Will e-Commerce succeed in Bermuda … ?

Authors
Bill Storie (Bermuda)  
and
Claire Green (London)

William R Storie & Co Ltd, Hamilton, Bermuda
April 19, 1999

This is a discussion paper.
It is not meant to be positive.
Neither is it meant to be negative.
It is however meant to be inquisitive.

We therefore solicit your business, legal and technical comments
and additional input to allow a follow-up paper to be written.

Index

                 Preamble

                           1.0    Introduction

                           2.0    Bermuda "Magnets"

                                  2.01    Quality Telecommunications
                                  2.02    Quality Internet Service Providers
                                  2.03    Quality security
                                  2.04    Seamless online payments
                                  2.05    Quality personnel
                                  2.06    Immigration policies
                                  2.07    Entrepreneurial pool
                                  2.08    Venture capital pool
                                  2.09    School and college education and training
                                  2.10    Legislative framework
                                  2.11    Regulatory framework
                                  2.12    Business community support
                                  2.13    Business-driven marketing
                                  2.14    Industry education

                          3.0    Regulation

              3.01    Data privacy/Data protection
              3.02    Patents, copyright and intellectual property
              3.03    Trade descriptions
              3.04    Trade tariffs

           4.0    Business issues

                 4.01    Brand names
              4.02    Homogeneity
              4.03    Non-sensitive e-commerce
              4.04    Online products
              4.05    Pre-screening
              4.06    Business planning
              4.07    Tax and legal advisory services

           5.0    Taxation

              5.01    History
              5.02    Tax in Cyberspace

          6.0    Socio-economic impact on Bermuda

              6.01    Economic Goal
              6.02    Opportunity cost
              6.03    Four standards of production
              6.04   Job opportunities
              6.05    Balance

   7.0    Business development issues

         7.01    Tax benefits
        7.02    Regulatory benefits
        7.03    Non-tax, non-regulatory benefits
        7.04    Business portals, search engines
        7.05    Remote processing

 Conclusions
 

  Biographical Information
 
***********
Target1
Preamble
The authors have had numerous discussions both in the Bermuda market and overseas with parties interested in exploring the potential for Bermuda as an e-commerce domicile.

In an attempt to foster continuing dialogue we offer this document as a means of sharing some of the perceptions and opinions of a wide spectrum of such interested parties.

Our research has been conducted in various forms – online searches, one-on-one meetings, workshops and in-house dialogue. Issues such as legal, regulation, taxation, financial, security, telecommunications have all been highlighted. In almost every instance we come back to the strong belief that Bermuda can, and will, become a major e-commerce domicile and that a thriving economic sector can be developed, provided that the various topics can (and must) be blended into a cohesive structure – but one which is founded on the principles of common sense and sound business practice .

While taxation seems to continually be a core issue, we believe that taxation should not be treated in isolation nor for that matter as the "be-all and end-all" subject.

We trust that our efforts are taken in the spirit in which they are given - to foster the continuing
development of Bermuda as a quality place to conduct business.

Target2

1.0    Introduction
      The advent of the Internet and its ubiquity has caused immeasurable confusion in the business world. Fortunes have been made - more will be made, but the use of the offshore domicile for e-commerce purposes remains a mystery. Most people are struggling to identify all the issues, assimilate them, interpret them and reach conclusions - then the acid test.....to implement them successfully. Too many are lost in cyberspace ......the "CyberFog" syndrome as we call it.
      E-commerce in and of itself is not an industry – it is a means of conducting business more efficiently and cost -effectively, while reaching a wider market.

      Amazon.com for example is not a company engaged in e-commerce per se – it is a company which
      sells books. It just so happens they do it electronically. However, they have to then physically deliver the books – i.e. a traditional part of the retail process. So much so, that FedEx makes more money delivering the books than Amazon does selling them..

      Bermuda must be clear therefore as to which part(s) of the e-commerce revolution we want to develop in the retail sector. Do we intend on becoming the great online shopping mall..?  Maybe the point-of-sale function, but not the physical delivery function – our limited land, labour and capital precludes the latter. Hence, we must be acutely aware of which functions within the retail sales process we can handle.

