Global e-Commerce Services

In order to secure any tax benefits from an offshore business venture, it will be necessary to have a substantial business presence (nexus) in the foreign location. You can be sure that the U.S. IRS will attempt to argue that just routing electronic information through a foreign web server is not enough "nexus" to make the foreign jurisdiction the source of the related income. (Nexus is generally understood to mean some kind of permanent establishment or physical presence on an ongoing basis, but that can sometimes be derived from having an agent who resides in the foreign locality.) If you are working from an office in the U.S. and are processing information to and from a web server in Antigua, you should be prepared for a court case if you want to claim that the business profits are derived from the foreign web server. If the U.S. IRS and the tax agencies of other high tax countries do not dispute this issue, huge amounts of tax revenue will quickly disappear.

If you set up a business in a foreign country, form a corporation in that country, live in that country and have your web site on a server in that country, your corporation will usually be deemed to be based in that foreign country and any profits realized would usually be subject to the tax rules of that country. (I have to say "usually" because of all the $%^&* exceptions.) If you own a U.S. based corporation that establishes a subsidiary company in a foreign location, but the subsidiary has a permanent office in that country and has an employee in that country who operates the business, then the foreign country will usually be deemed to be the source of that income and any related profits. However, if you are a U.S. taxpayer or company, there are other hurdles that must also be overcome to ensure that the profits of the foreign corporation are not subject to current taxation by the U.S. shareholders. (Further details about those tax issues are covered regularly in our Offshore Tax Strategies newsletter and in our special report, The Controlled Foreign Corporation Tax Guide.)

It's not absolutely clear at this point how much work must be done by an employee, independent contractor or agent to provide the necessary business presence in a foreign country so that the profits of an enterprise would be deemed to be from that source rather than from a U.S. source. It's my opinion that some substantial business activity in the foreign country is needed in addition to having a web site in a foreign location. Where there is an organization in a foreign country that is willing and able to contract to provide substantial services such as order processing, responding to inquiries from prospects, keeping records, paying bills drawn on a local (non U.S.) bank account, shipping or sending shipping orders to an independent fulfillment service, placing orders for additional goods and similar business functions, then you will have a strong basis to argue that any profits were earned in the foreign country.

Something like this could probably be accomplished with a combination of Internet Service Providers (ISP) or Application Service Providers (ASP) based in the foreign country, plus an arrangement with a local accounting firm to provide certain record keeping functions and an arrangement with a local trustee or a protector service (see <www.oversightgroup.com>) to provide some oversight of the local activities. The key is for any non-resident owners of the enterprise to be able to argue -- with justification -- that they are basically investors and that they only provide a management service at the level of the board of directors. The closer you can get to this model, the better your chances of winning a dispute with your local tax authorities.

The July/August, 2000 issue of OffshoreFinanceUSA has an article by Mark Heard about A.S.A.P. Services, Ltd., a company in the Bahamas that provides a legal address and official office in the Bahamas. They provide office space for meetings, accounting and bookkeeping, private mailboxes and mail forwarding. The same issue describes a service in Bermuda called "e-suites" which provide a way for non Bermuda companies to establish a "presence" in Bermuda so that they can do business there. The "e-suites" do not appear to offer the same scope of services as the A.S.A.P. service in the Bahamas. http://www.offshorefinanceusa.com

OffshoreBusinessCenter.com is a Vancouver based company that is moving to Barbados to provide e-commerce & business center services for Internet companies that are venturing offshore. - http://www.offshorebusinesscenter.com

These are a few early examples of companies that can provide your foreign business with the required nexus so that any profits are clearly derived from that foreign locale. There are a growing number of ISPs that offer e-commerce services as well as basic web hosting and email. There are some ISPs that actually let you rent the use of all the different software tools that you may need for a total turnkey setup. You rent their computers and you use their software to run your business. These expanded ISPs are generally called "Application Service Providers" or ASPs. The dividing line between the two is very fuzzy. At this time, I'm not aware any foreign based services that will provide all the services you might need including accounting, fulfillment and inventory management to name a few. (As and when I encounter any, I will bring them to your attention in future issues of this newsletter.) It may be necessary to contract with different companies or businesses to get the combination of services you need.

