Offshore Bank Account
Offshore Bank Accounts
An offshore bank account is simply an account with a bank that is located in a country in which the depositor is not a resident. Further, an offshore bank is usually not allowed to open accounts for residents or citizens of their home country as a condition of their charter.
It is usually important from the account holder’s perspective that they are non-resident for tax purposes. For this reason, offshore bank accounts are typically located jurisdictions that place a low tax burden on either wealth or income. These are usually referred to as a ‘tax haven’. While holding assets in a tax haven can be appealing to a foreign depositor or corporation, accounts are usually held in jurisdictions with less burdensome regulations, and banking privacy.
While many offshore financial centres have been built on the promise of financial privacy, true bank secrecy has been eroded quite significantly in recent years. Under threat of international sanction, and court order, many of the previously impenetrable financial havens have lowered their veil of secrecy in recent years and given foreign governments access to account holder information. The rationale for breaking bank secrecy is usually organized crime, drugs, or terrorism, however, it is becoming more commonplace for sovereigns to admit that they are really after tax evasion, tax evaders, and tax avoiders, as was the case with the recent high profile court drama involving the US and the largest bank in Switzerland UBS where the US accused the Swiss bank of illegally shielding the assets of private high net worth individuals – American citizens – from IRS tax collections.
The truth is, offshore banking and private banking clients often have other reasons for wanting to keep their financial affairs private — especially during periods of financial or political instability where holding wealth in your home country and being well known as a HNWI can make you a target of kidnappers, tax collectors, unscrupulous governments, nasty lawyers, fraud, and general criminal behavior. That said, tax authorities usually paint offshore accounts as only necessary for tax evasion, money laundering, criminal enterprises or more recently terrorism.
In particular, US citizens are required to declare any foreign bank account with over $10,000 in assets; including private accounts, numbered bank accounts, and accounts held in jurisdictions with strong bank secrecy laws. In addition, they are required to declare any interest earned on their tax returns. According to wikipedia, the United States’ tax collection authorities, Internal Revenue Service, estimate that last year they missed $40B in tax receipts due to the existence of private bank accounts and private financial centers.
In the past, most offshore banks didn’t report interest income to their clients’ tax authorities. However, many countries have bent on this policy in recent years, and the heavy hand of the IRS has made it next to impossible for a US citizen to open an account in the jurisdictions that would like to play by the rules but still honor their own banking secrecy laws.