      Similarly within the online financial services process. We can segregate the point-of-sales (e.g. in
      international life insurance sales) while remotely processing the back-office administration – which our limited supply of labour (and probably high cost structure) precludes.

      We must therefore recognise that labour, land and (indigenous) capital - three of the four standard factors of production - are in limited supply in Bermuda.

      Consequently, through the identification of those parts of the e-commerce process which can be successfully located in Bermuda, while isolating those parts which cannot , we can apply various other business principles and skill sets to clearly establish an e-commerce hub in Bermuda.

      The platform of our existing well-developed service structure (legal, accounting, banking, resident management etc) plus a well-balanced relationship between the Bermuda Government and the business sector plus a sophisticated labour force (including a heavy commitment to education and training, with particular emphasis on young Bermudians) must all blend together – in this fashion, the platform to develop e-commerce in Bermuda will be built on solid (and lasting) ground.

        Target3

      2.0Bermuda  "Magnets"
      Bermuda can succeed in the new world of electronic commerce if it identifies, then focuses on, a variety of attractions ("magnets" as we call them). It is unlikely that any one magnet will attract new e-commerce business to Bermuda – however, combinations of them will have the required effect.

      We outline some of the magnets which have been highlighted in our discussions to date.

                    2.01    Quality telecommunications
      Our analogy........there is no point in having fresh milk and a brand new truck, if the road to get the milk to market is so poorly built, that by the time the milk gets to market it's turned sour !

      The engine room of any e-commerce business is a high-quality, global outreach telecommunications network (the "highway"). If it were to be cost-efficient as well, then even more business would look at Bermuda seriously. Issues of bandwidth, fault tolerance, 7/24 service, security and so forth are critical to our success.

      Said the other way around - if we don't get our international telecommunications industry working, and working competitively, then e-commerce will zoom past our shores at high speed - never to return.
       

      2.02    Quality Internet Service Providers ("ISP")

      If the telecommunications industry is the "road to market", then the ISP is the "truck builder".

      Bermuda is reasonably well-placed with ISP's (Logic and Northrock), with a promise of more to come (C&W and TBI). However price sensitivity remains an issue and must be looked at - the notion that unlimited Internet access for say $20 per month is however wrong and should not pursued. Quality of service and attention to customer needs are of much greater importance.
       

2.03     Quality security   While network security in the business-to-consumer sector can be high but not watertight we must strive to foster highest level security through such developments as Public Key Infrastructure ("PKI") technology and so forth, especially in the business-to-business sector (intranets, extranets for example). Major multi-national corporates will simply not come to Bermuda if our service infrastructure and regulatory climate precludes mission-critical infrastructure.

The three essential demands of today's industrial-strength, online corporate world are "security, security, security".
 

2.04    Seamless online payments
      Electronic payment methods (credit cards, debit cards, charge cards, EFTPOS) are leading the online payment systems development. The more we can integrate our banking services with international credit card services alongside seamless technology, the more efficient we become - hence the more attractive we become. If the banks are central to the online payment system, how long can it be before they see the merits of being the one-stop shop...??
2.05     Quality personnel

Bermuda must ensure an endless stream of systems developers, maintenance personnel, software designers, network security personnel and maintain a cost-effective pricing structure.

If tax benefits are limited then the high cost of doing business in Bermuda (which in the insurance industry is offset by no tax charge), cannot be counted on in the e-commerce industry, hence our downfall could be that anything we do in fact gain through a favourable tax structure could be lost through high costs.

  2.06     Immigration policies

It is not the purpose of this Paper to opine on the immigration policies of Bermuda Government.

It is however appropriate to comment that such policies must ensure that the development of e-commerce in Bermuda is given every chance to succeed for the future of Bermuda's population and that any tendency to unreasonably restrict foreign worker entry may thwart immediate e-commerce development, if Bermuda
is to take a leading position worldwide.

  2.07     Entrepreneurial pool

Without any doubt, Silicon Valley in the U.S. is the entrepreneurial engine of the Internet. Capital always migrates to talented individuals. Bermuda cannot equal the achievements of the U.S. West coast, but it can and must, encourage the entrepreneurial community of the island. Entrepreneurs must be shown that
their ideas and efforts will be given a fair hearing and not be quietly swamped by protectionist practices of the merchant community.
 