Offshore E-Commerce Service Providers

Let's assume you have a business that could be operated from outside the U.S. or Canada and you have been reading that it's possible to save taxes with such an arrangement. You also might feel you could get more sales from a foreign operation than from your local operations. Assuming you take the necessary steps to sidestep the traps and pitfalls in the U.S. or Canadian tax laws, where can you get help in operating a web site and related administrative tasks outside the U.S.? There are many Internet Service Providers (ISP) that offer Internet connection and web hosting services in different countries who cater to those who do not need all the features of an automated e-commerce web site. In addition, there is a fast growing trend in the U.S. and Canada for ISPs to offer turnkey e-commerce solutions. They provide all the software you might need for a shopping cart, for online order processing with credit cards and for varying degrees of customer support and back end processing. Because they provide the application software as well as the Internet connection, they have become known as "Application Service Providers" or ASPs.

This is an area that is still in the early stages of development, but more and more internet service companies are rushing in to fill the gap. This issue provides a brief list and description of the ones I've found thus far that might be worth further investigation. As I encounter more foreign Application Service Providers (ASP) in the future, I'll include mention of them in the news section of this newsletter.

Here are some of the leads I've been able to locate thus far regarding ISP and ASP services in offshore locations that seem worthy of further investigation as to suitability and pricing.

** (Anguilla, Barbados) Span-Hansa Group - http://www hansa.net -- hansa@attglobal.net

This may be one of the most developed services available for those who want to establish e-commerce operations in other countries. At the present time, the group has offices or representatives in Amsterdam, Barbados, Caracas, Dublin, Geneva, Hong Kong, London, Paris, San Francisco, Toronto, Vancouver, Washington, and Anguilla. Their web site includes extensive information about their e-commerce services in these countries and their corporate secretarial, administrative, computing, communication and accounting services which are provided on an hourly or a predetermined annual fee basis.

** (Australia) Acorn-Solutions - http://acorn-solutions.com.au
info@acorn-solutions.com.au

If you would like to have a web site "down under" on an Australian web site that offers e-commerce services, take a look at their web page.

** (Bermuda) First Atlantic Commerce (FAC) -- <http://www.firstatlanticcommerce.com>

First Atlantic Bank of Bermuda provides credit card payment services for Bermuda based companies. In collaboration with First Data Corporation, they have created "cGate", a system to provide online shopping cart tools and credit card processing to the offshore community. FAC also offers web site hosting services or they will work with other hosting services. For more details, visit the web site or call (444) 296-5598 or email to info@fac.bm

** (Japan) Eurotechnology Japan, Inc. - <http://www.eurotechnology.com/internet/>

While Japan is not a tax haven, it is one of the worlds largest economies and represents a source of great opportunity for those who are willing and able to adapt to the Japanese market. While this firm does not appear to provide turnkey e-commerce services for non Japanese companies, they do provide consulting and feasibility studies to assist those interested in the Japanese market.

** (Vanuatu) E-Business Incorporated.com - <http://www.ebusiness-incorporated.com/>

This company is an international web hosting service affiliated with the firm of Moores-Rowland in Vanuatu. They are promoting the concept of "tax free trading" but a careful review of their web site makes it clear they are not referring to the trading of investment securities. They mean trading in the sense of buying and selling "stuff" or services. Such trading may be tax free in Vanuatu, but whether it's tax free in your home country depends on a variety of factors that vary from company to company.

** (WorldWide) HostPro -- http://www.hostpro.com

This web hosting service is ranked by TopHosts as the best web hosting service in the world and the company web site claims they have customers in more than 70 countries.

** (WorldWide) Verio - http://home.verio.com (888) 438-8374

TopHosts.com ranks Verio as the second best web hosting service in the world and describes them as one of the largest in the business with clients in every country.

I welcome leads from readers about other global/international e-commerce hosting services or application service providers, as well as any service organizations that help provide the requisite business presence (nexus) to justify treating the business profits as being derived from a foreign location.