Offshore banking can provide tax advantages, but they may not be legal.
Most consumers complete their financial transactions with domestic banks, in their country of residence. Some consumers use banks located in other countries, usually countries with strict banking secrecy laws and often with tax advantages. This is called offshore banking. Offshore banking is usually associated with either the very wealthy or criminals engaged in money laundering.
Tax Evasion
While offshore banking is legal, tax evasion is not. The IRS requires citizens to declare all taxable income, whether it was earned in the U.S. or in another country. Failure to do so is a federal criminal offense. Many offshore banking institutions offer tax advantages, with few or no reporting requirements imposed by the host country. The Internal Revenue Service (IRS) is implementing increasingly stricter regulations to close loopholes that allow you to reap higher yields on your investments without paying taxes on them. The IRS and the Department of Justice have also worked closely with the Swiss government to receive "an unprecedented amount of information on United States holders of accounts" at the Swiss bank UBS and other financial institutions. The IRS hopes to engage in negotiations with other countries to work out information gathering treaties.
Avoiding Instability
Developing countries are often associated with political and economic instability. This does not engender consumer confidence in their domestic banking systems. Therefore, investors and businesses seek to protect their money by using offshore accounts in countries that are more politically and economically stable.
Opening an Account
The website offshorebankingtoday.com states that it is relatively easy to open an offshore account. While all banks differ to some degree in what they require, generally you must complete an application form and provide a signature sample, a copy of a valid passport, a reference from a domestic bank and confirmation of a residential address.
Privacy
Offshore banking is particularly coveted for its privacy. These institutions thrive because of the high level of confidentiality they provide their customers. To continue to instill such confidence in existing customers and garner new ones, maintaining banking secrecy and enforcing it is of paramount importance to their business operations. According to offshorebankingtoday.com, the countries with the strictest bank confidentiality laws are Andorra, Lichtenstein, Panama and Switzerland.
Disadvantages
Offshore banking is often a more viable option for those with a high income and significant assets, since there are high costs to establishing and maintaining such accounts. Offshore banking has one definite disadvantage for regular taxpayers in the U.S.: When wealthier Americans take advantage of tax loopholes and offshore banking, more of the tax burden falls disproportionately to low and middle income earners. Additionally, offshore institutions, being remote, are less physically accessible and it is more difficult to find information out about them, which can be disconcerting to some investors.
