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To date, companies have tended to focus on marketing and selling as the most likely business functions to locate offshore, but there is no reason why procurement, administration, payroll and other corporate functions should not be based offshore.

Since physical distribution can be outsourced, and in some countries doesn't even amount to a taxable presence, the use of offshore is by no means limited to digitally-downloadable products. Still, there is no doubt that the greatest cost and tax savings are available to those companies whose products can be delivered electronically, as in the following list:

Retail businesses dealing in intangibles or intellectual property, such as software or music
Electronic publishing enterprises
Online reservations
Telecommunications services
Language translation services
Education and Internet-based training
Online gift certificates

Online brokerages and other financial services, including insurance
Legal services
Software and other technical support
Research and online information services
Internet Service Providers (ISPs)
Metamediaries and access portals
Corporate services

Data warehouse centres for processing and storing data
Database management services
Certification and verification services for business and consumer documents
Hubs for secure transactions and communications
Supply chain management centres
Communications and billing hubs for fibre optic and satellite systems
Network monitoring facilities and services

This section of the E-commerce Fact-File concentrates on four of the main business sectors in which offshore e-commerce or e-business development is most likely to take place.

On a technical level, the requirements of an offshore e-commerce operation are no different from those onshore. Essentially they amount to a server, which can be your own or hosted, adequate communications facilities, and the various software elements needed to make a sales offer, take orders and payment for them, and link into other company systems for despatch, procurement or production, inventory, accounting and administration.

Not all offshore jurisdictions have state-of-the-art technical and communications infrastructure, and this is particularly relevant to offshore e-commerce operations, which must be able to rely on secure and flexible technical facilities. Skilled staff may also be in short supply. See our Location section for an extended analysis of how to select a suitable jurisdiction for offshore e-commerce.

This section of the e-commerce site deals with sales and distribution from an offshore web-site, when the products and services concerned need to be delivered in a physical form or, in the case of services, using physical agents (usually people!). The distinction between such products and services and those that can be downloaded by computer is that a taxable event occurs that may attract import duty, VAT or sales taxes.

Currently the Internet is experiencing huge growth of both retail and business purchasing, and most of this is taking place from web-sites (servers) in high-tax jurisdictions. However, there is no technical reason why an e-shop should be confined to an onshore jurisdiction, indeed an offshore location offers many possible benefits to a company that either has or expects to have a significant volume of electronic turnover.

Obviously the central benefit to be gained from an offshore location is to do with tax. Providing the corporate structure is correct, an offshore company will pay little or no tax. If its owners (shareholders) are themselves offshore, then that will be that. But even if the offshore company is controlled from a high-tax jurisdiction then there may be considerable flexibility in the timing and amounts of tax needing to be paid. For a company that is able to move the bulk of its supply-chain offshore, it is often possible to avoid a permanent (thus taxable) presence in the original high-tax country: simple warehousing and delivery functions are not enough in many countries to create a taxable presence, and anyway they can be outsourced.

Additional benefits may include lower labour and overhead costs: e-commerce sales and distribution is always likely to reduce such costs, but the savings may be much easier to realise if the web-site is located far away from existing operations. However it is not always true that offshore jurisdictions are cheaper or more flexible than high-tax jurisdictions.

One sure benefit of e-commerce is 'internationalisation', and it may well be that an offshore vendor is in a more favourable situation to service multiple and diverse countries than one in a high-tax area. If a company's procurement is global in scope (or could be) then an offshore jurisdiction will almost certainly offer interesting commercial and fiscal opportunities; some offshore jurisdictions have tax-free zones, or are themselves completely tax- and duty-free, allowing warehousing, processing and marketing of products for onward shipping that will in this way avoid any entanglement with the tax and duty net until the very last moment.

Of all the products that can take advantage of offshore e-commerce, those that can be put into digital form are probably the most ideal. Change is coming rapidly, as vendors and customers alike begin to understand the benefits of digital delivery, and the necessary technology becomes more widely available. 'Technology' here means both the systems to store, handle, process and download digital product files, and also the availability of high-capacity communications channels into people's homes and workplaces.

Subject only to the technology constraints, a rather wide range of products and services are suited to digital, and thus, offshore, distribution. A partial list includes:

· Computer software
· Music, video, images
· Booking services (eg for travel)
· Publications including books, magazines, newspapers, directories
· Betting and gambling
· Professional services
· Training courses

For any of these products and services, it is clearly feasible to supply a customer in a high-tax area without incurring any local import duties, VAT or sales taxes, when these might apply. As much as national taxing authorities would like to be able to capture taxes on such transactions, they understand that it is not possible under current rules; and it is not clear when any agreement is likely to be reached among OECD countries about a mechanism for taxing digital downloads of products or services. The EU has adopted a directive which would extend VAT to digital downloads by consumers; but the proposal has been attacked as unworkable and the US. It is anyway unlikely to survive the EU's complex legislative process.