2.08     Venture capital pool

Bermuda must establish a venture capital industry as soon as possible. Ideally such a pool would consider indigenous projects but why not open it up to overseas projects which, as part of any funding, would be required to set up in Bermuda and employ local personnel and use local service providers.

A venture capital pool only succeeds if it is driven by sound principles and guidelines such that each project is screened thoroughly by business-drivers with input from technical experts - not the other way round. Not only would a venture capital pool provide the capital but would allow us to "force" a proper business plan to be prepared by the entrepreneur.
 

2.09     School and college education and training

Efforts have already begun (somewhat late of course !) to introduce Internet-based education and training programmes into our academic institutions. It is crucial however that such programmes are driven by the business world and supported by the academic world and Government.

The Internet started in the highly-secretive world of the U.S. Government and its military defence contractors - then it was picked up by the academic institutions, who protected its "free information" philosophy until such time as the business world hustled in and forced the Internet into a commercial miracle - academia may initiate progress - business makes it happen. Bermuda needs people to make it happen, not people to pontificate and make themselves look good to those who don't know any better,
but who then fail to deliver.

  2.10     Legislative framework

It is of critical importance that Bermuda not only has, but is seen to have, a workable legislative framework for e-commerce to flourish - not just in terms of where e-commerce is today, but where it will be tomorrow, next week and in years to come. Tricky, but essential.

Bermuda Government's initiative to appoint framers thereof is to be warmly applauded - let us however be very careful not to assume that a proper legislative framework (as will be designed) will, in and of itself, attract e-commerce business to Bermuda. If it is not integrated and closely inter-twined with the "Bermuda Magnets" then the cost of drafting the legislation will be too high.

  Remember, Bermuda's captive insurance industry was built in the beginning on a no-tax framework, not a good legislative framework (we didn't have one until 1981 - some 10 years or so after captives had already been coming here !). Therefore we were doing something right long before a proper legislative framework existed. It is not proven that the Bermuda Insurance Act actually attracted new business here
but it certainly solidified our position in the global insurance industry.
 

2.11     Regulatory framework

Legislative framework apart, in order to assess new proposals, Bermuda must ensure that the review process of the Ministry of Finance is solid. E-commerce entrepreneurs (in some cases the "cowboys" of the business world) cannot be bothered with "red tape" interpretation of laws, usually conducted by expensive lawyers. They will find other places to go - and quickly.

Government must delegate the authority to a Government Minister to listen and adjudicate on new applications and/or changes to business objectives without having to drag them through a long process of legal compliance. Make decisions, record them, justify them - then implement them.
 

2.12    Business community support
      It is of vital importance that our business organisations throw their undivided and strongest support behind Bermuda's E-Commerce Initiative. Not just by comments in the press, nor just by committee reports, nor just by lunchtime speeches, nor just by lobbying Government - but by clear support of new ideas and ventures. Be prepared to stand behind new initiatives....... some will fail of course, but it is always much more progressive to do something and suffer criticism than do nothing and criticise.

      The need for a Bermuda E-Commerce Association has arrived. Let us get the standards and guidelines of good practice in place while the legislation is being drafted, so that a process of "membership endorsement" can be visible to the outside world.

      So, let the business organisations (Chamber of Commerce, BIBA, etc) unite and forge such an Association - let us do it without much debate, without dithering and, in the absence of territorial disputes. Just make it happen.
       

2.13     Business-driven marketing

A programme of multi-media promotion must be designed immediately, implemented as soon as the legislation is in place and the business-drivers (the "Bermuda Magnets") have been understood, agreed and implemented.

Videos, online promotion (e-mail and website), brochures, overseas tours and speaking engagements, attendance at overseas trade shows and conferences and so forth must be implemented BUT only when Bermuda has its "sales pitch" correct - not before. No point in going to the microphone if we are still wandering aimlessly in the CyberFog !

