The Wisdom of Investing Offshore

Never in the history of mankind has financial security been so elusive. How did 50 million Americans end up relying on food stamps? What did Zimbabweans do to deserve to lose their hard earned savings and pensions to a worthless currency? What about the sovereign debt crisis in Greece? Should Greeks accept austerity lying down?

In Rwanda, a strong man saved the country from total destruction by civil war and turned the country around into prosperity but now, he holds the entire country in his firm vice like grip. In Uganda, a president who is well past his use by date still insists on remaining on the throne. In both of these countries, the definition of the constitution and the president are interchangeable and your financial security and prosperity are directly correlated to your political inclination.

Mega corruption scams are killing the dreams of many financial security seeking citizens of Kenya, South Africa and Nigeria. War is doing the same to citizens of Afghanistan, DR. Congo, Iraq, Libya, Syria, Somalia, South Sudan and Ukraine. Don’t even imagine what is in store for North Koreans and inhabitants of the larger South East Asian region.

Argentinians and Russians have in the past endured their fair share of economic disasters. Venezuelans are in hot soup right now. Jamaicans must be thinking that tings a guan in Venezuela. Europeans now have to shoulder the cost of hosting war fleeing immigrants and at the same time contend with the damage caused by terrorism.

You can go on and on but what comes out clearly is that billions of people are suffering financial insecurity for reasons that are not of their own making. Self serving politicians, overbearing and incompetent governments, the battle for resources, the battle for global supremacy and a myriad of other intrigues are to blame.

The hopeless citizen is always the one who picks up the tab. But there is a way out. Peace, political and economic stability are the basic requirements for financial security. If conditions in your home country cannot guarantee your financial security, you are free to look for financial security in other countries where peace, political and economic stability seem to exist for eternity.

More good news is that you don’t have to migrate if otherwise home is sweet home. You just need to move some of your financial investments to another country.

African communities have for long practiced keeping some of their livestock with relatives or friends living far away in distant lands. The simple reason was that if some disease wiped out most or all of their livestock or a rival community raided them for their livestock, the community would fall back on the livestock kept with relatives and friends in distant lands for sustenance.

Many other cultures of this world also have their version of this kind of wisdom.

The modern world is demarcated into countries and many people live urban lives. Everything is highly commercial and internet driven. The smart phone is now the main source of information and the free wisdom inherent in the culture of a people is hard to come by.

Tremendous scientific development in medicine relegated endemic livestock diseases to the chapters of history but war still persists. The biggest threat to financial security for billions of people now comes from governments and the politicians who run them.

Offshore investing simply refers to investing money outside your country of residence. Financial investments can indeed be made in any country of the world that has the necessary infrastructure and laws that permit foreign investment.

Offshore countries are those countries that have distinguished themselves as International Financial Centers (IFCs). These countries have investor friendly tax, privacy and investor protection laws that attract international investors who do not enjoy the benefit of such laws in their home country. Such countries therefore have a higher proportion of nonresident financial transactions. A simple way to understand the role these countries play is to visualize them as giant export processing zones for financial services.

Originally, offshore countries were literally located offshore but many onshore countries like Switzerland, UAE and Luxembourg recognized what a gold mine IFCs were and transformed into IFCs. Countries that have made such a transformation are now also referred to as offshore countries regardless of where they are located.

The term ‘offshore investment’ is used when international investments are routed through an offshore country. This investment strategy is as perfectly legal as it sounds but to be sure, it is prudent to look at what your home country’s tax law says about foreign income otherwise the taxman may request for a date that you will not look forward to.

Offshore investing does not raise legal or tax issues for international investors who are not taxed on their worldwide income by their home country but it is complicated for investors who are taxed on their worldwide income.

The U.S. frequently uses its powerful military and influential foreign policy to create business opportunities for American enterprise all over the world. It is therefore logical for the U.S. government to demand taxes on the worldwide income of U.S. citizens.

A few other countries with similar tendencies to the U.S. also require their citizens to pay taxes on their worldwide income. Offshore investing is complicated for citizens of such countries. Fortunately, most countries do not require citizens pay taxes on income that is earned outside their jurisdiction. Offshore investing does not therefore pose legal or tax issues for the majority of international investors.

Typical offshore countries are tiny sovereign islands in the middle of the ocean with just thousands of people in population and no significant natural resources besides fish but enjoy some of the highest living standards of this world. These countries have done a remarkable job in moving from such rudimentary economics into world class financial centers.

Offshore countries do right what many onshore countries get wrong every time. Most offshore countries do not participate or take sides in the politics or disputes in other countries or between countries or get entangled in alliances. Most don’t maintain an army and are often protectorates or dependencies of some other big country.

These characteristics are the main catalysts for peace, political and economic stability in offshore countries. The oldest parliaments of this world, that are hundreds of years old, are found in offshore countries.

