Offshore Financial Center - Bahamas - Case Study Example

Offshore Financial Center - Bahamas Abstract The use of offshore financial centers was popularized in the 1980s as global economic factors such as increases in the business taxes of some countries, especially in the Western cultures made it necessary for investors and multinational companies to look for alternative market centers where they could do their businesses at less capital demanding rates (Humphrey, 2001). Indeed, it is for this reason that Zoromé (2007) gave a definition to offshore financial centre as “a country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy.” From the definition, it will be realized that when a country serves as an offshore financial centre, it comes with a number of advantages for the host country and the non-resident offshore company. Particularly for the offshore company, it requires to perform several checks and researches into the preferred offshore financial center to ensure that investing in that market can guarantee fruitful financial returns (Zoromé, 2007). It is against this background that periodic environmental assessment analyses are performed for various offshore financial centres to test their financial viability for specific offshore companies and offshore countries. In the current paper, the spotlight is put on Bahamas as an offshore financial center to critically understudy the viability of that financial market as a preferred entity to use to raise capital Intel Corporation prior to doing an initial public offer. The profiling of Bahamas as a viable offshore financial center is done along six major parameters as outlined below. Secrecy and Views In the financial market, such as the offshore financial center, issues of secrecy and views are very important for the determination of financial transparency of a given center. It is for this reason that the need to study the secrecy and views that prevails on the Bahamian offshore market, such as financial secrecy is very important for making decision on the selection of the country as an entity for raising capital for an initial public offer. Nyangosi, Arora and Sing (2009) has explained that situations of financial secrecy exists when financial institutions refuse to disclose crucial financial information to the appropriate authorities for tax decision making and other criminal law enforcement policies. In effect, a higher scoring on financial secrecy index is a negative indication for satisfactory financial transparency. Meanwhile according to the Tax Justice Network (2011), the scoring for Bahamas in financial transparency is 83%, indicating an unacceptable level of secrecy and suppression of views. From the graph below, it will be noted that from a 15 financial secrecy indicator, Bahamas scored negative marks for most of the indicators. Source: Tax Justice Network (2011) For investors wanting to choose Bahamas as a preferred entity to use to raise capital for Intel Corporation prior to doing an IPO, the risk of not knowing the legitimate financial values and figures for most indicators that will be necessary for taking stock market decisions prevails (Breiman et al, 2009). Having stated the above however, it is important to stress the point that new policies and reforms have started emerging in Bahamas that make incumbent upon the country to have a free economy and exchange information as specified in Organization for Economic Co-Operation and Development (OECD) guidelines (Riyadh, Akter and Islam, 2009). Proximity to US Proximity has always been said to be an important factor in the determination of an offshore financial center destination for raising capital for Intel Corporation ahead of an initial public offer. This is because most offshore companies that operate in offshore financial centers do so by operating parent companies that govern and run the key organizational authorizations of the offshore companies (Hissam and Daniel, 1999). In effect, the offshore companies come in only as subsidiary companies. In such a situation the need to establish constant linkage and relationship with the parent company is always a crucial factor, especially in cases where manufacturing and transportation of logistics is involved. In the current situation where the focus is on raising capital for Intel Corporation, it is expected that some of the most important benefits that the offshore company will be seeking would include tax exemption and low cost of labor. Meanwhile once the actual initial public offer starts, the need to involve underwriters who would possibly be investment banking firms from parent location is eminent. In effect, proximity to the United States will become an added advantage. Interestingly, Bahamas lies only 50 miles away from the coast of Florida in the United States, guaranteeing excellent proximity for any United States parented company. Apart from the benefits discussed above, there is much guarantee that this proximity will ensure reduced credit spreads and interest rates once active business operations start in Bahamas away from the United States (Humphrey, 2001). Flow of capital The flow of capital and thus the availability of money in a given economy for the sake of doing business and starting investments remains an important indicator for determining the viability of an offshore financial center in any profiling analysis (Mavri and Ioannou, 2006). This is because in doing business in an offshore financial center, much of the attention of corporate capital realization is directed at the offshore market rather than an external source (Breiman et al, 2009). The