Offshore banks are banks that are situated outside the country where the depositor doesn’t reside. Offshore banks are situated in places where the tax is usually low (tax haven) or any place that offers legal as well as financial advantages. The term was earlier applied to banks that were located on landlocked nations. However, these days, it is also referred to banks irrespective of the location. The Swiss bank is an example of offshore bank.
Offshore banking is usually associated with organized crime as well as underground economy. Activities like tax evasion and money laundering are associated with offshore banking. However, legally there is no difference in the taxes imposed on assets of local banks and the offshore banks.
What are the advantages of offshore banking?
- Offshore banking will provide opportunity to politically as well as economically access jurisdictions that are stable.
- There is an advantage for individuals who are not required to shell out tax on worldwide income. In such cases, the offshore banks usually pay the interest without deducting taxes.
- There are few offshore banks that operate with low cost base. Due to this it can provide a higher rate of interest as compared to the legal interest rate offered by the banks in home countries. Two other factors that allow it to offer higher interest rates are lack of government interference as well as lower overheads.
What are the disadvantages of offshore banking?
Just as there are advantages of offshore banking, there are few disadvantages too. They are as follows –
- Since offshore banking is associated with organized crime and money laundering, it suggests that it funds several kinds of illegal and anti social activities.
- It serves as a tax haven for people who want to evade taxes.
- The cost of maintaining offshore accounts are usually very high. So, it caters to the higher income group only.