Stages of evolution of offshore activities: retrospective and current state

Stankovskii Maksim Vladimirovich ORCID: 0000-0003-0787-6147 Graduate student; Faculty of International Economic Relations; Financial University under the Government of the Russian Federation 5 Lesnaya str., Moscow, 127349, Russia maksj37@gmail.com Other publications by this author

Introduction

The use of jurisdictions with preferential taxation attracts attention from both investors and regulators. Despite the decrease in the level of public discussion, the problem remains relevant for the national economy in the context of international competitiveness and internal market organization. Offshore zones provide alternative capital allocation and business management schemes with reduced tax rates, which distorts the conditions of fair competition between states. The presence of developed offshore sectors may indicate the inefficiency of the national tax system, leading to capital outflow and a decrease in investment attractiveness. The above factors determine the scientific significance of the presented article devoted to the analysis of this issue.

The object of the research is international economic relations in the global financial system. The subject of the study is the functioning of offshore jurisdictions.

The research uses a set of methods, including general scientific methods of analysis, synthesis, deduction, induction and generalization, as well as private scientific methods such as tabular and graphical representation of data and historical analysis.

Offshore activity originates in ancient times. This fact is due to the fact that in different periods of world history there were territories that carried out activities similar to the functioning of modern offshore centers. Certain prerequisites for offshore activities date back to ancient Greece, when Athens introduced a two percent tax on imports and exports of goods. As a result, merchants and merchants traveled around the city to avoid paying taxes. Thus, settlements near Athens became "offshore territories" for duty-free trade ^[1].

Similar situations can be traced in other countries in different historical periods. For example, in India in the 12th-13th centuries, landowners transferred tax-exempt plots of land to monasteries. Thus, landowners, while continuing to use the land, received fiscal advantages.

The prerequisites for the emergence of large offshore centers in Europe were formed in the 11th century, in connection with the establishment of fiscal autonomy of the Channel Islands (Jersey, Guernsey and Maine) from the United Kingdom. It should be noted that Great Britain, being the largest colonial empire, played a key role in the formation of offshore territories. Traders and merchants around the world sought to evade British taxes on imported goods, which gave an additional impetus to the development of offshore activities ^[2].

Based on the analysis of historical retrospect, it can be argued that certain elements of offshore activities originated and successfully functioned for many centuries. Nevertheless, the formation of centralized offshore companies in the modern sense begins in the late 19th and early 20th centuries. It should be emphasized that the scientific literature presents various approaches to the periodization of offshore activities. Let's turn to the information provided in table 1.

Table 1. Approaches to the periodization of offshore activities

Source: compiled by the author himself.

Based on the information provided, it can be argued that economics has not developed a unified position on the periodization of offshore activities. In this regard, this scientific paper proposes to systematize approaches to the evolution of offshore activities in order to form an objective position and highlight the key features of the phenomenon under consideration. Let us proceed to a detailed consideration of the author's approach, formulated in accordance with the historical method of scientific research.

Periodization of offshore activity development

The emergence of organized offshore activities (19th century - late 1940s).

The first stage was the emergence of organized offshore activities (19th century–late 1940s). As noted above, certain elements of offshore activities have been functioning for many centuries. However, they were largely chaotic and spontaneous. In other words, offshore activity has not been singled out as an independent phenomenon within the global economy.

This stage in the development of offshore activities is causally related to the formation of centralized tax systems within globally dominant economies. Thus, States began to pay more and more attention to compliance with the principles of universal taxation. This fact has prompted business entities to search for mechanisms to optimize and minimize the fiscal effect of taxation ^[6].

One of the first offshore centers of that time were the American states of Delaware and New Jersey, which for the first time implemented in practice at the end of the 19th century the principle of simplified establishment of organizations, bypassing bureaucratic procedures. At the same time, the phenomenon of "virtual residency" was emerging in the UK, characterized by a mismatch between the place of registration of an organization and the place of actual activity.

After the end of the Great Depression in Switzerland, another characteristic feature of offshore activities is privacy. In 1934, the government significantly changed banking legislation and classified banking information on all accounts in national banks. At the same time, information about open bank accounts was not provided either to government agencies of foreign countries or to the Government of Switzerland itself.

Summing up the results of the first stage of offshore activity development, it should be noted that this stage is characterized by the formation of the main characteristics of offshore activity: a simplified registration procedure, a high level of confidentiality and the availability of virtual residences. In addition, the emergence of offshore centers is directly due to the formation of centralized tax systems and stricter legislation in the world's leading economies.

Transformation and spread of offshore zones (early 1950s - 1990s).

The second stage is the transformation and spread of offshore zones (early 1950s-1990s). The initial phase of this period was marked by the widespread practical application of Keynesian economic principles advocating government intervention in the economy. At the same time, the strengthening of national fiscal regulation stimulated the spread of offshore financial centers, which led to the integration of previously disparate offshore activities into the globalized offshore services market.

