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Change, Dependency, and Regime Plasticity in Offshore Financial Intermediation: The Saga of the Netherlands Antilles

Craig M. Boise


Andrew P. Morriss

Texas A&M School of Law; PERC - Property and Environment Research Center; George Mason University - Mercatus Center

February 1, 2010

Texas International Law Journal, Vol. 45, No. 2, 2009
U Illinois Law & Economics Research Paper No. LE08-020

The legal regimes of offshore jurisdictions have historically differed in significant ways from those applicable in onshore jurisdictions. Inevitably, legal and financial professionals have seized upon these differences to develop strategies for reducing transactions costs. A prominent example of such cross-border arbitrage was the routing of Eurodollar loans through a small group of former Dutch island colonies in the Caribbean, a practice which peaked in the mid-1980s, when virtually every major U.S. corporation made interest payments to a Netherlands Antilles finance subsidiary. The "Antilles sandwich" strategy exploited the difference between high U.S. withholding tax rates that applied to interest payments made to most foreign lenders, and the zero rate of tax that applied to U.S. interest payments made to residents of the Antilles under its tax treaty with the United States. Both jurisdictions reaped significant benefits from the strategy until the United States unilaterally terminated the tax treaty in 1987, virtually wiping out the Antilles offshore financial sector overnight. Unfortunately, because of rigidity in its governance structure, the Antilles' failed to develop alternative financial intermediation strategies to replace the Antilles sandwich structure before its demise.

The rise and fall of the Antilles' offshore financial sector provides insight into the current struggle between onshore and offshore governments over the role of offshore financial centers like the Antilles within the global economy. Concerned about tax evasion by their residents, onshore jurisdictions including France, Germany, and the United States are pressing for major changes in offshore jurisdictions' legal and regulatory regimes that may eliminate legitimate opportunities for international arbitrage. In such an environment, offshore financial centers may find it difficult to survive. In this article, we distill from the Antilles experience a theory of "regime plasticity" and examine the role that it plays in allowing offshore financial centers to adapt to changes in the legal and political environments within which they operate. How offshore financial centers react, and whether they have learned the lessons of the Antilles' experience will play a major role in determining the future of the global offshore financial sector.

Number of Pages in PDF File: 81

Keywords: offshore financial centers, OFCs, round-tripping, financial intermediation, tax havens, finance subsidiary, tax treaty, Netherlands Antilles, Curacao, Dutch, withholding tax, eurodollar, petrodollar, multinational, regime

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Date posted: March 27, 2009 ; Last revised: February 3, 2010

Suggested Citation

Boise, Craig M. and Morriss, Andrew P., Change, Dependency, and Regime Plasticity in Offshore Financial Intermediation: The Saga of the Netherlands Antilles (February 1, 2010). Texas International Law Journal, Vol. 45, No. 2, 2009; U Illinois Law & Economics Research Paper No. LE08-020. Available at SSRN: http://ssrn.com/abstract=1368489 or http://dx.doi.org/10.2139/ssrn.1368489

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Craig M. Boise
2121 Euclid Avenue, LB 138
Cleveland, OH 44115-2214
United States
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Andrew P. Morriss (Contact Author)
Texas A&M School of Law ( email )
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Fort Worth, TX 76133
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PERC - Property and Environment Research Center ( email )
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George Mason University - Mercatus Center ( email )
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Arlington, VA 22201
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