"There is no doubt that the e-commerce revolution will fundamentally change the commercial landscape for ever. The word “revolution” may seem exaggerated but it is entirely appropriate.  In economic terms, the impact of e-commerce will be more significant and far-reaching than the Industrial Revolution.  The statistics make interesting reading.  It is estimated that at present e-commerce accounts for only 3% of the global economy but that the pace of growth is accelerating and that this figure will move to 30% in a relatively short time frame.  The indications are that by 2002 revenues from e-commerce will be over US$ one trillion."

Paul Scrivener - Partner Solomon Harris

What is E-Commerce?

A simple definition of e-commerce would be the marketing, ordering and sale of goods and services over the Internet.  E-commerce tends to be subdivided into two categorisations: business to customer (or B2C) such as an individual ordering a book over the Internet from Amazon.com and business to business (or B2B) such as General Motors ordering parts from a supplier electronically.

Most would agree that e-commerce offers sellers of goods and services significant benefits when compared with conventional selling methods.  The most significant benefits are cost saving, greater flexibility and access to a truly global marketplace.  Access to a global marketplace is probably the most exciting and mind-blowing aspect of e-commerce.  It is the “Holy Grail” of the marketing executive!  Let us look at an example.   A company in the U.S. sell leisure equipment from several retail outlets in a relatively small area. They are convinced that their leisure equipment would be of enormous interest in Europe.  To build a marketing and sales infrastructure in Europe would be a costly and time-consuming process. They proceed to build a high quality website hosted in the Cayman Islands to market and take orders for their product on a global basis at a fraction of the cost of a more conventional sales and marketing route.

E-commerce is, in relative terms, in its infancy and seen by most as a separate business activity.  In other words, there is the perception that there are e-commerce businesses and then there are conventional “bricks and mortar” businesses.  In a relatively short timeframe, this will change so that virtually all businesses will integrate e-commerce as a natural part of their operations and will no longer regard e-commerce as something separate and distinct.  All businesses will be e-businesses.  It is interesting that Charles Schwab established “E-Schwab” as a separate operation only later to abandon the idea and integrate E-Schwab into its main business.

What is in it for the Cayman Islands?

The lack of a requirement for “bricks and mortar” means that the entrepreneur or the established business looking to set up an e-commerce operation has complete freedom to choose their geographical base.  The “old economy” rules about proximity to customers, suppliers, natural resources and the like, no longer need apply.  There is total flexibility.  Other factors come into play: regulatory and legal regime, taxation, IT infrastructure, protection of intellectual property rights, professional service providers and of course political stability. A sophisticated offshore11 financial centre such as the Cayman Islands  is attracting significant interest from those wishing to join the e-commerce revolution.

The Cayman Islands have a lot to offer the would-be e-commerce business. As a British Overseas Territory, the legal framework based on English common law as supplemented by Cayman Islands specific legislation, is well respected and robust.  The judiciary and judicial system are also highly regarded, with judgments from the Cayman Islands Court of Appeal frequently used as persuasive authority in other common law offshore11 jurisdictions.

Legal and Regulatory Considerations

The world of e-commerce presents a number of legal challenges to existing legal rules in all jurisdictions.  The Cayman Islands are no exception. Comprehensive e-commerce legislation in the form of the Electronic Transactions Law is imminent.  A summary of the key provisions of the Bill is contained elsewhere I this edition of The Cayman Brief. The primary purpose of the Electronic Transactions Law will be to put electronic commerce on the same footing as paper transactions so that e-transactions have the same standing in law and therefore those conducting business electronically have legal certainty in their commercial dealings.  The Cayman Islands Government, recognising the enormous potential that the Islands have for e-commerce, has spearheaded the initiative and the work of the Government’s e-commerce advisory board has been another good example of the healthy partnership that exists between Government and the private sector in the Cayman Islands. The Government has indicated that its objective is for e-commerce to become the new third leg of the Cayman economy alongside financial services and tourism.

