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[Excerpt from OPC newsletter 2001-12-10:]

Going Offshore With E-Commerce

The purpose of this article is to give you a primer of the pro's and con's of doing business over the Internet from an offshore location, a.k.a. "Offshore E-Commerce."

There are lots of scams out there, but also a lot of benefits, and there are many, many options available to the potential offshore entrepreneur.

Taxation, Or Lack Thereof

Quite possibly the most compelling reason for going offshore with an Internet business is the possibility of slipping the tax noose and operating a business that's legitimately tax-free and free from the smothering regulations of onshore government.

This is generally more easily said than done, as governments everywhere love to invent new rules and excuses to ensure their "fair share" of your profitable business.

Sales taxes are generally not applicable to most Internet businesses, at least for now. However, merely being in a different state or province and/or in a different country isn't a guarantee that you'll be free of all "legal obligations" to collect sales taxes. Governments will try and pin you down with the locations of your:

to make you pay their local sales taxes.

The types of goods you sell are also a factor, as digital (downloadable) goods are less likely to be affected than hard (physical) goods that need to be shipped from Point A to Point B.

You will have to investigate the local rules for your area to be certain of your "obligations". However, the odds are good that you're likely to be able to avoid most (if not all) sales taxes when doing business on the Internet.

Income taxes on your business profits are an entirely different kettle of fish. There are a lot of myths about web businesses based in tax havens, such as being able to accumulate tax-free web profits ad infinitum. This may or may not be possible, depending on your location, but it's a guarantee that if you attempt to remit any funds to your home country they're going to be taxable in your hands (unless, of course, you live in a country that imposes no income taxes whatsoever).

Government tax departments will always assume that if you're doing Internet business from a tax haven or low tax jurisdiction, you're "illegally evading" (rather than "legally avoiding") taxes. And most of the island tax havens are not the least bit concerned that you might be "breaking a law" in your home country by "evading taxes". After all, they're all competing with each other for your business, so don't assume that something's "legal" just because Promoter X in Offshore Jurisdiction Y assures you that this is the case.

Careful planning (including a possible consultation with a tax professional) is vital if you want the business profits to be "legally" tax-free. There must be fiscal separation between the owner of the business and the business itself, especially if the owner intends to remain onshore.

Some hurdles you should acknowledge include the following:

  1. If you're a US (or other high-tax jurisdiction) citizen/resident, you'll be taxed on your world-wide income. There are tax treaties between various nations that prevent you from being double-taxed on the same income, but there's no doubt that making claims under such treaties opens your financial affairs to not one, but at least two national tax departments.
  2. If you have a foreign corporation in a tax haven and also use a web server outside your country of residence, your local onshore government is going to look at where your "real" work is being done. Are you physically in the country or do you have a substantial physical business presence in the tax haven country? You are "courting" a legal case with the local tax department if you believe you don't owe taxes simply because your income is generated by a web site located on an offshore web server.
  3. If you process your business through a foreign corporation or IBC (International Business Corporation), the US-based IRS -- and other aggressive tax departments -- use controlled foreign corporation (CFC) rules to prevent you from sheltering your US company profits in a foreign corporation. Any foreign enterprise should be entirely unrelated to your existing onshore business to avoid this potential problem.

There are various ways to achieve this state which are beyond the scope of this article. See other writings on this website about the uses of International Business Corporations and Trusts for further details.

And Don't Forget To Keep Your Mouth Shut

We should also point out that an offshore e-commerce entrepreneur shouldn't neglect the important aspect of confidentiality either. The fewer people who know you're running a web business (especially an offshore one), the better. Resist the temptation to brag about all the taxes you're allegedly saving by being based in Panama, or the Isle of Man, or the Channel Islands, or wherever. Envy breeds enemies, and even if you've gone to a lot of trouble to do things properly, governments can and will bend (and break) their "law" once they decide to "make an example" of you.

An absence of taxes is of course not the only consideration when going offshore with an e-business, but -- just like a plain, chubby girl who also happens to be the sole heir of a billionaire -- the money can make up for a lot of other potential deficiencies.

What we're referring to here is the absence or reduced quality/value of certain services that you may be used to from onshore.

