The corporate
headquarters of large groups tend to
accumulate a variety of support services,
which are often priced into the base costs
of the group's products and services, and
then attract margin in the final price to
a customer. The profit realized by the group
in this way is of course taxed at whatever
local rate is applicable.
Nowadays,
in a world of telecommunications, computing
and easy travel, most or all headquarters'
functions can be carried out almost anywhere,
and there is extreme competition to attract
them between IOFCs and between high-tax
jurisdictions as well, all wanting the prestige
and the economic benefits stemming from
the presence of a group of highly-paid executives
and the business transactions they generate.
In different ways, it is thus often possible
for a group to make the profits inherent
in its support activities in a more or less
tax-free environment. Whether this translates
through to the bottom line depends on many
complex factors, but competent financial
management will usually be able to get a
good result.
The high-tax
jurisdictions have tried to attract
headquarters' offices and functions using
the 'coordination centre' concept. Originally
pioneered in Belgium, it is now in common
use in many countries. Essentially, the
host country will allow a resident corporate
coordination centre to carry out its functions
outside the normal tax laws, so that for
instance a re-invoicing function for cross-border
intra-group trading would be allowed to
escape withholding tax or transfer-pricing
rules. Taxation of coordination centres
is 'by agreement' between the corporation
and the host country, and is usually minimal.
This is one of the ways in which high-tax
jurisdictions, which are nominally against
low-tax areas, play the game themselves.
Often, however,
a group will decide to locate some of
its support functions in a traditional (!)
IOFC. There may be cost and operational
advantages to doing so, apart from any tax
savings; but the underlying reasons are
always tax ones, and eventually amount to
the fact that the profits implicit in the
functions can be made in a low-tax centre.
The list of corporate functions which can
be carried out from an IOFC is very long,
but includes procurement, marketing and
distribution, treasury management, debt
factoring, travel and transport management,
telecommunications, computing, recruitment
and training, pensions management, payroll.
The rapid
evolution of e-commerce and e-business techniques
has only increased the attractions of an
offshore location for many of these functions.
Foreign exchange
management is a good example of how
centralized IOFC management can benefit
a group:
Any large
group with many subsidiaries in different
countries has substantial costs connected
with foreign exchange. Multi-currency treasury
management on the basis of a set of independent
national treasury operations is nearly the
worst possible method, and concentration
of all transactions into a flexible central
treasury in a jurisdiction without exchange
controls or predatory and highly-protected
local banks is an obvious solution. Providing
that the centralized currency management
function is based in an IOFC with good local
financial infrastructure, treasury management
can proceed to optimize cash flows without
concerns about withholding taxes, capital
gains, or any of the other unpleasant taxes
or regulations often imposed by high-tax
governments. Finally, the profits from such
an operation, which can be quite substantial
in a large group, are made in a low-tax
jurisdiction.
The choice
of an appropriate IOFC for the conduct
of centralized group management or support
functions is obviously dependent on the
location of the existing head office or
support functions, the type of business
concerned, the existing group fiscal structure,
and a host of other factors. It is not possible
therefore to select a list of particular
IOFCs that should be considered.
Click on
Jurisdictions
for a list of IOFCs around the world,
then select likely candidates for full descriptions
of their facilities and tax regimes.
