Offshore Bank Account
What does offshore bank account mean?
In its most simple sense it is an account located in a country in which the depositor is a non-resident.
More specifically however, the bank in which the account is held is frequently a financial institution whose specific charter allows them to only deal iwth non-residents, foreigners, non-citizens -- people who are neither resident nor citizens of the country in which the bank is chartered.
Since these banks don't typically operate under the regulation of the given banking jurisdiction's Central Bank, the licenses are typically more restricted in the operations they can perform, while often more easy to obtain than a full banking license.
However, being outside of the Central Bank's direct oversight also means that these financial institutions often offer more flexibility, and most importantly often offer a greater degree of financial privacy for their clients. And, this is one of the primary reasons individuals open an offshore bank account in a country or jurisdiction other than the one in which they reside.
Offshore bank accounts are usually domiciled in a tax haven. In other words, a jurisdiction with a low tax on the offshore bank account depositor. In addition, offshore accounts can offer less restrictive regulatory environment, and often times a higher degree of banking privacy. While offshore banking clients have many reasons for desiring financial privacy, this can be extremely important in times of instability -- whether it be political or financial --in their home countries.
Opening an offshore bank account also brings with it certain disadvantages.
First, tax authorities often portray offshore bank accounts as being correlated with tax evasion, money laundering, drug trafficking, or terrorism. US persons, when they declare taxes each year, are required to declare any offshore bank account , including numbered bank accounts.
The Internal Revenue Service (IRS), the US tax collection agency, estimate a $40B tax shortfall due to offshore financial centres, and the offshore bank accounts they host.
Some offshore banks have no reporting requirements and will not report income to their respective clients' tax authorities. In countries with strong bank secrecy laws they are not required to report. This has recently come under attack in many of the traditional tax havens and is becoming more and more rare over time, as Lichtenstein, Switzerland, and Austria are the latest to come under attack.
Recent terrorist attacks, including 9/11, gave any tax authorities the opportunity to create new laws to make financial privacy more difficult to achieve, even for legitimate individuals and organizations. With it, have come addition scrutiny on offshore bank accounts, offshore banks and offshore financial centres. Weaker banking locations were the most susceptible to political and economic pressures from the European Union (EU) and United States have dramatically weakened their own bank secrecy laws and have in effect ceased to be effective offshore financial centers.