Other Points Besides Taxation

Professionally, there are several services you should consider evaluating for a given jurisdiction, such as the type and structure of the company that operates the business in the jurisdiction, various legal provisions (such as data privacy and protection, intellectual property, product liability, regulatory oversight, etc.), and the availability of competent accounting/auditing if required.

Each of these should be examined for potential pitfalls that could trip you up as the business grows and rakes in ever greater revenues and (hopefully) profits.

You must also concern yourself with technical issues such as the choice of the local Internet Service Provider (ISP) allowing you access to the Internet, should you choose to live in that particular offshore location. If you can't get onto the Internet cheaply and easily, you will have great difficulty managing and growing your Internet business. Typically the worst service is provided in countries with a monopoly, government-owned ISP -- we personally were very unimpressed with Costa Rica's RACSA ISP, but hopefully competition will arrive and make Costa Rican Internet access faster, more reliable, and cheaper in the future. You'll be best off where there are a lot of private ISP's vigorously competing for your consumer dollar.

Also, the choice of the host upon which your Internet business will actually reside is critical. A hosting service which is unreliable will lose you a lot of business due to downtime and/or slow access to your web pages -- a "store" that's closed or difficult to use is one that won't make many sales! The cheapest host is not usually the best one, so choose carefully for host quality and reliability as well as the appropriate jurisdiction. Hosts must be able to assure you of 99.99% or better uptime or they're not worth what you're paying for them. They must also be able to handle the bandwidth (Internet traffic) you need to speedily service your customers.

Hand in hand with hosting is telecommunications -- even the best host with the most modern servers and access lines can't be expected to work miracles if the local telecommunications infrastructure is not good enough to allow easy and reliable access to the rest of the world.

Fortunately, most offshore jurisdictions have well-developed telecommunications systems and good international connections, so this is potentially less of a problem than the ISP and hosting issues.

If you're going to base everything including your financial processing completely offshore (advisable, otherwise you might be deemed to be effectively onshore no matter where the hosting server is actually located), then you need to evaluate the following:

A Note on Payment Systems

So far, bank payment systems are still the way to go for Internet processing despite their various disadvantages such as expense, inefficiency, and lack of entrepreneurial initiative.

Internet-based systems which bypass the banking system (possibly using new electronic currencies) have yet to take hold in any significant way so far. Virtually all the ones in use, such as Beanz, Q-Pass, PayPal, E-Gold, etc. are still ultimately dependent on the use of a credit card to inject funds into the system in the first place.

This means that virtually all Internet payment processing is essentially a stepchild of the "real world" credit card industry including the concept of merchant accounts (which must be set up with a bank or similar credit card issuing institution). If you don't have a merchant account, then you must use a processing intermediary who does.

Merchant accounts can be expensive to obtain, and also the issuers often ask for a deposit balance equal to a percentage of your outstanding credit transactions (pending settlement of approved transactions through their network).

Intermediaries can be much cheaper to set up, but they will charge higher commissions for using their services -- 10% and up is not uncommon. There may also be substantial monthly charges, though this varies dramatically between issuers. Look for intermediaries which "effectively" offer merchant accounts as if they are credit card issuers themselves, allowing you to offer a range of credit cards through one intermediary. These entities are more expensive than normal merchant accounts, but are less expensive than less comprehensive intermediaries.

Some Likely Offshore Businesses

If you're wondering which business sectors are likely to take off fastest in the race to escape the taxman and go offshore, here's a list from offshore-e-com (link at the end of the article):

There is at least one example of each business presently offshore, with more to follow. Businesses specializing in digital products are the ones most able to ply their trade from an offshore location, so if you're still looking for a business idea, start developing your plans from there.

Some Likely Jurisdictions

Here's a list of the likely suspects from which you can base your offshore e-commerce business:

To go into the pro's and con's of each jurisdiction is too lengthy for this article, but here's where to go for all the details:

The parent site: is an excellent source of links and articles on offshore e-commerce in general.

Also, is affiliated with the offshore-e-com site and offers excellent jurisdiction information.

For other, general offshore e-commerce info, try:

Also, a great site for e-commerce marketing news is:

We mention this site in particular because if you buy a year's membership for access to their member's-only site, they'll give you A Merchant's Guide to E-Commerce Gateways which is filled with comprehensive listings of credit card processors (a number of which are going to be "offshore" from your present location).

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