  2.14     Industry education

A need for a Bermuda Conference on E-Commerce exists. Certain overseas organisers are in the process of developing "offshore e-commerce" conferences at the moment - but probably in New York or Boston ........ in the absence of anything else, this will be acceptable, however much better to organise it locally where ALL the issues are known and can be addressed (i.e. the Bermuda Magnets).

Target4

3.0    Regulation
What regulatory issues will cause an e-commerce company to set up in an offshore domicile instead of onshore..???

3.01     Data Privacy/Data Protection

As the intrusive nature of the online world bites deeper into society, consumer protection lobbying will increase dramatically, which will in turn lead to increased scrutiny by regulatory bodies (Government or otherwise). The simple principle is that by having an Internet presence the online consumer leaves footprints all over the CyberMap. This leads to enthusiastic selling techniques whereby names, addresses, buy-preferences, income levels and so forth can be easily monitored. Hence if it can be easily monitored, it can similarly be easily maintained in online databases and retained for internal corporate information or to be sold-on to other companies wishing to sell their products to a similar online audience.

The introduction of Data Protection Acts has alleviated the fears of Governments on behalf of their citizens BUT…..the online world is a wilderness where footprints cannot, at present, nor easily, be controlled.

Therefore, if say a U.S. company sells products globally over the Internet and if it maintains online databases of its buyers and if the U.S. authorities increase their controls over such databases then we end up in a situation where say 40% of that company's customer base is NON-U.S., however the information and data of that non-U.S. section is under the control of, what to those customers, is a foreign Government. How soon therefore will the U.S. company (i.e. the seller) work out that they would be better to move their non-U.S. customer base and point-of-sale to a jurisdiction not so regulated.

So, either the customer wants out of the "control" of the U.S. Government OR the selling company reduces its costs of regulatory compliance by moving that customer base off the radar screen of the U.S. regulatory body and let it otherwise face the tax consequences of such action within a segregated international business development strategy.
 

3.02     Patents, Copyright and Intellectual property

In a similar vein, the online world is often one where all is not as it seems as far as ownership of products is concerned. Whilst it is frustrating that the Internet allows small companies to make themselves appear larger than they really are, through the clever use of online marketing and advertising, such that companies can advertise one product but actually be selling another, using the ad merely as an online hook (hence the reason why website banner adverts are increasingly becoming "old news") there is a greater risk at hand in the issue of the electronic protection of intellectual property and patent rights.

Whilst in the "real" world, it is possible to physically see a patent or a document proving ownership of a concept, a design or a process, in the online world it becomes less simple and could potentially be the cause of major litigation unless there is sufficient provision made in the legislative environment. That said, the registration and authentication process should not be significantly prolonged by the introduction of
new rules and amendments to existing ones.
 

3.03    Trade Descriptions
      In many countries, the trade description regulations are so onerous that the cost of compliance is prohibitive. If markets can be more cost-effectively developed by selling from an offshore/online sales base, then the issue of trade description compliance becomes a more complex issue.

      While the delivery of "less-regulated" products into a "well-regulated" jurisdiction will continue to be a deterrent (such that customs will impound the goods), the scope for selling "less-regulated" goods into "less-regulated" countries is considerable.

      Trade description regulations apply to products SOLD to the citizens of that country NOT to the manufacture of such products in that same country, which may then be exported to less-regulated countries. So there may be an opportunity for Bermuda to benefit from online sales of products with less-than standard regulations to a global online audience within less-regulated countries.
       

      3.04     Trade Tariffs

The World Trade Organisation ("WTO") is a good example of a keen watchdog of international trade practices, such that it can impose penalties for non-compliance or mis-interpretation of established trade rules. It is one of the most intricate aspects to international business.

However, while again this Paper does not seek to opine on Bermuda's ability to "negotiate" with such bodies, it is believed that Bermuda’s "voice", in term of its industries and its economic infrastructure within the offshore world should be heard. If e-commerce is deemed to become the third pillar of Bermuda's economy (some even say bigger than the international insurance industry) then such issues assume significant importance.

Target5

4.0    Business Issues
What business issues will cause an e-commerce company to set up in an offshore domicile instead of onshore..???

