieve).

There are a tiny handful of jurisdictions that are resisting some of these initiatives because they believe they are wrong and too expensive to implement. One such is The Republic of Vanuatu which is fast growing as an international offshore centre, with the financial and banking sector burgeoning amidst the totally tropical environment.

Vanuatu is situated 1,750km north-east of Australia and has been an independent island for 23 years after 74 years of Franco-Anglo rule. The country is made up of 83 islands and although there are 100 languages among the indigenous Ni-Vanuatu people, the main languages are English and French. The legal system is based on English common and civil law.

It has been cautious in its development to ensure that the economy is not rushed, says the Vanuatu Investment Promotion Authority. The country is increasingly aware of what investment and tourism can bring to the island after years of reliance on still-strong fishing and agricultural sectors.

Although 11 hours ahead of GMT, the country boasts good telecommunication services and air links and is attracting investments from all over the world, with a particular interest from Asian countries. The country is increasingly being used by Australians as well, and giant banking groups Westpac and ANZ have been stationed on the volcanic islands for a good while. The National Bank of Vanuatu also offers services and then there are a wealth of offshore banks alongside these main three.

Accounts can be opened, but interest rates are piffling. ANZ offers rates of 0.375 per cent for investments above $50,000 and 1 per cent for deposits of £50,000.

Privacy has been a key issue addressed by the island and investors are protected under the Foreign Investment Act, meaning that only – and strictly only – in criminal cases will the island divulge information about investors.

The government is keen to attract more investment and changes in its personnel will not affect the overall outlook of protecting confidentiality. The VIPA has stated that it will fully comply with OECD recommendations where it thinks it will benefit the country. It feels that the OECD leans favourably on member jurisdictions and reports have sometimes given a misleading representation of the island.

Vanuatu is a member of the International Trade and Investment Organisation, which has spoken out against the OECD for offering preferential treatment to certain offshore centres that have not favoured smaller states. The VIPA believes that as a small nation it is more vulnerable to international reports that may give a negative perception, yet it continues to offer a sound investment base and bring in more international business.

If you are based in this time zone, if you want a private internet bank account, or you simply want to deal with an Australian banking group, then Vanuatu is worth a closer look.

*Four days after this article was posted, the OECD announced that it had removed Vanuatu from its list of uncooperative tax havens. In a statement the organization said: “The OECD welcomes the commitment that Vanuatu has made to improve the transparency of its tax and regulatory systems and establish effective exchange of information for tax matters with OECD countries by 31 December 2005.”

Vanuatu will become the thirty second non-OECD country to commit to its principles and the first to be withdrawn from the list of countries deemed uncooperative.

The government of the Republic of Vanuatu has said it is important for the country to move into line with the OECD to pursue the long term development of its economy, whilst retaining its economic and fiscal autonomy.

The Pacific island nation has committed to a number of measures that will be gradually phased in. From the first tax year after 31 December 2003, the country will be ready to negotiate effective exchange of information agreements for criminals, and for civil tax matters procedures will be in place after the end of 2005.

Vanuatu has also assured the OECD that the appropriate authorities will now have access to information on the ownership of companies, legal entities and trusts established on the island. The government will also oblige all companies established there to keep accounts in line with outlined standards.

The last main amendment states that no new taxation regime or practice will be introduced, or an existing one modified, unless it complies with the principles of transparency and effective exchange of information.

In return, Vanuatu expects that it is withdrawn from the list of uncooperative countries and does not become subject to any framework of defensive measures by OECD member states. The country will now be invited to meetings of the OECD Global Forum and receive assistance in amending or implementing new laws and regulations.