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Madeira: E-Commerce

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 GBP4.5m 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.

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 (now 27) 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 had chosen to relocate to low-VAT territories such as Madeira were 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 claimed cost the government as much as EUR18bn annually in VAT revenues.

In December 2007, European Council of Finance Ministers (Ecofin) reached a landmark political agreement on two draft directives and a draft regulation aimed at changing the rules on value-added taxation intended to ensure that VAT on services accrues to the country where consumption occurs, and to prevent distortions of competition between member states operating different VAT rates.

The agreement ended a five-year deadlock on the sweeping changes to the community's VAT laws, but the reverse charging of VAT on the purchases of goods and services electronically will not begin until 2015, with a revenue sharing agreement phased in over the subsequent three years. This appeased Luxembourg, which had used its veto to block the proposed reforms. Like Madeira, Luxembourg has become a popular location for internationally known e-commerce businesses with its low 15% rate of VAT.

The new rules will require taxation for VAT on business-to-business supplies of services at the place where the customer is situated, and no longer at the location of the supplier, as is currently the case. For business-to-consumer supplies of services, the place of taxation will continue to be that where the supplier is established. However, in certain circumstances, the general rules for both businesses and consumers will not be applicable, and specified rules will apply to reflect the principle of taxation at the place of consumption. These exemptions concern in particular: restaurant services, the hiring of means of transport, cultural, sporting, scientific and educational services, and business to consumer supplies of telecommunications, broadcasting and electronic services.

To simplify VAT arrangements made necessary by the new rules for telecoms, broadcasting and electronic services, a "one-stop" system will be introduced, to enable service providers to fulfil in their home member state a single set of obligations for registrations, declarations and payments, including for services provided in other member states where they are not established. VAT revenue will then be transferred from the country in which the supplier is located to that where the customer is situated, whose VAT rates and controls will be applicable.

As a general rule, the measures entered into force on 1 January 2010.

The Council's political agreement was made possible by a compromise regarding the change of rule on the place of taxation for business-to-consumer supplies of telecoms, broadcasting and electronic services. For this sector: application of the new rules and the one-stop scheme will be deferred to January 1, 2015; the member state of establishment will, until January 1, 2019, retain a proportion of VAT receipts collected through the one-stop scheme. This proportion will amount to 30% from January 1, 2015 until December 31, 2016, 15% from January 1, 2017 until December 31, 2018, and 0% from January 1, 2019 onwards; the Commission will be asked to report on the feasibility of the new rules before their entry into force.

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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