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Choice of jurisdiction

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.

Wilson says the British Virgin Islands may offer cheaper incorporations, but because they are more risk averse, they have been  "slow to the mark" on the establishment of acquiring banks needed by possible Internet merchants.  Antigua, Dominica, Nevis and St. Kitts provide gaming licenses not available in other jurisdictions, but these centers may also be more susceptible to risk.  Many centers are currently ironing out relevant legislation to facilitate e-commerce transactions.  "The business must do its homework," says Wilson.

Corporate structure

Once that all-important location question is settled, the corporate structure has to be established.

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. 

"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."

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."

Payment systems

"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.

"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."

Types of businesses appropriate for offshore

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.

"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."

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.

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.

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.

"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."

Mitch Leventhal is president of Bermuda-based International E-Commerce Ltd., which provides merchant and transaction processing facilities and other online solutions for companies catering to businesses and customers worldwide.  "Increasingly, these companies are looking more and more like traditional multinational corporations," says Leventhal, describing the current general profile of an offshore e-commerce company. 

"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."

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."

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.

Cost

Now, the big question.  How much is all of this going to cost?

"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."

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. 

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.

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."

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."
 

Mark Heard is a reporter and assistant editor with Offshore Finance USA magazine. [Copyright 2000 O.F.C. Publications Inc. This article was published in the January/February 2000 issue of Offshore Finance U.S.A. magazine]