Option #1: Accounts Receivable Financing

Option #2: The E-Commerce Opportunity

Option #3: Becoming a True Multinational Company

DEFINITION: If you are conducting business in a high tax jurisdiction and your goal is to reduce / eliminate taxes without attracting attention from the taxing authorities, we make available to you a variety of tax-optimization strategies. By real world, we imply that these strategies are carried out in the day to day world as a normal way of doing business and provide abundant opportunities to reduce taxes.

Many who market trusts often tout many non-real world strategies. They claim that you can almost magically transform taxable business profits into non-taxable profits. Such strategies include the so-called multi-layered trust strategy or the upstreaming "multi-trust" strategy. These strategies involve the utilisation of multiple trusts, with one or more trusts in the middle. These "middle" trusts are nothing more than "pass-through" vehicles that allow funds to pass through to no tax jurisdictions into trusts that do need to report income derived from the country where the income flowed from.

This strategy is technically legal but it has the following serious problem: there is no commonly used business practice involved here. In other words, it is a transparent tax optimization scheme. The result is that most tax authorities will treat the income that was up-streamed as taxable since it is clear that the only purpose in mind was to avoid taxes. All tax optimization schemes are generally judged by this rule of thumb: if the process involved is not commonly used in the day to day world of business for reasons other than tax minimisation or optimization, it is almost certain the scheme will not stand up to scrutiny.

It follows then that tax optimization schemes must not only be legal but also use normal business practices where tax optimization is not the aim.

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OPTION #1:
ACCOUNTS RECEIVABLE FINANCING

This strategy allows you to effectively "upstream" domestic taxable profits into a no tax jurisdiction. The beauty of this strategy, as with all other safe tax optimization strategies, is that it utilises a common and normal business practice, i.e., selling your accounts receivable at a discount to a factoring company. The advantage to you is that you get the cash (discounted) and are able to "offload" the risk of future collection.

The factoring company gains the advantage of picking up future income for a discounted down payment now. This is why factoring is such a profitable and common business practice since both parties get what they want out of the arrangement.

This scenario is ideal where a company does not consider itself ideally suited to financing its clients. On the contrary, the factoring company does what it does best - collect payments from such clients and force collections when necessary.

Factoring is not only a completely normal and legal business practice but also it is an ideal strategy for minimising tax liabilities and moving money offshore. So, how would you structure this arrangement using an offshore IBC?

Firstly, you need an IBC in a suitable offshore jurisdiction such as Nevis. This needs to be set up as a "non CFC" - that is a non-controlled foreign corporation. Control implies benefit, so you need to ensure that the structure that is set up is "non-controlled". This can be achieved by multi-layering, i.e., having a trust own the IBC as outlined in our section on trusts. (See What is a Trust) In effect, you set up an IBC that is legally not owned or controlled by yourself.

Your domestic company decides to sell its accounts receivable to a factoring company at an agreed discount of say 70% (a common figure). Technically speaking, your company will immediately get immediate cash and offset some of the income to the offshore factoring company. Consequently, your domestic company will actually earn LESS taxable income - while the offshore company will earn money in an offshore, tax-free environment. The amount the company earns of course is the 30% (100% less the 70% discount) assuming of course there are no bad debts. This money legally remains tax-free for as long as it remains offshore.

In short, what you are doing is moving some of the profit from one entity (the onshore corporation) to another entity (the offshore corporation) - and gaining a tax advantage in doing so.

To make this work you must obviously have genuine accounts receivable. You must also have legal documents supporting this arrangement, such as a written agreement between the selling party (your onshore corporation) and the buying party (the offshore IBC). You also need a security agreement, which indicates that the offshore corporation's interest is secured by the accounts receivable. This establishes that you have a prior creditor, something that provides good protection against any potential lawsuits.

These legal agreements form part of the essential paper trail that would make this arrangement workable. Additionally, the offshore IBC should be ideally managed by a professional third party, or someone you trust so that the agreements between your onshore company and offshore company are not signed both by you. You should be signing for your onshore company and someone else other than yourself should be signing for the offshore company.

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OPTION #2:
THE E-COMMERCE OPPORTUNITY

E-Commerce can provide you with a good opportunity to set up an internationally based business. Such a business can be operated at arms length from your own home (high tax) jurisdiction or from anywhere in the world. Depending on what is being sold, an e-commerce business is the ultimate portable venture.

To take advantage of the e-commerce opportunity for tax optimization purposes, you need to set up an offshore corporation that you neither own nor control. (See previous sections on IBC / Trust combinations.) This then can be your platform for an international business with great tax benefits.

A few of the basic ingredients would include:

1. An IBC and a bank account in a tax haven country.

2. Web hosting in a country other than your own.

3. Credit card merchant account - outside your home country.

To make this arrangement even more secure, you should also ensure that whatever product or service is being provided is also based in, or distributed from, an "offshore" location. Consequently, there is no literal business activity-taking place on your home territory. Even better, you can employ people offshore. What you want to achieve is a genuinely international business, one outside your own tax jurisdiction.