wisdom in this is that once the focus becomes an external capital pool, there will be extra demand on the acquired money including interest rate issues, bringing about depreciation in value of capital. To this end, the ability of Bahamas to serve as a strong capital flow destination is useful for the survival of any company that is seeking an initial public offer in the short term. Interestingly, the Bureau of Economic and Business Affairs (2012) notes that “the free flow of capital to markets is encouraged by the GCOB and supported by the functions of the Bahamas Development Bank and the Bahamas Mortgage Corporation.” What is more, the openness of Bahamas to foreign investment makes it an open ground for constant flow of capital. Luckily, the government of Bahamas has realized the need to make foreign investment as open as possible by removing “foreign investment restrictions on restaurants and entertainment businesses and increase the minimum investment requirement from $250,000 to $500,000” (Bureau of Economic and Business Affairs (2012). Pass through for tax As far as offshore business is concerned, any form of incentive that comes with the payment of taxes serve major advantage in ensuring that companies accrue monies for growth and development that would have been absent in their parent countries. To this end, most companies look at options with pass through taxes when deciding on their offshore business destination (Breiman et al, 2009). It would be noted that a tax-through situation exists when owners of businesses are spared the payment of actual tax on their companies but are made to pass these taxes through to their personal or individual tax returns (Bradley and Stewart, 2003). The effect that this has on businesses is that it reduces the quantum of tax that would have been paid on business revenue as the taxes are no longer treated as commercial but personal taxes. Because of the pass through that is given from business revenue, double taxation is avoided. Currently in Bahamas, there are no such pass through taxes for multinational corporations, most of whom are patrons of offshore business establishments. Rather, these pass through taxes are available for sole proprietorships and limited liability companies. In effect, until the initial public offer is rendered, the intending company may benefit from the provisions of pass through tax as a private firm. This privilege will however be absent once the public offer goes through. Pros and Cons The advantages and disadvantages associated with having Bahamas as an offshore financial center destination for a company seeking to raise business capital is very much linked with the comparative rate of success that these companies might get as against doing business in their parent countries. As far as the cons are concerned, a major business situational issue that continues to confront Bahamas is the size of the labor force of that country. Statistically, greater percentage of the working force is in areas of agriculture, tourism, and industry (Chen and So, 2002). This leaves the services sector highly neglected. For most offshore companies therefore, there is always the need to import labor, creating extra financial responsibility. With the pros, it can be said that Bahamas remains a brand name, establishing brand equity for offshore business. In effect, most of the business environmental factors, particularly political factors are designed to be favorable to offshore companies. It is not surprising therefore that there continues to be constant tax reforms to suit the dictates of prevailing global economic climate. Finally on the pros, Bahamas has been said to be a rapid growing country, presenting a competitive trade background for companies seeking to raise capital for future expansion purposes (Hissam and Daniel, 1999). Poor tax shelter/haven image As far as the ultimate aim of the company in question, which seeks to raise capital for Intel Corporation, is concerned, selection of Bahamas as offshore financial center will come with the advantage that the country has so much poor tax shelter and that it is regarded as a tax haven to a large extent. It will be noted tax haven comprises countries or states where there is an intentional lowing of tax rates in such a manner that tax levies become low or totally absent (Chen and So, 2002). Meanwhile in Bahamas, research shows that government does not focus its revenue generation attention on taxes as there is no income tax, capital gain tax, value-added tax, or corporate tax (Humphrey, 2001). Even in cases where pass-through taxes may apply, there is no wealth tax, saving business owners from all forms of tax leverage. Noting that the cost of tax to companies in the United States, United Kingdom and other parts of Europe remains a key financial expenditure, reducing the overall capital of companies, Bahamas becomes an ideal entity to raise capital for Intel Corporation prior to undertaking an initial public offer because amounts that would have been spent on taxes can be directed to other investment sectors for value creation. REFERENCE LIST Bradley, L., & Stewart, K. (2003). The diffusion of online banking. Journal of Marketing Management.10 (19), 1087–1109. Breiman, L., Friedman, J., Olshen, R., Stone, C.J. (2009). Classification and Regression Trees. London: Wadsworth. Bureau of Economic and Business Affairs (2012). 2012 Investment Climate Statement - The Bahamas. Accessed August 30, 2013 from http://www.state.gov/e/eb/rls/othr/ics/2012/191104.htm Chen, C. C., So, R. W. (2002). 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