1. They are used commonly
International Financial Centres (IFCs) feature in many (if not most) cross-border transactions and structures. International trade has expanded dramatically in recent years; companies now span many jurisdictions, all of which have their own complex tax regimes. It is therefore not surprising that most multinationals will choose to coordinate their networks from a single jurisdiction with simple, appropriate legislation, low operating overheads and a stable and sophisticated forum for dispute resolution.
Anybody who has an ISA, a savings account, a pension or any kind of insurance is likely to have invested money offshore. These financial products are commonly domiciled in IFCs to ensure that any profits are not subject to double taxation.
2. They encourage tax neutrality
If you have a pension, your money (along with that of thousands of other people), has probably been pooled to buy units in an investment fund, likely to be a company or partnership domiciled in the British Virgin Islands. If the fund’s investment portfolio includes shares in, say, a Brazilian mining company, then any profits attributable to those shares will already have been subject to tax in Brazil. The reason for domiciling the fund in the British Virgin Islands is that the dividends are not then subject to a second layer of taxation. This is why IFCs are often known as tax-neutral jurisdictions, because they do not add additional tax to whatever is imposed by onshore jurisdictions. Equally they do not reduce the tax burden incurred onshore. It is also why IFCs are attractive to multinational companies — a tax-neutral jurisdiction is a way of avoiding double taxation for companies operating in more than one economy.
3. They enable access to finance for developing or recovering countries
IFCs play a vital role in moving capital from developed to developing countries, many of which would not be able to benefit from international investment without the stability and neutrality achieved by the inclusion of an IFC in the financing structure.
For example, the International Finance Corporation (the private sector arm of the World Bank) is currently facing a backlash for investing in Sub-Saharan Africa through companies that operate in IFCs. Many of the governments in that region are experiencing grave difficulties and legal frameworks are seen as being unpredictable and sometimes unstable. If financing and project entities are incorporated in a trusted IFC, then disputes and differences in interpretation are less likely and all stakeholders are on an equal, neutral footing. The use of an IFC to hold vital assets and enter into contracts can provide comfort and certainty to lenders, thus enabling a developing country or a country experiencing unrest to attract investment where otherwise it might not be possible.