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 ELECTRONIC PRODUCTS BUSINESS TO BUSINESS CASE STUDY
Physical Products Consumer Case Study
Offshore Corporate Functions Case Study
ELECTRONIC PRODUCTS BUSINESS TO BUSINESS CASE STUDY
Company A is based in the UK and has been selling computer software to businesses for a number of years using a mail-order catalogue and a small direct sales force, it has successfully set up a UK web site that allows the purchase and shipping of software to customers' homes and businesses.
The web site has started to generate significant quantities of non-UK orders from around the world.
Company A's Internet host, Net ISP Ltd, who handle most of the administration of the site, have pointed out to the company that some of their competitors have begun to supply software in digital form.
They recommend that Company A do the same. The company's auditors, Taylor Price (TP), a medium-sized firm of accountants and consultants who have specialised in IT and e-commerce are asked to advise; they agree that there will be substantial cost savings on packaging, warehousing, shipping and handling, but suggest that the new operation should be set up offshore. They recommend the Cayman Islands, where they have a branch.
Net ISP worry that the Caymans do not have sufficiently advanced telecommunications facilities to handle the high-bandwidth requirement for complex software downloads, but is rapidly reassured by TP. Net ISP also point out that digital delivery is probably the whole future of software distribution, so that Company A should be prepared to move their whole business offshore eventually.
TP say that, if so, then the Caymans operation should be set up as a separate entity to minimise any entanglement in UK taxation. Company A agrees with this advice and its shareholders decide to incorporate Computec Systems Ltd in the Caymans with TP's assistance.
TP also recommend an ISP in the Caymans with adequate facilities where Computec's dedicated server can be co-located. Netsource are asked to supervise technical aspects of setting up and running the web-site, since initially Company A does not plan to have an office or staff in the Caymans. Company A allocates project responsibilities as follows:
- Formation of Computec Systems Ltd as a Caymans exempt company (it will pay no taxes, but there are some quite small annual fees) - TP (Caymans) Ltd
- Negotiation of licensing deals and technical data specifications with software suppliers; discounted prices are to be agreed for digital products; licensing will follow standard procedures - Company A
- Installation of server and systems (front-end catalogue and ordering facilities with multi-currency secure payment processing package; software database and distribution system) - Net ISP with Caymans ISP.
- Open bank accounts; establish credit-card merchant IDs and authorisation procedures - TP
- Installation of software into the database - Net ISP with Caymans ISP
The advice of TP is that Computec Systems Ltd, as a Caymans company will have no need to charge VAT in the EU or sales taxes in the US.
Physical Products Consumer Case Study
Toys to Go are a newly established company that will retail toys exclusively through the Internet from its headquarters in an offshore jurisdiction. It is owned by two Canadian businessmen, who between them have previous experience of offshore companies, e-commerce and toy retailing; they see substantial tax and cost advantages to be gained from an offshore location.
The company and web site are to be based in the British Virgin Islands, as one of the directors has contacts with that jurisdiction. The BVI has an established financial industry and its infrastructure is good enough to support e-commerce enterprises.
The site will be the sole means of ordering goods, with marketing being a mixture of Internet and printed media advertising. The two owners plan to live in the BVI and run the business from there. They will need work permits, but these will be issued without demur since they intend to employ a number of local administrative staff. Since the local supply of skilled workers is limited, it may be necessary to hire one or two expatriate computer technicians, who will also need work permits.
Toys to Go intends to source its supplies from around the world, with procurement being handled from the BVI, but bulk deliveries being made to warehouses in the US and the EU. Warehousing and customer delivery arrangements are to be outsourced to Interhouse, an established company with 40 years' experience of warehousing and fulfilment for consumer goods in international markets.
Although Toys to Go could probably have maintained an EU warehouse without damaging its tax status, it would have been more difficult in the US; and Toys to Go sees no need to create subsidiary operations with their own managerial demands if adequate alternatives already exist.
Toys to Go development programme is as follows, involving a BVI firm of lawyers (BVLAW), a BVI Internet Service Provider (BVISP), a Toronto e-commerce platform designer (TECP), and Interhouse.
- Establishment of Toys to Go (BVI) Ltd (BVLAW).
- Web-site design, with interactive catalogue, ordering facilities, shopping cart, tax/duty calculation (TECP).
- Multi-currency payment and customer account management packages sourced and integrated into site (Toys to Go; TECP);
- Negotiation of banking and credit card facilities including merchant ID and clearance procedures (Toys to Go);
- Development of customised inventory control, despatch and Interhouse/Toyco billing routines (Toys to Go, Interhouse, TECP);
- Co-location of the web site at BVISP's facilities (BVISP).
Interhouse are to handle importation formalities, and will take responsibility for the payment of import duties and VAT in the EU or (in the US) sales taxes on final customer delivery.
All customer payments are to be processed in the BVI, and will include charges for import duty and VAT/Sales Tax when applicable. Interhouse invoices to Toys to Go will include import duty and VAT/Sales Tax expenses as well as billing for import clearance, warehousing and despatch.