The disproportionate concentration of the early development of offshore financial centers in the former British colonies is explained by the preferential tax policy pursued by the United Kingdom in the late colonial period. Subsequently, these measures became the basis for the development of offshore activities in postcolonial territories. Examples include Bermuda and the Cayman Islands ^[7].

The confrontation between the USSR and the USA during the Cold War had a positive impact on the development and strengthening of offshore activities. During the period of political and economic instability, business entities were interested in preserving financial resources. In this regard, the high degree of confidentiality that was provided in offshore jurisdictions came to the fore.

In the 1970s, offshore centers were actively expanding in the Pacific region. Foreign capital is becoming the main source of development for island States without innovative economic sectors. In fact, countries such as Nauru, Vanuatu, the Cook Islands and Samoa compete for foreign investment. The main methods of attracting foreign capital are: zero or minimal corporate and personal taxation, confidentiality of information about the final beneficiaries, virtual residency and the ability to choose a "flag of convenience" for aircraft and ships ^[8].

Thus, to one degree or another, offshore activities have spread across all continents. By the early 1990s, according to various estimates, there were about a hundred offshore territories. In this context, data from the Bank for International Settlements is indicative, according to which offshore companies were recipients of a third of all foreign investments at that time ^[9].

Considering the above, offshore activities become a separate subsystem of the global economy in the second stage.

Understanding the activities of offshore zones (early 1990s - late 2000s).

The third stage is an understanding of the activities of offshore zones (early 1990s ‑ late 2000s). At this stage, the international community paid due attention and realized the importance of offshore centers in shaping the global economic system. In addition, for the first time, a number of negative consequences caused by offshore activities were noted. For example, the uneven development of both individual states and regions within one state.

For a long period of time, developed countries have not only demonstrated passive tolerance for offshore financial activity, but also actively used its advantages. Moreover, the fundamental principles governing offshore jurisdictions were clearly formulated by the United States and the United Kingdom, ostensibly to facilitate their use by large corporations in developed economies. This fact determines the formation of offshore jurisdictions in the immediate vicinity of the main geopolitical centers: Great Britain, the United States, and Europe ^[10].

The proliferation of offshore financial centers in Southeast Asia and the Persian Gulf clearly correlates with the economic and geopolitical imperatives of rapidly developing countries in these regions.

The significant fiscal deficit in national treasuries in the mid-1990s, directly caused by the extensive exploitation of offshore financial centers, accelerated a critical reassessment of offshore activities and initiated active multilateral efforts to combat tax evasion and capital flight.

The 1988 Organization for Economic Cooperation and Development (OECD) Convention on Mutual Administrative Assistance in Tax Matters represents a major development within this analytical framework. In particular, the subject of this Convention was the exchange of information, including simultaneous tax control, collection of tax debts and delivery of documents to taxpayers ^[11].

The global financial crisis of 2008-2009 was a turning point, culminating in widespread condemnation of offshore financial activities. The role of offshore financial centers in facilitating illegal capital outflows, tax evasion, and opaque financial transactions has been widely identified as a major factor in the international scale of the crisis. The participating States of the London G20 summit in April 2009 outlined the vector of work of the international community in terms of mutual struggle against offshore activities.

Thus, the third stage in the development of offshore activities is characterized by the global community's awareness of the scale and consequences of the uncontrolled functioning of offshore jurisdictions. Illegal capital outflow, tax evasion, and deliberate concealment of transaction information are recognized as key causes of the destabilization of the global financial system.

Formation and development of a system of tax and non-tax regulation of offshore activities (2010s-present).

The fourth stage is the formation and development of a system of tax and non–tax regulation of offshore activities at both the supranational and state levels (2010s-present).

Tax regulation involves ensuring the deoffshorization of the economy by changing the taxation mechanisms of business entities and using elements of tax administration. Tax regulation is designed to solve a number of problematic aspects in terms of combating unfair tax competition, dilution of the tax base, and the withdrawal of taxable income to offshore jurisdictions ^[12].

In turn, non-tax regulation involves managing offshore activities by changing the general business environment. An example is the establishment of requirements for disclosure of the final beneficiaries and the content of transactions, the use of currency control mechanisms, and the creation of an investment climate. Non-tax regulation is designed to solve problems related to the legalization of proceeds from crime, capital flight abroad, and financing of criminal and socially dangerous elements ^[13].

It should be noted that tax regulation, being a more narrowly focused and private sphere, makes a significant contribution to achieving the goals set in terms of deoffshorization of the economy. In addition, government measures to regulate offshore activities often cannot be clearly delineated in accordance with these areas due to the complex nature of their actions.

