by Jon Allen
The technology of the Internet promises to transform the way companies trade with their business customers and consumers. The Internet provides a shop front open 24 hours a day, 365 days of the year within easy reach of anyone in the world. Importantly, the system providing the shop front can be located anywhere in the world where there is the required telecommunications infrastructure. This has far-reaching implications for any business involved in or considering e-commerce, as well as for the role of Offshore Financial Centres such as the Isle of Man.
The E-Commerce Opportunity
There is a strong consensus among commentators that electronic commerce will take off exponentially across the world in 2016. Research by the International Data Corporation (IDC) shows out of an estimated current 97 million web users world-wide, 27 million (28%) have bought something at least once over the web. The study indicates by the year 2018, there will be approximately 320 million web users of which over 128 million (40%) will use the Internet for buying products and services. As a result of this massive increase in web buyers, plus an overall increase in the average transaction size, it is predicted that the value of electronic commerce will top $400 billion by 2018. In addition, a recent study by Deloitte & Touche revealed within 2 years half of all European companies will be conducting at least half of their business over the Internet with e-commerce growing annually by a factor of 300%.
The Internet is intrinsically distance insensitive. Companies who sell products that are, or can be, stored in digital format are able to store, send, manipulate and sell it anywhere. Any such company should be selling and delivering their products electronically. These companies include those that sell products and services such as software, music, films, newspapers & magazines, and financial transactions & services. For these businesses the Internet offers a win win win scenario; infrastructure costs such as office space can be dramatically reduced, distribution costs disappear and new and innovative services can be offered to customers world-wide 24 hours a day. In addition, the location independence of the Internet removes any geographical barriers to basing your business offshore.
The Offshore Incentive
So why consider basing your electronic commerce business offshore? There are two parts to the answer; firstly, because you can provide as good a shop front from an offshore location as you can from anywhere else and secondly, trading companies can take advantage of tax efficient offshore company structures which can result in the payment of zero local taxes. With e-commerce, as much or as little of your operations can be based offshore as suits the requirements of your business. The size and value of goods sold has no bearing on e-commerce as delivery management can be automated with instructions automatically transmitted to the location where the stock is held once payment clearance is confirmed.
Offshore company formation and administration is a mature industry. Far from the shady image in the popular press, offshore corporate structures are used by most of the world’s largest companies. The support industry is full of household names such as premier accountancy firms, international banks and more lawyers than one might consider decent. 99% of offshore products are about tax planning in a global market – enter e-commerce.
It should be noted the benefits are not limited to new companies or small businesses. Existing companies of any size can easily move to hosting offshore and it is then a matter of negotiation with the parent company’s tax authorities to establish what proportion of revenues are attributable to the offshore company.
It is essential to plan strategically and carefully when setting up an offshore electronic commerce business regardless of which components of the business will be based offshore. Whilst the accommodating tax regime enjoyed by offshore companies also applies to e-commerce businesses, it is essential to obtain proper tax advice before a wholesale move in order to maximize the potential benefits.
Other considerations include:
- Regulatory regime and political stability.
- VAT: If your target market is largely in the EEC then VAT is also an issue which must be carefully planned for. For instance the Isle of Man is within the common purse but Jersey is not.
- Barriers to new residents.
When selecting an offshore location, it is important to ensure the chosen jurisdiction can provide the whole spectrum of required business services and infrastructure. These should include ISP & web hosting services, secure transaction facilities, e-commerce software expertise, web site development, and corporate services such as tax advice & company formation. Particularly important is the communications infrastructure and the availability of high quality, relevant technical services.
As the popularity of the Internet rapidly increases, so do commerce opportunities in the electronic marketplace. E-commerce is providing businesses of all sizes with a global presence overnight. However, while the means of doing business may change, traditional tax considerations remain … so why not consider the offshore advantage?