Tag Archives: offshore discretionary management

Offshore financial centers and how they thrive on near-zero taxation

Image source: LOM Financial

 

Most countries generate revenue via different sources and national taxation is one of them. Two of the biggest national income providers come from the citizen’s personal income tax and the domiciled companies’ corporate taxes, but what happens to jurisdictions who decided not to impose them?

Offshore financial centers (OFCs) are often asked the same question: how can these geographically small nations afford not to impose corporate and personal income taxes? Since it’s impossible to support the economic growth of these countries, how will they make up for the loss from the absence of these revenue-generating systems?

The truth is, OFCs enjoy several benefits than other nations but it doesn’t mean that they’re completely tax-free. The taxation system in the Cayman Islands, for instance, supplement the loss of corporate taxes by imposing several measures like increasing tax requirements for imported goods, resulting in a higher cost of living. This means that while employees enjoy a completely zero income tax environment, they have to pay higher for their daily, living expenses.

One of the most interesting facts about the Cayman Islands is the number of domiciled companies in this jurisdiction: approximately over a hundred thousand – that’s almost twice their territory’s total population. This impressive statistics also means one thing: while there is no corporate tax collected from over 100,000 companies based in this offshore investment center, the government still earns by imposing registration fees as not just a one-time payment since an annual renewal fee for continued operations is also required.

Indeed, tax revenues from a growing business environment as well as the spending power of a particular population make up a large percentage of the national income, but there is also one sector that contributes to its total earnings: the tourism industry. From this highly active sector, tropical OFC destinations earn from collecting departure taxes as soon as tourists exit the country.