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 . The Weekly Update news bulletin offer news and commentary regarding a number of issue which are of interest or concern to clients. Such topics may include offshore company formation, trusts, banking, investing, real estate, expatriate matters, residency & second passport matters, and other topics concerning the Dominican Republic & Panama. |
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(and related topics) . A number of clients have been contacting us regarding business related topics, namely Offshore Merchant Accounts & operating an on-line business. Is it really possible to operate an Internet Business in a tax-free offshore environment? Is it possible to find good web hosting services or credit card processing services offshore? The answer is yes to all. But for those that are concerned about the future for e-commerce, take a look at the following brief online article first: . http://searchhound.iz.com/Howl/Articles/Display/0,,articleId=573,00.html . Let us examine some very basic premises why any on-line business is one that is almost impossible to tax (if set up properly), and also discuss some basic ideas about the Internet. An on-line Internet business or shall we say e-commerce business is basically an extension of the traditional mail order business. The only new twist is that the catalogs are now on-line (on the Internet). This makes it much easier for customers to find what they want, and it makes the task of updating new products much quicker and easier. For all practical purposes, the Internet is a medium, which allows almost any business to present their products or information to customers in a quick, convenient and inexpensive way. So, we can then say, the Internet is a medium for not only mail order type of firms, but also real estate agents, travel agents, and any other kind of business as well. With regards to the tax question, much of this comes down to breaking the previous definitions of how or why a business might be taxed. Who owns the Internet? Where is the business or merchant located? From where are the company products delivered, or where is the order fulfillment end of things done? What if the order fulfillment service was a separate company that was located in a high tax jurisdiction such as the US or Europe, but the sales were completed somewhere else in a more tax advantaged place (ex. no tax)? In other words, what if the company sending the product was a different company than the one making the sales order, and the company sending the product did not make much taxable profit at all? The consumer really does not care, providing they get the product they want, and that the customer’s expectations are met (quality product, timely delivery, etc.). . The taxation end of things really comes from the problems, which always existed with the mail order industry. For example, if you live in Ohio, but order from a company in California, you pay no sales tax (or shall we say the company in California is not required to collect sales tax when the customer is not a resident of California). Let’s expand this out further to discuss a mail order company in Taiwan and a customer in Italy. Who pays the sales tax? Who collects the sales tax? If you think the company in Taiwan has any intention of paying sales or any other kind of tax to Italy simply because someone from Italy ordered a product, you can forget it. What if the company was not in Taiwan, but was say in Panama, or located inside a tax-free zone in the Caribbean, and has zero corporate income tax by law (or local legislation)? While such a prospect was a pain to set up before, all things are possible with the Internet and related advances with communications. Even telephone rates have made it cheap enough in some countries to telephone in your order half way around the world (should you still like the idea of speaking with someone, as opposed to filling out an on-line order form). The point being made is, it is almost impossible to effect or collect sales or other kinds of taxes from another state, or from another country. Interestingly enough, all of the OECD countries are banding together to fight so-called money laundering, and in effect gang up on the smaller tax haven nations with respect to taxation or reporting matters. But I wonder how long the good feelings will last as a cohesive group when they start cannibalizing each other’s tax revenues? What a cat-fight that would be, each government claiming sales or other taxes due from the other, each with different tax rates and different kinds of tax rules. What happens when the US government tells the government in France, that the French tax authorities owe the IRS $ 50 Million Dollars? What happens also when both countries agree to a settlement of taxes (where each agrees to pay the other) but there is a gross difference in the amounts? What do the French people have to say when the government of France cannot fund their own social programs because they must send tax money off to the US, so the US can fund their own social or other tax supported programs? . Sound far-fetched or is this a real possibility? Well, consider the fact the US currently owes US$ 1.3 Billion Dollars (that’s Billion with a B) in back membership dues to the United Nations. An organization located in New York and in part founded by the US. Why haven’t they paid? Well, the US claims they disagree with the way the UN is operated. The US also claims they want the rest of the world, specifically smaller developing nations, to kick in more money. Whether you agree that the UN is a good organization or not, this is really not the point. What is interesting, is the fact that we have one large country with holding cash payments because they claim they do not like what another country or an international organization is doing. Yet, that same country continues to feel justified in dictating economic policy, politics and morality to the rest of the world. I am not trying to highlight some negatives with regards to the US, but it is always interesting to see how money owed to another country (or entity) comes into play, and how it is used for manipulation (on both sides). Equally of interest is the prediction of how all of these issues will play out going forward, especially when we bring in the topics of taxation and other things. So, maybe the US will promise something to another country if the other country does what