What is an IFC?

International financial centres (IFCs), otherwise known as offshore financial centres, are countries or territories with specialised legal institutions and regulatory frameworks that facilitate the flow and investment of international capital.

What are the defining characteristics of IFCs?

That definition of IFCs is vague, but they usually demonstrate the following characteristics:

  • High-quality, specialised legal institutions:  IFCs have high-quality, specialised legal institutions that allow investors to trust the fairness of arbitration and the protection of property rights.  Many IFCs, including the Crown Dependencies and Overseas Territories, have British-based legal systems.
  • High levels of regulatory compliance:  IFCs trade on their legal institutions and respect for the rule of law.  As a result, stringent compliance with international regulatory standards is a hallmark of IFCs, as shown by OECD and FATF assessments.
  • Tax neutrality:  Tax-neutral jurisdictions allow for pooling of capital from international investors for investment often in emerging markets.  Income and gains will be taxed in the investor country of residence and also in the source country of the investment, but is not subject it to a third level of taxation.

What countries are IFCs?

Which countries fall into the definition depends on one’s methodology.

The IMF conducted a statistical study that identified the Bahamas, Bahrain, Bermuda, the Cayman Islands, Cyprus, Hong Kong, Guernsey, Ireland, the Isle of Man, Jersey, Luxembourg, Malta, Singapore, Switzerland, and the United Kingdom as IFCs.

Most IFCs are small, although countries like the United Kingdom and the Netherlands prove they aren’t necessarily.  However, small countries have an inherent incentive to be open, tax-neutral, and focused on trade in services, while islands are more likely to be globalised and use both English common law and the English language.  As a result, many such jurisdictions are British Overseas Territories or Crown Dependencies: a situation that offers benefits to the IFC and the United Kingdom.

definition:

 

“A country or jurisdiction that provides financial services to non-residents on a scale that is incommensurate with the size and the financing of its domestic economy.” [2]

High quality legal institutions

Most IFC legal systems are based on English common law. English law is widely-regarded as one of the best forms of law to protect property rights and reach a fair conclusion between competing parties.

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Tax Neutrality

IFC Forum believes that income should be taxed where it’s earned – and those taxes should be paid in full. IFC Forum unreservedly condemns the use of foreign jurisdictions to evade domestic taxation, and applauds efforts to make tax records available to tax authorities in other countries through Tax Information Exchange Agreements and now the OECD Common Reporting Standards.

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High levels of regulatory compliance

IFCs succeed because people trust their legal institutions and regulatory frameworks. And that can only happen if investors from around the world recognise that processes in IFCs adhere to the highest standards in the world.

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Sophisticated legal and professional services

To cater for their highly-respected institutions and large international client bases, international financial centres are home to some of the most sophisticated legal, financial, and accounting professionals in the world.

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