For a small or medium-sized company based in a high-tax area it is often confusing when it come to deciding how to approach the idea of offshore e-commerce. Even the concept of e-commerce itself is sufficiently challenging. If a company has previously relied on traditional business methods it could seem too extreme to even consider dealing with the complexities of a move offshore at the same time.
Ignoring the advantages of offshore e-commerce could however be very short-sighted – there will never be a better time to go offshore than the moment at which e-commerce is going to be introduced; and the tax consequences of waiting could be dire.
Can the owners make use of an offshore environment?
One of the most critical points to consider in offshore e-commerce is whether a company (meaning, its owners) will be able to take advantage of lower taxes. Although there are a number of other attractive reasons for locating your e-Commerce company in the Bahamas, tax benefits certainly play an important role.
Once a company’s principles accept the concept of “being flexible” in order to achieve tax benefits, then there is hardly a company on earth that can’t benefit from offshore e-commerce. ‘Being flexible’ might mean a whole range of things, including a change of residence, corporate restructuring or redesigning product ranges.
Choosing what to send offshore
Having accepted in principle that there might be some ‘hassle’ involved in going offshore, the next step is to determine which parts of a company’s operations could be taken offshore. The real question actually is the other way around: which parts of the business absolutely must stay onshore? It’s obviously impossible to give a generic answer to that question, since so much will depend on the nature of each business in particular, but some generalisations are possible.
For instance, the delivery of physical goods has to take place onshore – but it can be outsourced, and is nowadays better outsourced in many cases, even for an onshore business. The marketing of goods which require physical contact with the customer has to stay near the customer – except that increasingly sophisticated software is allowing ‘virtual’ on-line experiences to take over ever-greater parts of the sales process. Our legal advisors can assist you in determining the best way to structure your offshore components.
Going offshore is not trouble-free
The tax position of the owner(s) is usually seen as the most crucial factor in determining whether a business can move offshore. The owner(s) of an onshore business may have to make some fairly major changes if the tax benefits of offshore e-commerce are to be fully realised. This is because the combination of Controlled Foreign Corporation (CFC) laws with generalised anti-avoidance legislation ‘sees through’ any simple structure that attempts to distance onshore owner from offshore business. The few high-tax countries that haven’t already put these types of legislation in place will no doubt be doing so in the near future, as ‘offshore’ becomes more and more threatening to their tax bases.
Ensuring a tax-efficient result
This is another point at which it is difficult to generalise. There really are a lot of different ways in which the fiscal separation of owner and business can be achieved, and advice from our professional advisors is indispensable, to take account of the circumstances of all concerned. However, again, it is possible to make a few generalisations:
if the owner (whether company or individual) is going to remain onshore, then ownership will have to be divided among distinct entities or individuals in order to get below the CFC barrier; and there may still remain a problem with anti-avoidance legislation in some circumstances;
if possible, it will be best for most or all ownership to be held in offshore hands; and finally,
if possible, it will be best for a new business to be started so that capital gains tax problems don’t arise on the transfer of the business out of the high-tax jurisdiction.
These ‘rules’ impose some fairly rough and difficult changes for most people, and a judgment has to be made as to whether it is prudent.
At this stage, a competent professional adviser becomes an absolute necessity, and should be chosen from among the many Bahamian accountants, consultants or lawyers with demonstrated competence in e-commerce and international tax planning.
It is also necessary to plan the e-commerce or e-business commercial structure; here again there a number of experts within the Bahamas. Please consult our Business Directory or contact us for our recommendations.
These individuals, or firms, will lay the foundation for successful offshore e-commerce, and they must be capable of working together with the owner(s), and with existing financial management, as well.