A major concern in the research findings of the authors in the development of business-to-consumer online e-commerce is the authenticity of the seller - especially if located offshore.

Will a consumer in Wyoming, who otherwise likes the product being sold, nonetheless buy from an offshore company...??? It is quite unlikely that the Wyoming consumer will know much, if anything, about offshore jurisdictions and perhaps treat all such places as being places to NOT do business. Regardless of the quality and/or price of the product being sold, the consumer will rarely be convinced. If that consumer is in Uruguay for example, the issue becomes even more sensitive.

Our technical people will of course assure us that the consumer either doesn't care or doesn't know. Well, maybe so - but his credit card company can tell him - and maybe he/she will think they've dodged a bullet this time because the ticket price was not high and albeit they received the product in timely fashion and in good condition, but they may be leery about coming back to buy again.

We believe the "offshoreness" of retail sales is a concern, especially in the case of a product which can only be physically delivered to the consumer by traditional means of transportation (mail, parcel post, courier, etc) where there is a time gap between date of purchase (credit card trigger date) and receipt of goods (e.g.allow 2-3 weeks delivery). Moreover the concern of a product-return policy in the event of a
wrong order for example, can be a major obstacle to international/offshore selling. Therefore a Bermuda-based e-commerce company in the "goods-in transit" type of business (e.g. Amazon.com) as opposed to the "goods-immediate" business (e.g. Schwab.com), may prove difficult to justify itself being offshore.

Some of the individual issues we believe to be worthy of discussion in an attempt to debate the "why offshore...?" question, are as follows...

4.01    Brand names
      If the seller is a well-known company (such as Kodak selling cameras) which happens to use Bermuda for its international sales, then the consumer really will not care where the e-commerce company is located - believing that the purchase is supported by the reputation of Kodak.

      Compare whether an offshore e-commerce company called "Cameras.BM" selling the greatest camera in the world for the least price ever heard of will sell more or less than a poorer quality, higher-priced camera from "Kodak.BM" . The Kodak brand name is the selling trigger, not the camera.

      Bermuda's concentration on attracting retail sales e-commerce companies could be better focused on brand name companies whereby Bermuda can show the benefits of an offshore base for certain brand-name products within a global sales, tax, regulatory and business-driven Corporate Strategy of the brand -name company. Clearly onshore political sensitivity of such actions could derail that type of approach – however, let the market decide.

      The introduction of quality online shopping malls in Bermuda will increase traffic to Bermuda as such, but in the opinion of the authors, leaves much business reason still to be shown - in other words, site visitors will exist - site buyers may not.
       

      4.02    Homogeneity

      If an "affinity group" exists with an international constituency which wishes to go online in its product selling or service promotions to its members, then there may be some benefit in using the Bermuda e-commerce base - particularly in the case of non-core functions (such as selling products for profit to the members) of otherwise not-for-profit organisations.

      In this case, the issue of "why offshore..??" is eliminated instantaneously. If the homogenous group has deemed that its server and/or selling and/or promotional location is Bermuda then it is highly unlikely that its membership-at-large will complain.

      There is a massive number of homogenous or affinity groups and associations around the world with international connections and/or appeal, which if shown the "Bermuda Magnets" of Bermuda properly, could easily be persuaded to use Bermuda as their e-commerce base. The commercial venture of the International Chambers of Commerce based in Paris is but one highest-reputation organisation which was so convinced.

      A concerted effort on the identification of suitable groups will without doubt produce considerable lists of potential international candidates which can then be approached rifle-shot rather than through the widespread, "build it and they will come" mentality.
       

      4.03    Non-sensitive e-commerce

      If the "Bermuda Magnets" can be aligned and properly aimed at specific usages of offshore server bases within the "non-sensitive" areas of e-commerce then Bermuda can develop another market.

      Too often we assume that "e-commerce" means "online transactions with a credit card payment system included", when in fact e-commerce includes a wide variety of online processing without needing a credit card - in which case high-level security may not be so critical. For example, the ability to access an industry database or business portal with (or without) a password is a non-sensitive issue at the consumer's location - the end-user or member.