The situation regarding corporation (income) tax is clearer, but equally satisfactory for an offshore business: profits made in an offshore jurisdiction will be untaxed or very lightly taxed, so long as the offshore trading entity itself is not a controlled subsidiary of a company resident in a high-tax area.

Music is perhaps the quintessential digital product, and the one for which the most progress has been made towards a digital future. It well illustrates the commercial and legal challenges that await. The Mp3 format already allows music to be stored, downloaded and played in digital form. However the technology has bypassed the legal framework of intellectual property and copyright laws and conventions which govern the commercial distribution of music; in particular, it has bypassed the established record companies and offers independent producers and artists a means of direct distribution.

Programs such as Napster which allow the exchange of high-quality music files between music consumers computers have given rise to alarmingly rapid growth in illicit, or anyway, free copying of music. After hoping for some time that these problems would go away, the record companies faced up to the inevitable and tried to suppress Napster through the courts.

These problems (if they are problems) will be solved, but the music industry in 10 years' time will be unrecognizable. A company wanting to make money from music distribution will have to be armed at all points with technological defences against piracy, and will have to be well-crewed with lawyers.

After music will come words and other static intellectual property - anything that can be copied is at risk from Internet technologies, and it is not yet clear whether anti-piracy technology will be able to stay ahead of the pirates. It may be too extreme to say that intellectual property is dead, thanks to the Internet (people have said it), but it is probably true that companies making their money from repeated sales of static intellectual property will have to be extremely innovative if they are to stay in business. Although these arguments apply equally to onshore and offshore locations, the extra flexibility available offshore may give suppliers an advantage in this respect!

There is nothing new about offshore to banks, investment funds and other types of financial institution; most of them long ago set up offshore branches in order to service multinational corporations, to facilitate trade, and to provide investment management for high-net-worth individual customers.

Some offshore jurisidictions have developed as centres for particular types of offshore financial service: thus, there are 700 banks in the Caymans, and several thousand investment funds in Luxembourg.

In recent years, growing financial awareness has created strong demand for offshore financial services among a wider community of customers; this is especially true of offshore investment funds. Even so, offshore financial services have tended to remain the preserve of larger companies or of relatively wealthy and sophisticated individuals - transaction costs are high and information not always easy to come by.

The Internet however opens the way to a far broader market for the providers of offshore financial services, by reducing transaction costs and by making information about offshore available instantly to anyone who is interested. This last point is important: until now, the marketing media used by offshore financial service providers have been subject to strong local regulation which controlled and limited the advertising of financial products. Thus, at present, a financial magazine based in, say, EU country X, is obliged by the regulators of country X not to accept advertisements for retail financial services unless the providers have conformed to local regulations (and have joined the appropriate trade body and have paid their dues!). No such pressures exist on the Internet, and it is difficult to see how they could be brought into play. An investment fund may say firmly (and does) on the Internet that its products are not offered to citizens of country X; but the citizens can still read about them, download the offers, and get Uncle Joe living in Spain to make the purchase for them using money in an Isle of Man bank account.

Offshore providers of financial services have strong competitive advantages and the unclogging of marketing channels may unleash a tidal wave of demand for their products. Here are some of the competitive advantages of offshore:

· Profits are less highly-taxed, or untaxed, allowing cheaper products
· Offshore jurisdictions are usually less highly regulated than high-tax
countries, so that an offshore financial institution has more flexibility in
planning, marketing and delivering products
· Financial products themselves can take advantage of a low-tax
environment in order to deliver greater returns to customers
· The cost base of an offshore location is often more favourable than that
of a high-tax location

These competitive pressures on the financial services market will be so great that institutions will be forced to use the Internet, and forced to do so from offshore, at least when they are not prevented by regulatory bodies from marketing offshore products. They often are, of course, and it will be interesting to see how far the Internet breaks down many of those regulatory barriers.

The whole range of retail financial services can be provided from offshore using the Internet. Services and products can include:

· Electronic banking including current and deposit account maintenance,
paying bills, direct debits etc
· Offer and sale of stocks and shares, investment and mutual fund units,
equity derivatives etc
· Foreign exchange services
· Offer, sale and maintenance of savings products including pension
· Offer and sale of insurance products

Offshore financial services may be starting from a low base, and the volume of e-commerce transactions is not yet great, but if current trends are maintained then offshore electronic financial services will present a major challenge to their onshore brethren in a small number of years.

It is hardly unusual for corporations to separate administration and service functions off from operational units. Such functions are normally performed centrally, and nowadays more and more frequently they are outsourced. Many corporations take advantage of beneficial tax regimes in offshore jurisdictions, or in high-tax countries which offer quasi-offshore regimes, to locate such corporate functions where they can obtain tax advantages in addition. See the Offshore Business Review for a description of the tax and operational rationale underlying such structures.

The rapid development of e-commerce and e-business, hand-in-hand with advanced telecommunications techniques, adds a new layer of possibility for corporations to place their support functions and services where they can be most efficiently (including tax-efficiently) performed. This section of the site explores the opportunities available to corporations to apply the new technologies to a range of corporate services.

