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| Global
E-Commerce 101: The Nuts and Bolts of Going Offshore |
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| There has
been a lot of hype about offshore e-commerce, and to be sure, the financial
incentives available offshore may be rewarding. There are a number
of factors, however, that e-commerce businesses must take into account
before making the move. Costs and options will be different depending
on whether it is an exclusive cyber company, or just an e-commerce addition
to an already existing business. The legal framework regulating Internet
business has also not been able to keep up with technological advances,
but it is going to catch up eventually, meaning the rules will change.
Once the decision is made to go offshore, a number of questions need to
be addressed. |
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| Choice
of jurisdiction |
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| First,
e-commerce businesses must choose a jurisdiction. Andrea Wilson,
co-founder and senior vice-president of First Atlantic Commerce Ltd. (FAC),
an e-commerce solutions provider in Bermuda, says the many offshore centers
offer varied advantages. Bermuda features private e-commerce legislation,
reliable telecommunications, a stable political environment, "high-end
e-commerce solutions" and progressive banks. But, incorporations
and telecommunications cost more. |
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| Corporate
structure |
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| Once
that all-important location question is settled, the corporate structure
has to be established. |
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| A
large number of companies have jumped onto the e-commerce bandwagon, but
it is doubtful that all have developed the appropriate international corporate
structure. |
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| "When
looking for offshore service providers and planning your business, my advice
would be to choose partners who cover a range of jurisdictions," says Stephen
Izatt, the managing director of London-based S-Corp, a marketing and technology
consulting firm. "The goal to structuring any e-business has to be
global optimization of all functions including development, maintenance,
financial services, manufacturing and distribution." |
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| Wilson also
stresses the importance of having the right corporate structure in place.
"Tax and accounting advice is available through many management consulting
firms offshore," she says. Legal firms usually complete the incorporation
on behalf of the company, but many choose to work with a management consulting
firm to get the system in place. "It's much easier if it's a new
business creating a new entity offshore," she adds. "Existing businesses
moving offshore have the tax and capital gains challenges associated with
the move." |
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| Payment
systems |
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| "Once they
choose a jurisdiction that meets their needs and the corporate structure
is in place, they need to find an e-commerce processing solution to 'payment
enable' their Web site," says Wilson. Getting paid is a principal
concern for any business. With e-commerce, there is a good chance
the infrastructure will already exist. |
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| "Retail companies
are beginning to see the advantages and are beginning to at least process
payments through an offshore company," says Izatt. "Given that offshore
payment facilities are the most common offering from within the jurisdictions,
this is a fairly easy function to outsource and the tax savings under current
legislation are pretty impressive." |
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| Types of
businesses appropriate for offshore |
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| Concerns facing
the young industry, and as a result its young businesses, include the lack
of regulation and precedent. International bodies are scrambling
to find ways to regulate the new borderless economy, so rules could change
and laws could be born at the drop of a hat over the next few years.
All of this will affect the kinds of companies providing offshore e-commerce
services. Trends have developed, but diversification has also been
constant. |
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| "Unfortunately,
the companies that were fastest to take up the advantages offered by operating
some aspects of their e-commerce company offshore offered gambling and
pornography," says Izatt. "However, this is changing, and more e-businesses
are using the offshore jurisdictions for mainstream products and services.
Some of that is due to an effort on behalf of the offshore-based service
companies refusing that sort of business and pushing a little harder into
the marketplace." |
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| Following
the initial flood of casino, lottery and pornography business, a little
respectability crept into the offshore e-commerce world, and financial
institutions such as insurance companies started offering products from
offshore servers. Izatt speculates this was probably a result of
their familiarity with the offshore environment. |
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| Now, a typical
offshore e-commerce company may be a start-up with a good marketing and
business plan. "Some are existing businesses looking for a better
solution for their corporate objectives, whether that be technology driven,
regulatory driven, tax driven or f/x driven," says Wilson. |
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| Present popular
offshore e-commerce businesses include those offering digital content,
subscriptions, software downloads and corporate services. Merchants
without physical product distribution are common, and as they deliver products
electronically over the Internet, they can do their selling from anywhere.
These businesses may have the most to gain from going offshore. |
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| "There are
very few businesses that cannot take advantage of some of their business
processes being placed offshore," says Izatt. "But, given the general
confusion that exists around legislation, the easiest to place offshore
right now would be financial and digital products and services such as
gambling, insurance, MP3 music, online software distribution and online
publishing in general." |
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| "These
are enterprises which have significant and growing international business
and which have realized that by pursuing traditional multinational structuring
strategies they can realize additional advantages. The difference
from traditional multinationals, however, is that many of these companies
are initiating these strategies at earlier stages in their development
than their more traditional cousins." |
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| In terms of
the more difficult operations to move offshore, professionals point to
those which require a large staff with a physical presence in the same
place. "This is mainly a function of the scarcity of appropriately-skilled
labor in some of the jurisdictions and the difficulty with immigration
laws and costs associated with moving staff offshore," says Izatt.
"However, I would still argue that those functions could be placed in more
appropriate and easier places with some functions such as payment processing
still being placed offshore." |
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| Companies
selling goods or services which are substantially manufactured or produced
in the US, and which cannot have production facilities easily shifted offshore,
could stand to gain the least from an offshore strategy. |
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| Cost |
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| Now, the big
question. How much is all of this going to cost? |
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| "The threshold
in support of a decision to go offshore is pretty small," answers Izatt.
"You can set up offshore exempt companies and outsource certain critical
processes and company management for probably as little as 5,000 pounds
[$8,000] per annum and then other charges would be incurred by transaction.
So, it is more about how optimistic you are and where the stakeholders
wish to hold their funds." |
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| For FAC's
services in Bermuda, Wilson says a complete turn-key solution costs between
$3,000 and $6,000 for a one-time set-up fee depending on the solution the
merchant chooses. |
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| If choosing
a Caribbean locale, businesses will have to be aware of much higher telecommunications
fees and bandwidth costs in comparison to onshore competitors. Another
concern, if considering insurance, is the possibility of higher ‘cyber’
insurance premiums. |
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| With all of
this in mind, Wilson still says the costs involved in establishing an offshore
e-commerce company would "never" outweigh the benefits. "Actually,
having said that, if the business plan is faulty, the business may have
spent thousands of dollars on the incorporation and accounting advice and
never break even," she adds. "But the benefits of being offshore
greatly outweigh the set-up costs if the business plan is sound and they
have a strong marketing angle." |
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| Izatt has
one last thing to add: "Nobody really knows what will happen with regional
or global legislation of offshore e-commerce, so flexibility is key." |
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