The real winner of course has to do with taxes. Offshore countries charge very little to no income tax. This is because politicians in offshore countries have no incentive to build massive infrastructure projects or raid other countries for their resources. The entire country is only a few hundred kilometers squared and requirements of such a country are quite modest.

On the other hand, income tax in onshore countries is often north of 30%. North of 30% versus near 0% or 0% is not a contest at all. It is a white wash. Financial institutions that want to do business with citizens of the world never miss to take advantage of this offshore opportunity. Incorporate offshore and enjoy huge tax savings. This is why offshore countries are also called tax havens.

Onshore countries on the other hand are several thousand kilometers squared with bulging populations that require every kind of government assistance and protection from both internal and external aggression. Politicians from these countries are in a rat race to outdo their predecessor’s legacies or outdo the next country’s infrastructure or emulate the most prosperous country by building the biggest infrastructure and the strongest army regionally or globally.

These endeavors always result in high income taxes that very easily find their way into politician’s pockets. Contracts for infrastructure projects are routinely awarded to politician’s cronies and family who return favor through kick backs and campaign contributions. Infrastructure that gets delivered is often of poor quality or several times the real cost or both. There is no shortage of examples of projects that were not delivered yet funds were released by the government.

A few countries do well with the taxes they collect from citizens. The motivation to invest offshore for citizens of such countries is the opportunity to invest in the economies of countries that are growing faster than their own country.

Low taxation costs allow offshore financial institutions to reduce their overall cost of doing business. Some of this benefit is in turn passed on to clients in the way of lower costs of financial services products. This is the reason why offshore financial services products fair better cost wise when compared to their onshore counterparts.

You might be wondering what benefit is in this arrangement for offshore countries. Well, they make big business out of financial regulation. Offshore financial regulation is refined to world class standards and is without the political and nationalist overtones or sometimes mischievously ignorant undertones that are rife in onshore financial regulation.

Global financial institutions flock to small offshore countries to domicile their global operations for tax efficiency reasons and offshore countries reap big from financial regulatory fees and other fringe benefits. Offshore financial services also provides booming business for related legal, accounting and real estate support services. This arrangement generates a lot of employment for offshore islanders.

Clients of offshore financial institutions on the other hand can rest assured knowing that their financial investments are in a safe jurisdiction beyond the reaches of a hostile, incompetent or unstable government at home. Some more good news is that many offshore countries go out of their way to generously guarantee financial investments entrusted to financial institutions within their jurisdiction just in case these institutions go under.

A common misconception about offshore investing is that offshore investments are done within offshore countries. This is contrary to the reality on the ground. Offshore financial institutions provide investment platforms that allow their clients to invest in any country of the world that has the necessary infrastructure and laws that permit foreign investments. There is a minimum criterion so don’t expect to find financial investments from Somalia and other countries in similar circumstances on offshore investment platforms.

Financial investments that feature prominently on offshore investment platforms include those from emerging economies like Brazil, Russia, India, China, South Africa, Indonesia, Singapore, Malaysia among others and developed economies like Germany, Britain, the U.S, Canada, Australia, Norway, Sweden among others.

All financial asset classes including bonds, commodities, money market instruments, stocks and real estate are available on offshore investment platforms. However, investors need to approach any financial investments from an informed position. This is easier said than done. School curriculum all over the world gives financial literacy a wide berth yet it is essential knowledge for anyone seeking financial security in this modern world.

Engineers, doctors, pilots, architects, pharmacists, teachers, scientists, lawyers and many other professionals graduate without acquiring proficiency in personal finance yet they are expected to invest their income in stocks, bonds and other financial instruments for their financial security. It therefore helps a great deal to have a competent financial adviser by your side if your background is not in finance.

Your own diligence will also go a long way in ensuring success in your international investments. Make sure you have clear investment goals, confirm that the proposed investment is consistent with your goals and risk profile, read all the fine print before you sign on the dotted line and finally participate in the management of your investment by reviewing it regularly with your financial adviser.

That one requires large sums of money to make an offshore investment is a myth that needs to be busted. Regular investments can be as low as USD 100 per month payable monthly, quarterly, half yearly or yearly. Lump sum investments can be as low as USD 5,000, very affordable by many standards.

What is also nice about investing in these times when there is a lot of technological advancement is that you will have online access to your investment. An increasing number of offshore investment platforms allow viewing of valuation statements, re-balancing of portfolios, withdrawals, top ups and updating of account holder’s information to be done online.

Any good thing under the sun attracts mischief from human beings. Tax evaders and criminals have in the past used offshore countries to hide money from tax authorities and launder proceeds of crime. This is why investing offshore sometimes looks tarnished. Changes have since occurred and principal tax and law enforcement authorities frequently exchange information on suspicious transactions. Tax evaders and criminals should therefore beware. Offshore countries are no longer a sanctuary for dirty money.