Toys to Go (BVI) Ltd will be incorporated as an International Business Company, and will be exempt from taxation in the BVI. The BVI has a sophisticated financial infrastructure which will be able to support Toys to Go's future expansion without difficulty. Toys to Go expect to move on to Internet procurement and freight transport handling in the near future.
Offshore Corporate Functions Case Study
LeRoche & Dubois (LRD) is a major European supplier of cosmetics, health care products and toiletries under many well-known brands. It has parallel listings in Paris and London.
In 1975, it acquired a 50% stake in West Indies Fragrances (WIF), a British company with extensive interests in essential oils throughout what had been the British Empire. WIF is perhaps the leading European supplier of essential oils (used for fragrances and flavourings) and was a key part of LRD's supply chain. LRD accounted for nearly 40% of WIF's turnover.
WIF had been a family company based in Tunbridge Wells since 1775, but in 1995 when the then Chairman approached retirement and there was no family member to succeed him, it was decided among the shareholders (M & M and 30 or more WIF family members) to seek external management, and to prepare the company for flotation. A firm of consultants was asked to recommend the best route.
Most of WIF's activities take place in ex-colonies, where oils are sourced either from proprietary farms or externally, refined, packed and shipped to the UK. In Europe, there is a certain amount of re-packing to break bulk and a small amount of mixing; but essentially, it is just a warehouse and shipping operation.
There are more than 2,000 customers, and more than 1,000 product lines; little sales and marketing takes place, because WIF has more or less a stranglehold on the market due to its control of oil sourcing. It is a highly profitable business.
WIF used to have a multinational force of 'order-takers' but in recent years most customers have installed inventory control software (developed for WIF by a European consultancy) which automatically generates orders monthly or in some cases weekly; these are faxed to the Tunbridge Wells offices and generate picking lists, despatch notes, invoices, etc.
A further project, begun in 1997, is moving this ordering chain onto a corporate extranet using IP, implemented with a mixture of standard and bespoke e-commerce tools and packages. WIF's consultants put together a project team consisting of Internet host, e-commerce systems supplier, and telecommunications provider; the resulting integrated system was tested successfully with a group of M & M plants in 1998, and in 1999 was rolled out to cover the whole of WIF's client base.
Very few clients are not yet equipped to join the new system, and for them the fax-based system is maintained; their orders are coded into the new system by WIF personnel.
The consultants saw immediately that with an Internet-based ordering and inventory control system in place, WIF did not need to be in the UK at all, and it was decided to set up a Jersey listed company (Channel Islands Stock Exchange) which would buy a 40% holding in WIF with the proceeds of an IPO.
The Jersey branch of a major London issuing house easily placed the £40m issue. LRD tendered a 20% holding to the offer; the family also tendered 20% of its holdings (mostly from UK-resident members who were going to benefit less than those living in Jersey and other offshore jurisdictions); and in 1998 WIF became a public company in Jersey. LRDs remaining stake of 30% in the new company is owned through a Netherlands holding company, ensuring maximum tax efficiency for dividends received from WIF.
(NB This structure may come under threat from the UK Finance Act 2000 because of the Chancellor's attack on 'mixer' companies. LRDs advisers will study alternative structures when the fine print of the Act is settled.)
WIF now processes customers' orders in Jersey; WIF's systems control the warehousing and despatch operation in EU member states, and invoices are sent from Jersey, carrying VAT at local rates as they did before the move (WIF needed to re-register in those countries where it had significant business, but apart from that the VAT situation remained unchanged).
The ordering information received in Jersey is fed into an inventory control package where it is combined with stock level data from the warehouses (received daily) and sourcing data (availability, cost and shipping time). This package generates least-cost ordering patterns from WIF's world-wide network, and sometimes from external sources if necessary.
Needless to say, these re-stocking orders are sent out on the company's extranet. Supply lead-times are in fact quite short, since essential oils are very high-value but concentrated, and are invariably airfreighted.
In terms of Jersey taxation, WIF is an International Business Company, paying a maximum rate of 2% tax on its net income, reducing to 0.5% on income over £10m. It is allowed to have an office in Jersey; but due to the high level of technical sophistication in its systems, the Jersey staff is considerably smaller than it used to be in Tunbridge Wells. Annual turnover is more than £30m.
WIF's dividends are paid without deduction of any withholding tax; however, the IBC is not entitled to use the Double Taxation Agreement between Jersey and the UK, meaning that UK shareholders in WIF will be taxed in the UK on their dividends. Jersey residents receive their dividends franked at 20% (the standard rate of income tax in Jersey); residents of other offshore jurisdictions will not normally have a tax liability in any event.
WIF's various shareholders are very pleased with the changes. The company itself has been transformed in ten years from a sleepy, if magnificent colonial relic into a highly efficient modern electronic corporation; and the new tax structure benefits everyone.
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