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CASE STUDY: ELECTRONIC PRODUCTS BUSINESS TO BUSINESS

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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).