MADEIRA: E-COMMERCE

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- MADEIRA INTERNET SERVICE PROVIDERS
- MADEIRA OFFSHORE ACTIVITIES
- MADEIRA CASE STUDIES

Madeira encourages information technology operations, and the island has invested heavily in state-of-the-art telecommunications. There are already a number of Internet Service Providers in Madeira, with clear interest being shown in offshore e-commerce development. See below for specific information on e-commerce in Madeira, or go to Offshore-e-com.com for an extensive analysis of the commercial possibilities and the legal background.

A conference held in January 2006 heard that increasing competitiveness in the e-business sector and the improvement of the jurisdiction's internal efficiency through e-government may be fundamental tools in stimulating the creation of new economic activities and the strengthening of innovation in Madeira.

The suggestion was made by Willem Mole, senior adviser of ECORYS Nederland, part of the European research and consulting group, during the conference organized by S.D.M., the jurisdiction's investment promotion agency, which was held in Funchal under the theme: “Madeira, Present and Future: the challenge of development."

The conference heard how Madeira could learn how other small and dynamic economies, such as Luxemburg, Malta, The Isle of Man and Singapore, overcame their own difficulties and developed strategies to respond to the challenges of the constantly changing global economy.

The general conclusion drawn by the delegates as a result of the presentations and debates was that Madeira needs to reinforce its presence worldwide and must use the strengths of the International Business Centre and the Tourism industry.

This view was strongly endorsed by the Vice-President of the Regional Parliament, Miguel de Sousa, who stressed that “all the required conditions must be created in order to assure the competitiveness of Madeira's IBC as well as the necessary stability to attract international investors".

Madeira Internet Service Providers

The main Internet Service Providers in Madeira are Cabo TV Madeirense, SA and Portugal Telecom.

Other ISPs with smaller market-share on the island are:

• KPNQwest Portugal
• Telepac
• Vodafone
• Equant
• NovisNet and
• Dixcart.Net Serviços de Internet Lda

Madeira Offshore Activities

The natural bonding of the Internet and Offshore stems from the fact that both, of their nature, manage to avoid tax. Businesses which can operate on the Internet without, so to speak, touching ground in a high-tax jurisdiction will naturally migrate to offshore jurisdictions; while businesses that already have offshore existence will find it highly convenient to be able to use the Internet to trade with their high-tax customers without having to make a landing in their countries.

As a major offshore jurisdiction with many thousands of offshore enterprises already installed, including many trading companies, it is only a matter of time before Madeira becomes a centre of e-commerce activity. The island's geographical location between continents, its good telecommunications links, sophisticated business infrastructure and the highly-educated work-force are all factors which will attract the sales, marketing and administrative departments of retail operations, particularly those trading into EU and African countries.

By locating websites in Madeira to carry out functions previously based in high-tax jurisdictions such as sales and marketing, treasury management, supply of financial services, and most of all, the supply of digital goods such as music, video, training, software etc, businesses can take advantage of low rates of taxation for increasingly substantial parts of their operation.

In many countries, the distribution of goods from a warehousing facility does not constitute the carrying on of a trade or business in that jurisdiction, so that even for physical goods, in many case it will be possible to avoid a permanent establishment (taxable presence) altogether in many high-tax jurisdictions where trading activities currently take place.

During 2002, Madeira became the country of choice for EU Internet Service Providers wishing to offer broadband services, due to its low VAT rate and the advantages of the International Business Centre (MIBC).

British Telecom announced in April of that year that it was planning to move its broadband internet division BTopenworld to Madeira, where it joined Virgin.net, a new flat-rate internet service which is a joint venture between the Virgin Group and cable provider NTL, and which established its financial base in Madeira.

Later in the year, Freeserve (now Orange) joined BT and Virgin. Freeserve, controlled by France Telecom, was at that time the UK's largest ISP with an estimated 2.5 million customers. Freeserve reckoned to save around GBP4.5 million in tax from the move.

Madeira is also thought to have benefited from the European Union's decision to apply its Value Added Tax to digital downloads by consumers. Starting in July, 2003, VAT has been payable by the supplier of goods and services downloaded over the Internet in the EU, including downloads of software, music and videos from non-EU companies, subject to de minimis rules. Before, these products had escaped VAT, which ranges from 15% on the Portuguese island of Madeira to 25% in Sweden.

Under the single registration clause of the directive, companies are allowed to pay the combined tax liability that they have accumulated throughout the EU in one member state, which retains part of the tax before passing on the rest to the other states involved. Graeme Ross, head of indirect tax at KPMG, said that faced with the prospect of dealing with 15 tax authorities, it was inevitable that internet companies and ISPs would opt for single registration. The island is also ideal for e-commerce, as following a decade of telecoms infrastructure investment, it now boasts the widest bandwidth in Europe.

A proposal advanced in May 2006 by Karl Heinz Grasser, Finance Minister of Austria, would mean that VAT will be charged on the basis of where the customer is situated rather than the jurisdiction in which the vendor is based, a plan which would likely have serious consequences for Madeira, which as previously mentioned, is - for the moment, at least - the jurisdiction du jour when it comes to such matters.

According to EU Tax Commissioner Laszlo Kovacs, the activities of the companies which have chosen to relocate to low-VAT territories such as Madeira are tantamount to tax avoidance, distorting intra-union competition.

“We want to avoid unfair tax competition because if we maintain the place of origin principle, in that case, businesses will establish themselves in the country with the lowest rates and that would certainly distort the competition,” stated Kovacs at the time.

"Until there's greater harmonisation we would prefer the country of consumption as a principle,” he added.

However, in June of that year, German insistence that the European Union change its tax legislation to crack down on widespread value added tax fraud put the brakes on the planned e-commerce VAT reforms.

At a meeting of European Union finance ministers (Ecofin), German Finance Minister Peer Steinbrueck told fellow ministers that Germany would not support the e-commerce VAT measure unless it was given permission by the European Commission to introduce 'reverse charging' to reduce missing trader fraud, which Berlin claims costs the government as much as EUR18 billion annually in VAT revenues.

In June, 2005, mobile phone tycoon John Caudwell, owner of Caudwell Group, denied rumours that he was to re-register his firm in Madeira to cut costs as the company underwent a major management shake-up.

A company operating an e-commerce facility in Madeira will very probably choose to establish itself in the International Business Centre (see Offshore Legal and Tax Regimes) and will therefore have minimal local taxes to pay.

For information about the impact of e-commerce on a number of the main offshore activities which take place on the island, click on a link below to go to our specialist E-commerce site Offshore-e-com.com

Sales and Distribution of Physical Products
Sales and Distribution of Digital Products
Banking and Financial Services (including Investment Funds)
Corporate Support Functions

To see an analysis of the current state of legal and tax issues surrounding offshore e-commerce, click here.

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