Offshore Financial Centers for Financial Inclusion: A Marriage of Convenience

The words "offshore" and "tax-haven" are often taboo rhetoric within the investment space. Through interviews with representatives of 12 Financial Inclusion Equity Council (FIEC) members based in the United States and Europe, one development finance institution (DFI), as well as informal conversations with other industry stakeholders, this paper seeks to better understand the scope of offshore usage in impact investments and the factors at play when impact investors select a fund domicile. It aims to answer the below questions:

• How prevalent are offshore funds?
• How many are domiciled in territories considered to be “tax-havens”?
• What are the reasons for setting up an offshore fund?
• What are the operational and tax advantages?
• What are the legal and ethical issues involved?

Major Findings:

• Impact investors have legitimate reasons for using offshore financial centers (OFCs) - and tax status is not the driving factor. The main factors for choosing OFCs include:
  • Administrative Efficiency: OFCs have the legal, financial and administrative infrastructure in place to facilitate investment.
  • Human Capital: Accordingly, OFCs have specialized staff on hand to manage investments, such as lawyers, accountants and auditors.
  • Reputation: OFCs are reputable vehicles in international investing, which helps to validate their use for financial inclusion.
  • Convenience: OFCs may serve as a neutral base for multiple investors. Favorable time zones, shared language and currency also add to their accessibility.
• Two divergent perspectives exist between North American and European investors regarding the tax implications of OFCs. The North American perspective prioritizes tax minimization for shareholders/investors, while the European perspective prioritizes paying their fair share of taxes to the offshore country.