IMD International

Offshore Registrations on the Rise

IMD Professor Arturo Bris explains why

November 26, 2012

While it is difficult to have an accurate estimate regarding the prevalence of offshore banking registration in recent years, there is ample evidence that the number of firms incorporating in certain markets such as the UK, Singapore, the UAE, and Brazil is on the rise.  

In the past offshore registrations served as a means for companies to save time and avoid the extra burden of bureaucratic formalities in their own jurisdictions. The 2008 study written by Marco Becht from the Université Libre de Bruxelles and his coauthors[1] showed that within Europe, companies chose to incorporate in locations with minimum capital requirements and where delays in incorporation were minimal. Interestingly, they argued that as a result of companies' legal arbitrage E.U. member states were somehow forced to adapt their regulations to re-attract offshore firms.  

In my opinion, the return of the offshore company in the post-Lehman Brothers period is mostly due to tax considerations. As the cost of the crisis is imposed more and more on the private sector in general, and on the corporate sector in particular, companies are now looking for the best tax deal. Terms such as Double Irish Arrangement or Dutch Sandwich have become common among companies that use offshore registrations to avoid undesirable corporate taxes. These mechanisms use legal loopholes and different tax regimes that allow the firm to report losses in a given jurisdiction and profits in a more favorable tax regime—hopefully with an instrumental registration in some other tax haven. The New York Times ("How Apple Sidesteps Billions in Taxes," April 28, 2012) even described how Apple Inc. was massively avoiding California taxes through a convoluted scheme known as Double Irish With a Dutch Sandwich. That is, offshore registrations are becoming frequent even within countries.  

With this trend towards increasing offshore registrations, I see two forces at play. One is the likely temptation of governments to increase corporate taxes in the coming months. This has already started in France and Portugal for example. As the fiscal pressure mounts, tax authorities will be indirectly pushing businesses out of their countries and into offshore jurisdictions. The second force will be the new regulations being enforced in some countries to prevent offshore registrations—the most important being the Foreign Account Tax Compliance Act of FATCA in the U.S., which will require foreign financial institutions to report directly to the IRS information about financial accounts held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.  

Arturo Bris is Professor of Finance at IMD.

[1] Marco Becht, Colin Mayer, and Hannes F. Wagner, 2008, "Where do firms incorporate? Deregulation and the cost of entry", Journal of Corporate Finance, Volume 14, Issue 3, Pages 241–256  

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