"Technology and globalization are two powerful forces of our time. Where these forces originate or are applied should not be accidental. Every historical phenomenom of this type breeds its own new standards and competitive advantages and disadvantages. These forces must be carefully considered in their application to your e-commerce. Your business structure and its location are two of the most important of those considerations."
Much has been written about e-commerce and much more will be written of its size, its potential, its exponential growth, its affect on our lives, etc. The purpose of this material is not to add to, challenge or agree the statistics on numbers of Web sites, millions users, or trillions of dollars of commerce. Nor is our purpose to discuss or promote any of the elements that will make up e-commerce such as Certificates, security, cryptography, etc. though many of these elements are the business of Span-Hansa and its strategic partners.
The purpose of this page is to crystallize the concept that taxes are an option in e-commerce. The statement that the only certainties are death and taxes, no longer applies. Equally important is that the e-commerce company's decision as to its level of taxation must be taken at the outset. It cannot be delayed until the business is up and running. By then you may be committed to a jurisdiction from which you cannot escape.
Our program of "Location Optimized Commerce on the Internet" ("LOCI"), embodies seven essential elements that will allow you to make choices with respect to the level of business taxation to which you are subjected. But, you must start today.
1. You must choose the appropriate treaty / business location for your e-commerce home. For example, a Web insurance company suggests Bermuda or Barbados which have large established bases in this industry.
2. You must carefully weigh the tax rules and how they will affect the way you will conduct your business. For example you may find that royalties on the sale of your product are subject to withholding tax whereas, an outright sale at a commensurate price is not.
3. You must transfer your business or the product to your chosen location at fair market value, hence the need to do it early. For example, a new invention worth only the cost of its creation, can move for free; an YouTube with a large market capitalization and record of sales would be prohibitively expensive to move. Governments deem you to have sold your assets on exit from the country and demand their tax on the resultant capital gain.
4. You must ensure that the "mind, management, and control" over the new business and its operation is present and substantial in your strategic jurisdiction. Herein lies one of the exciting elements of e-commerce through the prudent choice of location for your Web server.
5. You must ensure that your contractual relationships are sound, legal, and conform to "transfer pricing" rules. For example, your Anguillian company may still contract work back to a Silicon Valley venue for critical programmers but those contracts require careful attention in their drafting and in the observance of them.
6. You must ensure that you have all the necessary support and resouces in your chosen jurisdiction, just as you would for any location. For example, Prickly Pear Island has absolutely no tax, but it also has no water, telephone, power nor support services. Hansa.net supports several ideal locations, and they all have the required resources and utilities to operate effectively.
7. As important as all of the previous six points is - the nature of the business transactions that e-commerce will perform and, how and where those transactons take place.
Let us briefly describe an e-commerce transaction as it passes through a server located in Anguilla or some similar strategic jurisdiction.
When a vendor presents his marketing material or product descriptions on a Web site, this is referred to as an "invitation to treat". That invitation takes place at the server location; lets say Anguilla. When a prospective purchaser wishes to buy, he makes his "offer" by clicking on a shopping cart and presenting his credit card; again, on the server in Anguilla. When the vendor has validated his card he "accepts" the buyer's offer; again, on the server in Anguilla. Finally, the vendor sends a delivery order to the plant in Taiwan or some similar manufacturing site; "title" to the goods (covered by adequate insurance and shipping costs built into the price) transfers to the buyer as soon as the specific product is ascertained...and the transaction is complete.
The elements of the transaction: "invitation to treat", "offer" and, "acceptance", took place in Anguilla and are therefore only subject to tax there. Anguilla has no tax. The "transfer of title" took place at the plant or a Taiwan warehouse and should not affect the transaction if carefully structured.
Finally, there is the fundamental equity ownership of the Anguillian entity conducting the e-commerce business. This is a topic that requires more time and attention than these Web pages will allow. We are helping many companies solve that challenge. Please see some of our examples at International Business and Tax.
We hope this perspective on e-commerce, one which is receiving more and more attention, will tempt you to explore "LOCI" with us.