      In this case, the issue of being offshore is irrelevant - few people will care that the server is situated offshore as long as it provides the required information or data, or allows perhaps the ordering of a service to be "consumed" at point of sale e.g. ordering a car rental where a credit card guarantee is not deemed necessary by the car rental company until the customer shows up.

      The three "Bermuda Magnets" applicable in non-sensitive situations are (a) the quality and cost of a telecom structure which does not raise the cost of doing business to a point which makes the offshore site inefficient ;(b) adequate network security to prevent hackers coming in changing the content data and ; (c) adequate data protection laws and regulations are firmly in place in Bermuda to protect the content.
       

      4.04    Online products

      There is considerable scope in the online business world for the "retailing" of online products and services. A good example would be an online research report, which can be delivered on a pay-per-view basis i.e. downloaded immediately - no time delay. In this scenario there is less concern by the consumer of an offshore transaction due to (a) probably a higher standard of education of the consumer (i.e. technical
      reports) whereby he/she can see exactly what they are buying and can make an immediate judgement to buy or not to buy and (b) the buyer can react immediately to the non-delivery of the purchased report by an e-mail complaint.

      An online Bermuda-based "consumer complaints bureau" would significantly add to the credibility of Bermuda as an offshore marketplace especially if one of the recognised Bermuda business organisations were to operate the bureau (see "Bermuda Magnets"). There may be merit to also consider the creation of an "E-commerce Ombudsman" function.

      As the level of online security and encryption technology increases, the ability to transact business and then receive electronic confirmation or an electronic certificate of ownership which can be held on disk or printed out, will increase certain types of online financial services dramatically - such as online life insurance ; online stock trading ; online travel insurance for example. The use of the offshore domicile in
      this section of the marketplace could be significant - bear in mind that some of the other "magnets" could ideally be allied with "brand name" or "homogeneity" as discussed above.
       

      4.05    Pre-screening

      It has always been the opinion of the authors that Bermuda should not allow its own brand name to be used in situations where a company (exempt) is NOT formally incorporated in Bermuda.

      In other words, it is important to ensure that Bermuda's well-tested incorporation procedures are followed in the case of a cyber-company being set up in Bermuda (i.e. the existing incorporation requirements and procedures of the Bermuda Monetary Authority and Registrar of Companies). For example, there is considerable interest these days in online gambling and pornographic businesses being formed in offshore jurisdictions. Bermuda must be exceptionally careful not to attract this type of business.

      Hence a balance must be found between pre-screening to weed out the potentially bad corporate citizens in an attempt to avoid Bermuda's name being dragged through commercial courts around the world where the Bermuda company has committed illegal activities or is party to serious litigation on the one hand while on the other hand, being seen as a corporate friendly jurisdiction.
       

      4.06    Business planning

      One concern of the authors is that there still tends to be an almost naïve belief that by having a good website with technical wizardry can equate to a successful sales programme online. This cannot be further from the truth.

      The reliance that some technical sales providers, place on such things as search engines for example as being a solid way to attract customers to your business storefront is wrong. An online sales company is no different from any other company in the world - a process of attracting customers through advertising, mail-outs, trade shows, trade promotions and so forth is paramount to success in the traditional business world – even more so in the electronic business world.

      Sometimes we are overpowered by the technical sales pitch in that the Internet is portrayed as a "magic machine" where, because of the tens of millions of people online every day, as long as your product is good and well-priced, then lo and behold the machine will do the rest. Not true – it is damned hard work to build a successful site, maintain it, keep it fresh, build repeat traffic, encourage people not just to visit but to buy and so forth.

      As offshore e-commerce sites require more sophisticated construction schedules and hence larger initial outlays (many running into several million dollars) then Bermuda's ability to differentiate between the Yahoos and the Wahoos could become a real issue of regulatory monitoring.

      It would seem to be counter-productive for Bermuda to insist on a Business Plan prior to incorporation (similar to the incorporation procedure these days for insurance companies to be formed in Bermuda), however this issue should be acknowledged by our authorities. We run the risk that the good intentions of the legislative framework being installed are negated, not by illegal conduct per se, but by the imprudent business practices of the new Bermuda e-commerce company. Hence through poor management the Bermuda company finds itself in some foreign court defending its conduct in the global community
       

      4.07    Tax and legal advisory services

Notwithstanding the legislative framework and regulations attached thereto which are being worked on presently by an overseas law firm, it will be of crucial importance for Bermuda's service providers to acquaint themselves with the various tax and legal issues applicable to the establishment of Bermuda as an offshore e-commerce centre.