In terms of tax regulation of offshore activities, in 2013, the OECD and the G20 joined forces to create a system to counteract the erosion of the tax base and profit withdrawal. The result of the work done was the development of the "BEPS plan". Increased interaction between tax authorities of different states has led to the creation of a new institution within the framework of international tax regulation: the Global Forum on Transparency and Information Exchange for Tax Purposes ^[14].

Despite the measures taken in the field of tax regulation, the harmful influence of offshore centers remains significant. The OECD estimates that the annual revenue losses of member States related to the activities of offshore financial centers range from 120 to 240 billion dollars. In relative terms, this amount ranges from 4 to 10 percent of the total State income from corporate income tax.

According to the author, this fact is due to the development of the digitalization of economic processes, which in turn transforms the forms of doing business. The existing regulatory mechanisms are insufficient for the speedy and complete elimination of tax risks arising from the changing forms and methods of offshore activities in the digital economy ^[15].

Nevertheless, the OECD continues to work to combat unfair tax competition. At the moment, the focus has largely shifted to taxation of international corporations as part of the integrated digitalization of economic processes. As a result, a new package of measures was developed, called the "BEPS 2.0 plan" and consisting of two areas — Pillar 1 and Pillar 2.

The current stage of regulation of offshore activities is characterized not only by tax regulatory methods. The system of non-tax regulation also plays an important role in ensuring control over the activities of offshore jurisdictions. For example, many offshore jurisdictions, under pressure from the international community, have implemented a requirement for foreign organizations to have a local office and staff. An example is the Isle of Man, where this condition is mandatory for doing business in the jurisdiction. This measure eliminates the possibility of fictitious registration of companies in offshore jurisdictions, which helps to ensure transparency of business activities. In addition, offshore jurisdictions reduce their privacy by maintaining public or partially public registers of the ultimate beneficiaries of companies. For example, Luxembourg has been maintaining this registry since 2019, Cyprus – since 2021.

It should be noted that the development of a system of tax and non-tax regulation in the framework of the current stage is directly related to the increasing damage caused to the global economy in connection with the activities of offshore jurisdictions. The use of offshore jurisdictions by private businesses to minimize tax payments has become the basis for a number of problems in the economies of their tax residence. Among the main problematic aspects, it is necessary to highlight the lack of tax revenues to the state budget, the outflow of capital to offshore centers, the secrecy of the final beneficiaries, the concealment and dilution of income received. Quantification of the observed phenomena is crucial for establishing an objective, empirically based assessment of the impact of offshore activities on the global financial system.

It should be noted that the assessment of the economic damage caused by the activities of offshore centers is complicated by the high confidentiality of offshore jurisdictions and the secrecy of a significant part of the operations carried out. This circumstance determines an approximate and incomplete analysis of the macroeconomic consequences of offshore activities. According to B. A. Kheifets, any estimates of economic damage due to offshoring are rather approximate, since they require taking into account unofficial data characterizing the shadow economy ^[16].

Most scientific papers devoted to offshore topics focus on the problem of capital outflow to offshore jurisdictions. However, the main problem caused by offshore activities is not so much the movement of financial resources between jurisdictions, as the loss of state budget revenues due to this movement of capital. In this case, income should be understood as the entire range of tax payments that an individual state can claim.

The lost revenues of the state budgets of the world's economies in the form of taxes largely reflect the negative macroeconomic consequences of the functioning of offshore jurisdictions. In this regard, within the framework of this scientific work, it is necessary to focus on the analysis of the results of tax abuses carried out by offshore jurisdictions and leading to a reduction in tax revenues.

According to the Tax Justice Network, the annual global loss of tax revenue due to abuses related to offshore financial centers amounts to $145 billion. Despite some progress in the exchange of financial information (in particular, automatic information exchange), the volume of undiscovered offshore assets remains significant, approximately corresponding to 9% of global GDP.

The analysis of tax losses due to offshore tax abuses by region of the world is shown in Figure 1. It should be noted that the greatest damage occurs in Europe and North America – 53.2% and 29.4%, respectively.

Figure 1. Annual tax losses due to tax evasion in offshore jurisdictions by region of the world, %

Source: compiled by the author independently based on data from the Tax Justice Network.

The analysis in the context of countries causing tax damage is of the greatest practical interest. Detailed information on tax losses from offshore tax abuses by region of the world, indicating the main countries responsible for these losses, is presented in table 2.

Table 2. Annual tax losses incurred by other countries due to the activities of offshore jurisdictions

Nota Bene

• About
• Bank details
• Partners
• Contact Information
• Private policy

 

For authors

• Agreements
• Author's area

 

Our Services

• Translation of articles
• Publishing Services
• Library

 

Other

• How to write an article?
• Journals in the list of the
  Higher Attestation Commission
• Mobile app

 

Our sites

• Aurora group s.r.o.

© 1998 – 2025 Nota Bene. Publishing Technologies. NB-Media Ltd.