This was one of the first corporate support functions (as distinct from management) to be centralised. Some corporations even founded what amounted to internal banking units. Leaving aside some of the strategic corporate finance responsibilities of treasury managers, the transaction-heavy cash management and foreign exchange functions are ideally suited to electronic handling, together with the management of their downstream risk-measuring systems and derivative porfolios. Incoming information from subsidiaries is or easily can be electronic, while the external trading or account-handling transactions are already performed on the Internet or on systems which are readily linked to it. A crucial factor is the intrinsic profitability of treasury management, whether performed in-house or outsourced; if the corporate structure is such that eventual taxation in a high-tax home country can be mitigated to at least some extent, then there is every reason to want to locate treasury management profits in a low-tax area.

It would be more accurate to say, the whole supply-chain, both because the successive stages of the chain all contain opportunities to crystallise profit, and because they are all increasingly taking place electronically or with electronic guidance and control. Lean supply-chain management, most famous as JIT, relies heavily on a constant supply of information about stock levels and usage, future production schedules, and supplier readiness; all of this information is inevitably electronic. It can therefore easily be combined with the fast-emerging packages for e-procurement to allow a wholly portable supply-chain management function. Once again, there is the opportunity to attribute profits to the supply function, and a resulting need to locate it in a tax-efficient place.

The emergence of exchanges in a number of industry sectors, often owned by a of major players, takes this process to a logical conclusion. If the value inherent in efficient procurement can be located in a minority-owned offshore Internet exchange, which itself can eventually be listed, then the capital realised from flotation or from trade sales of shares will largely have escaped taxation, especially for companies with benign CGT regimes in their home countries. This process seems to be a modern fiscal Philosopher's Stone: the transmuting of income into capital without taxation. Perhaps there will be anti-avoidance legislation which will attack the transfer of value on the setting-up of the exchange . . . but it will not be easy to draft. The authorities have twitched a little because of the anti-trust implications of exchanges, but they don't seem to have noticed the fiscal implications yet.

Corporations are employing an ever-wider range of communications techniques, many of which amount to the supply of communications services to subsidiaries, or form part of internal 'products' which can be priced to include profit elements. Some of these 'products' can be outsourced (as when Cable and Wireless supplies and services a corporate intranet), and some can be 'insourced', as when a corporation buys in bandwidth and creates its own intranet or extranet. The 'product' in all these cases is evidently highly portable, and can be positioned internally almost at will in a tax-efficient way. Thus, if ABC Corporation has an internal telecommunications subsidiary in the Caymans, when London calls New York on the corporate intranet at 25% of the cost of a PSN call, it is reasonable for ABC Caymans Ltd (or even ABC Brussels Ltd if there is a coordination centre in Belgium ) to charge London 75% of the cost of a PSN call, and put the difference into its own pocket. This is an e-commerce transaction, or maybe an e-business transaction: it is cross-border;
VAT is involved; it has to be recorded, billed, etc; it has to be 'arm's length'.

Every large, geographically spread-out corporation has a substantial internal travel bill, and if trading forms a significant part of corporate activity then there is probably freight transportation as well. Aspects of freight transport have been handled electronically for a long time already through the use of EDI (Electronic Document Interchange) for Bills of Lading and other shipping documents, but it is only recently with the advent of the Internet that whole freight transport networks are being managed and controlled electronically, with each package or shipment able to be tracked throughout the whole of its journey, and with electronic links to other corporate systems (stock control, billing and accounting). Management of personal travel has been slower to migrate to the Internet, perhaps mostly because of the need for physical tickets, but dematerialisation of travel documents is around the corner, breaking the last spatial link between the traveller and the travel management system. In future, corporations will be free to locate the travel and transportation management functions wherever they choose; the profit possibilities inherent in these functions may not be on the scale of telecommunications or treasury management, but they are not inconsiderable, and in suitable cases a low-tax location may well be worthwhile.

Not all corporations trade on markets on a substantial scale; but many do - oil and gas and other commodities-based companies, metals companies, banks and financial institutions (currency markets, stock markets, equity and financial derivatives), insurance companies and fund managers (stock markets) and (a new one) telecommunications companies on bandwidth markets. For historical reasons, trading on markets usually takes place in the most expensive possible place, right in the centre of downtown financial districts. This was inevitable, given the need for people to get together physically to trade and their need for good communications. Although a few exchanges cling to floor trading, it won't be for long; America's 'day traders' are probably the future of trading, and not just in stock markets. Trading is a major profit centre (or sometimes a loss centre!) for most of the organizations that do it on any scale and the opportunity to locate it in low-tax regions will probably be too good to pass up. There will be major cost savings as well: compare the costs of running a 12-person dealing room in the City of London with the equivalent costs in, say, Cyprus. It may not even be necessary to have a dealing room, if traders can work from their own homes. There are some managerial issues to be addressed, but 'teleworkers' are a growing phenomenon even in high




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