E-Commerce in a Low-Tax Area
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 or low-tax 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.
By locating websites in low-tax jurisdictions 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.
When it comes to considering the future of Switzerland as an e-commerce centre, however, the position is not as simple as it is for out-and-out offshore jurisdictions, because the 'offshore' or 'low-tax' sector of the Swiss economy, based on the various special forms of the Stock Corporation, sits within a normal, moderately-taxed economy (see Offshore Legal and Taxation Regimes). In fact the legislation governing most of the special forms of company specifically prohibits normal commercial and business activity inside Switzerland, or allows it only to a certain degree, in which case it is taxed normally. Therefore local e-commerce activity would have to be carried on in subsidiaries, and their profits would be subject to withholding tax on distribution to the tax-exempt parent holding company.
The situation is somewhat better for the subsidiary of a group which is providing services internally, since it can use the Service Company form; and an e-commerce company providing commercial services exclusively abroad would probably be able to function as a Domiciliary Company as long as it avoided any permanent establishment in Switzerland - it is not clear whether this would allow the presence of servers. In the seven cantons which permit Auxiliary and Mixed Companies, there are some further possibilities.
Specific advice should be sought from Swiss specialist lawyers and accountants before setting up e-commerce operations in Switzerland.
Subject to these uncertainties, Switzerland certainly has the opportunity to become a centre of e-commerce activity, being a major 'low-tax' jurisdiction with tens of thousands of enterprises already installed, including many collective investment funds, banks and other financial institutions. The country's geographical location, its good telecommunications links and its sophisticated business infrastructure add to its suitability as an entrepot. It remains to be seen whether the government and the cantons will adjust their fiscal policies to favour e-commerce development (not necessarily that easy for an OECD country during the current crusade against harmful tax competition), or whether rapid e-commerce growth will be constrained by legal and fiscal complexities.
The country may not have helped its e-commerce prospects with a law enacted in April, 2003, requiring Swiss ISPs to keep e-mail records for six months to aid criminal investigations. The authorities will be given access to the data only as part of ongoing criminal investigations. The ISPs have been told to log information such as connection times, e-mails sent and received and the recipients of these e-mails. However, they will need further authorisation to access the actual content of an e-mail.
Not surprisingly, this has greatly increased the compliance burden for Swiss ISPs, which have had to install sophisticated new equipment, often at great expense. Though the ISPs had a year to come into compliance with the changes, some complained the transition period allowed to implement the technology was not long enough. To put the task into context, one ISP, Infomaniak, says it would have to monitor 300,000 emails a day if asked to log the activity of just one customer.
Critics argue the new law is full of loopholes that enables criminals to easily bypass the legislation. For instance, company and university servers are not included in the scheme, nor are e-mails sent from internet cafes. Criminals using 'hotmail' accounts on international servers also escape unseen.
However, Switzerland's formidable banking sector has in fact made good progress towards offering Internet services to its customers. Credit Suisse, for instance, has launched an online business portal which brings together the expertise and advice of over 40 partners providing comprehensive banking and insurance products amid a wide range of services, information and tools in the areas of finance and insurance.
Credit Suisse states that the portal enables the business sector to 'find out about different financing options rapidly, to determine one's company's risks in a matter of minutes or to produce a business plan .. thanks to its new business portal, Credit Suisse can meet the needs of its corporate clients, and keep pace with continuing dynamic developments in e-business.'
For information about the impact of e-commerce on a number of the main activities that take place offshore, click on a link below to go to our specialist E-commerce site Offshore-e-com.com.
To see an analysis of the current state of legal and tax issues surrounding offshore e-commerce, click here.