The Cayman Islands have been quick to recognise that the explosive growth of the dot.com companies and other Internet companies has come about because of the freedom and commercial emancipation that the Internet has brought about. Therefore, whilst regulation is essential, there must not be over-regulation which will merely serve to stifle the growth and opportunity that e-commerce presents. Therefore, the regulation of e-commerce businesses in the Cayman Islands will be effective but not burdensome, in line with the general approach towards regulation in this jurisdiction. This is of particular attraction to those currently considering whether to establish their e-business onshore or offshore. Inevitably, the regulatory regime and compliance costs onshore will be significantly more onerous.

Attraction of Zero Tax Domicile

Apart from the ability to avoid over-regulation, tax efficiencies will inevitably be a strong driving force towards an offshore11 jurisdiction like the Cayman Islands.  In the Cayman Islands there are no forms of direct taxation and when setting up a business vehicle (an inexpensive and speedy process), a guarantee can be obtained from the Government that in the unlikely event that direct taxation were ever to be introduced in the Cayman Islands, the vehicle will be free from direct taxation for a specified period, usually 20 years, from the date of the guarantee.

Many of the e-businesses that Solomon Harris are seeing are start-up operations with the potential for rapid growth.  The advantage of domiciling in a jurisdiction without direct taxation is obvious. Onshore tax advice is essential to ensure that the structure and proposed method of operation do not lead to the e-business being treated as resident onshore for tax purposes.  There are a number of complex issues here, the details of which are beyond the scope of this article. Broadly, it is vital to ensure that the management and control is not regarded as taking place onshore and that the business does not have a permanent establishment onshore.  Often, where the website is hosted will be a key factor.

Considerable attention also needs to be paid to issues relating to withholding tax, sales tax (North America), value-added tax (Europe) and transfer pricing.  With professional advice, the pitfalls can be avoided or at least mitigated.  Currently the onshore jurisdictions are grappling with how to ensure that their tax base is not eroded in the e-commerce arena and no real consensus appears to be emerging how the “leakage” can be plugged.  This inevitably presents an excellent opportunity for a jurisdiction like the Cayman Islands.

Telecommunications infrastructure

Avoiding burdensome regulation and achieving tax efficiencies means little if the telecommunications infrastructure is not there.  Telecommunications services in the Cayman Islands are provided by Cable & Wireless.  Cable & Wireless recognise that they play a very large part in the success or otherwise of e-commerce in the Cayman Islands.   The imminent completion of the Maya 1 Fibre Optic Cable System project is crucial to this success.  The project represents an investment of some US$200 million and comprises 5,200 metres of fibre optic cable linking seven countries.  In particular, the cable will connect the Cayman Islands to North, South and Central America.  This will be Cayman’s second fibre optic cable system adding 2.4 Gigabytes per second capacity to the existing cable which connects Cayman to Jamaica and from there to the rest of the world.  The new Maya 1 cable will provide the necessary bandwidth for broadened voice and data transmission capability and also offers the potential for lower cost international access.

Availability of Professional Services

Last but not least, the breadth and depth of the professional infrastructure in the Cayman Islands is of particular importance in the area of e-commerce.  Those looking to establishing an e-business have a wide choice of all the necessary service providers including lawyers, accountants (all the “Big Five” international accounting firms are represented), IT consultants and company management firms.  A number of firms (including Solomon Harris, in conjunction with its affiliated management company, International Management Services) have developed expertise in guiding the client through the whole process from planning, co-ordinating onshore tax advice, legal structure, website design, business vehicle formation, protection of intellectual property rights, contractual arrangements and website hosting.  An expertise in e-commerce is, for these service providers, a natural extension of the range of offshore11 corporate and commercial services that they have provided for many years and which have been at the heart of Cayman’s success in becoming the fifth largest financial centre in the world.

As outlined above, the environment in the Cayman Islands is highly conducive to the development of a strong and successful e-commerce business with clients from around the world.  The challenges are not insignificant and the competitive pressures from other offshore11 jurisdictions who have developed a strong position in e-commerce, should not be underestimated.  However, both Government and the private sector are committed in building upon Cayman’s existing solid foundations to create the third leg of the Cayman economy and enable Cayman to become a significant e-commerce jurisdiction.

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Solomon Harris
Attorneys-at-Law
P.O. Box 1990 , 
Barclays House
George Town, 
Grand Cayman, 
Cayman Islands 

Phone:  345 949 0488 
Fax:  345 949 0364 

E-mail: solomonharris@candw.ky
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