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 Lowtax.net Offshore
Business Review for a description of the tax and operational rationale
underlying such structures.
For information on onshore as well as offshore see the new Onshore-Offshore section on www.lowtax.net
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.
TREASURY MANAGEMENT PROCUREMENT
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.
Procurement
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 group 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.
TELECOMMUNICATIONS
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’.
TRAVEL AND TRANSPORT
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.
PROPRIETARY TRADING
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-tax
jurisdictions.