The corporate structure (IBC) forms the basis for this strategy as it provides you with the legal framework for doing business. The web-hosting location adds another layer of protection - and enhances your international location. The third element of the strategy is your merchant account by which you are authorised to debit people's Visa / Mastercard (and others).

Getting a merchant account in your home country should not be difficult but that is not the best option. You need a merchant solution that is outside your jurisdiction. Why? Because the proceeds of all sales should bypass your own country's banking system. Remember, this is an "international" business you're setting up, so you need an international payment solution.

To activate your international merchant account, you need the services of a clearinghouse - a third party service that will allow you to bill using their merchant status. And, as you would expect, this type of service costs more that one in your country of residence.

Most domestic merchant accounts will require a 2.5% -3% discount rate - the percentage they take of your turnover. However, when using a clearinghouse service, the discount rate is higher. You can expect to pay anywhere from 4% to 15%. The higher rates are being reserved for the riskier businesses.

Additionally, the clearinghouse will require you to put up a security deposit in order to protect itself from any fraudulent use. This is usually collected in the form of a "rolling reserve," which means they retain say 5%-10% of your sales revenue for a period of three to six months. Thereafter, your funds are released on a pro-rata basis.

The advantage of this type of clearing service is that they will wire your sales proceeds (less discount and reserve) to your offshore corporate account. If you are selling information services - then it's even easier, as you can have the actual information located offshore as well. What that means is that you have no trading base in your home country. You have no operations, no stock, and no transactions - nothing. You can also contract with third party fulfilment companies anywhere in the world to ship your product / service, and many will provide you with credit card payment options as well. Drop shipping is also a very commonly used option since you will have no inventory costs to consider.

That leaves just one thing. What about the money you make and how do you get it back onshore without tax liability? The obvious way, of course, is to use a non-associated offshore card to draw funds from an ATM but this is not a long-term solution, especially if you need to show some income to justify your lifestyle.

The easiest solution is to treat this e-commerce business as a secondary income stream and build up an offshore nest egg. However, if this were indeed your primary income, then you would need to repatriate funds at some stage. This "drawn" income would be taxable in your home country (and you'd need to have proper paperwork to justify this income) - leaving undistributed profits to accumulate offshore.

For instance, let's say that you are selling a magazine. The company publishing this magazine would be the IBC and all the accompanying business arrangements already discussed would be in place. You maybe contracted as the editor of this magazine - and therefore receive remuneration accordingly. That income would be taxable in your home country - but would not represent the full profit picture of the company as a whole. The balance of your profit would be retained offshore.

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OPTION #3:
BECOMING A TRUE MULTINATIONAL COMPANY

A third tax optimization strategy is similar to the one presented above except you don't need to be involved in e-commerce in order to derive benefit. All you need is a successful business in your home country that is ready to tap the international market. If that is the case you can benefit just like the big multinationals and reap all sorts of tax benefits. Large multinational companies habitually pay little or no taxes because of their ability to upstream profits from a high tax jurisdiction to a low tax jurisdiction.

Profits from your overseas sales conducted through one of more IBCs can accrue offshore on a tax-free basis just as with any internationally based business. Of course, every country has different rules and regulations of what constitutes doing business in that country and therefore what is taxable. Your "onshore" sales are taxable as always. Nevertheless, depending on the visibility of your business in the countries you do business in (whether or not you have a business base, such as subsidiary offices, etc.) will determine the extent to which such sales made abroad will indeed be free from the local taxes of those countries. This is an infinitely complex field with many variables, but it should be possible to see the potential, as there are many ways to avoid taxes on overseas sales, depending on how you go about making the sale.

Additionally, many aspects of your business can be moved offshore to a more favourable tax and regulatory climate, whereby wages and other costs may also be lower.

Outsourcing, i.e., contracting out in house services in order to slash costs and streamline operations, is a prevalent business trend. Separate cost centres can be arranged with your properly set up IBCs which allows them to contract with and provide the onshore part of your business with invoiceable services.

Properly structured internationally based businesses can provide such services as advertising, accounting, computer services, web design and hosting services, re-insurance services, legal, marketing consulting, and more, all from a jurisdiction outside of your "home base". Thus, your company in your high tax home base is paying for these services to another company that you set up in a low or no tax jurisdiction. All these services are of course invoiceable and tax deductible as legitimate business expenses. Naturally, in order to be able to justify such internationally based business expenses, you need to run a business that can justify the outsourcing of such services and have it operate in more than one country.

Similar opportunities such as the setting up of Patent, Copyright and Royalty companies in low tax jurisdictions can also be beneficial for tax efficiencies. A company in a high tax jurisdiction can arrange to make royalty payments for inventions, songs, movies, books, software, etc. to such a company in a low tax country that has a tax treaty with your home jurisdiction. The company being paid for the royalties pays significantly less tax on profits then the company in the high tax jurisdiction.

When you decide to internationalise your business, many similar opportunities to upstream profits are available. The advice of a competent tax attorney in one's home jurisdiction is a must.

To take advantage of any of these tax-optimization strategies contact us now at scib@hushmail.com.