When a business wants to open an offshore bank account, in the financial world it is always perceived as an attempt to tax evasion. That could be one of the reasons central banks and tax authorities run after their business owners to check their offshore banking activities. However, an insider view of a business owner(s) and purpose provides a clear view of the matter and why and when a business may take advantage of having an offshore bank account. Here we list a few reasons:
To enable global operations
Today many businesses have their operations in multiple countries. Either be it a service or goods, everything has gone cross-border. For better conversion rates, payment options need to be localized, and this creates a need for an offshore banking account. If you are a service provider to the United States, you are obligated to accept AMEX cards, and it works the same way in India.
A better example would be an Indian merchant providing services to Europe and thus needs a European payment gateway, and when he approaches the payment gateway provider in Europe, they ask for a European payment gateway, which makes it impossible to operate globally.
Interest on Assets
The interest rate on assets is ridiculously low in many European countries. But interest rates for fixed deposits are very high in developing countries like India and Sri Lanka. It becomes a better option to invest money or keep their assets in a country where the banks provide better interest rates.
Lack of Infrastructure
Many developing countries don’t have banks with proper infrastructure. The situation gets tough if you are an exporter from a developing country and your home bank does not have the required infrastructure to handle multiple currencies. Creating a bank account in a country where you could receive, transact with multiple currencies provides the competitive advantage for exporters.
Risk Mitigation:
Currencies like Brazilian Real, Argentine Peso, Indian Rupee, China Yuan, Japanese Yen are unstable to a certain extent, which make it a disadvantage to hold assets in such currencies. Political factors like the instability of government and economy also plays a key role in the value of the currency. In 2015, China artificially devalued its currency to improve its export market attractive for the International market. However, by this move, the stock market plummeted in China and Hong Kong.
Some companies which operate in high risk regions - albeit legally - usually have their assets moved into a LLC company in an offshore account. A study states that almost 15,000 baseless lawsuits are filed every year against these companies. Having an offshore account helps these companies to stay safe against these legal risks.
Hence it makes sense for the asset holders to diversify their holdings in different currencies in other countries with considerable stability.