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
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.