they want (like asking the small country to become a tax collection or reporting agent for the US). Of course, they could then take it away at the last minute (the money, promise, etc.) or claim they do not want to pay after all. What is good for the goose, is also good for the gander. . But, with all of this said, it does not mean that many countries have not attempted to tax the Internet or e-commerce. The problem is that you cannot apply traditional rules of taxation as before. For example, point of sale is usually determined at the company’s place of business. If you walk into ABC hardware in Lansing, Michigan then we know you purchased something in that particular place. If you walk into a shop located in London, we know you made a physical purchase in England (and that sale or purchase is subject to local sales tax, etc.). But what is the point of sale for the Internet? Is it your home computer or is it the other end on the company’s server? If it is your home computer, does this mean your home computer is a place of business (maybe then all computer purchases and related use is tax deductible as a business expense, even if you don’t have a business)? If it’s the company’s place of business, and that location is in another country, I refer you back to the paragraph above. . In the past, the US claimed that all Internet traffic (in theory) passes through US telephone lines and therefore all Internet sales are taxable by the US (or the state jurisdictions therein). Nice try, but you can just imagine what the rest of the world had to say about it (see the paragraph immediately before this one). Other countries have taken a more pragmatic approach, stating that the previous method of tax assessment is the same and that the web site’s location would be a determining factor. In other words, regardless of where the business was physically said to be located, if your site was hosted inside a certain jurisdiction, than this in effect is where your place of business is located. Australia for example, recently claimed they would now tax all Australian domiciled Internet businesses at a rate of 50% income tax (how nice for them). What Australia, and any other country with this point of view, fails to realize is that web sites can be hosted anywhere. If the tax problem centers around where your site is hosted, then simply move it to a place that does not assess taxes simply because you host your site on a server inside their country. . With respect to offshore web hosting, Mr. Tony Betts of INSATCOM has contacted us recently to make clients aware of his services from Dominica. Tony has told us that Dominica offers very good communications infrastructure and protection under the confidentiality laws that exist as well. For more information contact Mr. Tony Betts, No. 7 Canefield Industrial Park, Commonwealth of Dominica, Tel. (dial 011 first from US) 767-449-0954 or Fax 767-449-3032. Email Tony directly: tony@insatcom.com Rates for web hosting can be viewed on-line at: http://www.insatcom.com/rate.html . . So, you have decided that you like the idea of your own business that could allow you to enjoy a tax-free income in the process. Some people may tell you its crazy, but how crazy is it really? I mean you could possibly have a very good business offering handcrafted jewelry from Ecuador, handmade wool blankets from Peru, handmade leather horse saddles from Columbia or Panama, and a whole number of other things. Want something closer to home? How about closeout clothes bargains? Buy swimsuits when the season is over for a few pennies on the dollar and sell them at a discount on-line. Are you from Europe? Rumor has it that the days of Airport Duty Free shopping is gone for good, or is it? How about the Virtual Airport Duty Free Shop (on-line from a free zone in the Dominican Republic or anywhere else you like)? There are hundreds of ideas to explore, and you do not necessarily need a large budget or outrageous investment either. Worried that some of the “Dot.com companies” like Pets.Com went out of business? Do you know why they went out of business? Too much overhead, but a good idea none the less. Suppose you put the same kind of business together for less than $ 10,000? This is not fiction, but reality. Web hosting, or your offshore on-line store is not really expensive to set up. You can learn to build web pages and web sites yourself if you take the time, in fact I would encourage that you do learn it. In other words, you can build a business with your own hard work and effort, you do not necessarily need a six figure bank account. . This is not about a get rich quick scheme, in fact, its hard work. In reality any business is hard work, and it still must be attended to after its up and running. The image of the wealthy business owner sitting on a Caribbean beach sipping daiquiris is a myth, although no one says you cannot take a break once in a while. However, the idea of earning $5,000 per month, $ 10,000 per month (or more) tax-free is very possible. Even more appealing when your monthly living expenses are only $ 2,500 per month, which allows you to have a comfortable apartment, full time live in maid, and private school for your children – where they actually learn something other than how to pass through a metal detector. Places like Ecuador, Panama, The Dominican Republic, Mauritius, are some examples. . How is it possible for you to succeed when “Pets.com” failed? You do not need to earn that much to become profitable when you have low business or personal expenses. At a monthly business revenue of $20,000 you can probably survive very nicely (and put the excess into your tax free bank account earning 10% or more) where as pets.com would go broke right away on this kind of revenue amount. . So, what exactly is the correct way to gain tax advantages, and some of the other things we spoke of? Well, as a general rule, incorporate your business is a stable jurisdiction offering the ability of a zero corporate income tax. Perhaps find a reliable web hosting service in the proper jurisdiction, which may be another country altogether. Set up an offshore merchant account in yet another place, which offers the best rates or service. Finally, perhaps bank in yet another if it is favorable to do so. This all sounds complicated, but it is very easy to set up this way. In fact, a number of our clients have already done it. It is neither illegal nor immoral, it is just good sense. |
