The Definition of International Banking
International banking is the process in which financial institutions allow foreign clients---both companies and individuals---to use their services. Perhaps the most talked-about international banks are located in Switzerland. However, many other countries have fully developed international banking infrastructures. Many individuals and companies participate in international banking to minimize (or evade) their tax liability. This strategy, however, has certain disadvantages. In addition, several international organizations have made recent efforts to curb the use of international banks as tax havens.
Other People Are Reading
-
International Banking Hubs
-
These countries generally have similar characteristics. They are usually smaller wealthy countries. Often times, they are small island countries, which is where the term "offshore" banking comes from. These countries generally offer low---and in some cases zero---taxes to international clients. They usually keep their clients' information secret from tax authorities from other countries. They often have little transparency and have no residency requirements for their clients.
-
Specific Countries
-
According to the U.S. National Bureau of Economic Research, about 15 percent of the world's countries operate as tax havens. These countries include, among others, Aruba, Belize, Bermuda, Cayman Islands, Cyprus, Hong Kong (China), Isle of Man, Macau (China), Panama, Samoa, San Marino, Switzerland and the U.S. Virgin Islands. For a more exhaustive list of countries generally designated as "offshore centers," please consult Resources.
Advantages
-
In general, mostly wealthy individuals and companies use international banks. While there are many benefits to international banking---particularly taxation---the process can be quite expensive. Some advantages of international banking include tax evasion, foreign direct investment, protection from lawsuits, the fostering of international trade and protection against fluctuating domestic interest rates. International banking also makes sense for companies that operate internationally.
Disadvantages
-
Despite the benefits of international banking, several disadvantages exist. First, if the country in which one banks becomes economically or politically unstable, he could absorb dire financial risks---like nationalization of his assets. Second, while offshore banking certainly falls into a gray area of U.S. law, if one is determined to be illegally sheltering money, the Internal Revenue Service imposes stiff penalties for such abuse. Currency exchange rates can fluctuate, thus potentially devaluing one's assets.
Efforts to Curb Tax Evasion
-
G20 world leaders, at their April 2, 2009, summit, created a tax haven blacklist of countries. They created a four-tier system to rate countries and to what extent they comply with international tax standards. The Organization for Economic Cooperation and Development (OECD) club of rich nations issued a report in 2000 listing a number of countries as tax havens. The European Union recently pushed several international banking centers to sign the European Union Withholding Tax and Exchange Information Directive, which forces those banks to deduct 15 percent tax or fully disclose information on its clients to their home countries.
References
Resources
- Photo Credit "The Skyline." is Copyrighted by Flickr user: jeremyfoo (Jeremy Foo) under the Creative Commons Attribution license.
