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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, Netsource 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 does the same.
The company's auditors, MacFarlane & Roberts
(MFR), 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.
Netsource worry
that the Caymans don't have sufficiently advanced
telecommunications facilities to handle the
high-bandwidth requirement for complex software
downloads, but are rapidly reassured by MFR.
Netsource 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. MFR
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 SoftDown Ltd in the Caymans with
MFR's assistance.
MFR also recommend
an ISP in the Caymans with adequate facilities
where SoftDown'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
SoftDown Ltd as a Caymans exempt company (it
will pay no taxes, but there are some quite
small annual fees) - MFR (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) - Netsource
with Caymans ISP.
Open bank accounts;
establish credit-card merchant IDs and authorisation
procedures - MFR
Installation
of software into the database - Netsource
with Caymans ISP
The advice of
MFR is that SoftDown Ltd as a Caymans company
will have no need to charge VAT in the EU or
sales taxes in the US (see our Tax Law section
for an explanation of this point).
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