Bermuda's law firms grappled with insurance legislation in the early days and would really only opine, at that time, on the Bermuda legal issues within the formal documents of the company and not the entire document(s). Consequently, considerable legal work was allowed to remain overseas - latterly some of that has "come home" - but no need to take the wrong path with e-commerce at the outset.

The build-up period, or evolution process, in captive insurance will not be available in the e-commerce business. Moreover, it will be a valuable service for the legal and tax community to integrate their knowledge within the promotional efforts of the technical service providers (ISPs ; telecoms ; e-commerce service providers and banks). In this fashion an all-round service can be provided to the interested entrepreneurwanting to set up in Bermuda.

E-commerce initiatives, especially emanating from the U.S., will be heavily influenced by tax and legal issues. The extent of the U.S. tax authorities is complicated enough where there is case law to follow as precedent - imagine the nervousness within the new electronic world where case law is so thin at best, or non-existent at worst. If Bermuda can therefore confidently discuss and opine on such issues then it will significantly boost its chances of becoming a recognised offshore e-commerce authority.

While we would defer to the legal fraternity to debate the pros and cons of laws and regulations, we nonetheless wish to make them aware of our findings within the market on the offshore e-commerce business debate to date and would welcome the opportunity to discuss the matter, from a business perspective, in more detailed session.

Target6 

5.0    Taxation

      5.01     History

      No matter how much we investigate the "why Bermuda....?" point, we repeatedly come back to the tax posture of Bermuda being perceived as the major business attraction for e-commerce development.

      In previous other writings of the authors we have likened the potential development of the e-commerce industry in Bermuda to the development of the captive insurance industry in Bermuda (Bill Storie has been involved in the captive insurance industry since 1975, both on the island and through numerous overseas promotional and marketing trips over many years). That comparison will show that, at the outset,
      the attractiveness of Bermuda for captive promoters was heavily (but not exclusively) tax-driven - we did not have a legislative or regulatory framework to speak of until the Bermuda Insurance Act 1978, which
      was not implemented until 1981.

      Hence a legislative and regulatory framework was not the magnet ; likewise, we did not have a large sophisticated human resource infrastructure of qualified, experienced and innovative people to compete with the more traditional centres of insurance - hence the intellectual capital of Bermuda was not the magnet ; we did not have a large collateral market (reinsurance, broking, finite carriers) to complement and support the captive company core business ; hence the business infrastructure of Bermuda was
      not the magnet. The sun, beaches and golf of Bermuda were (and still are) nice, but multi-national corporates don't make decisions on shifting sands - hence the ambience of Bermuda was not the magnet.

      Make no mistake, "in the beginning" a leading magnet was the "no tax" policy of Bermuda. Simple as that.

      However, as the U.S. (in particular) authorities closed in on tax and regulatory issues, the tax magnet became less important, and by then a migration was taking place whereby Bermuda's attraction became driven by Bermuda Magnets.

      In other words, Bermuda realised over time, that as international tax authorities closed the net, other attractions had to be designed, developed and implemented to ensure the continuation of Bermuda as a place from which to conduct captive insurance business.

      The lessons that can be derived from this historical fact pattern are evident - moreover they can be used as a road-map to foster the controlled development of e-commerce in Bermuda.
       

      5.02     Tax in Cyberspace

      The recent concerns of OECD and so forth about "harmful taxation" are driven by a fundamental fear that, as ONLINE world trade ("e-commerce" if you prefer) explodes, the location of the taxpayer can just as easily be offshore as onshore - hence their tax base would dissipate quickly and perhaps permanently.

      Hence, the blatant threat of trade boycott and other stringent measures as the means to scare off the migration from onshore to offshore.

      The explosion of global e-business creates much confusion as to where the transaction took place - location of seller, location of buyer, location of server - and thus where the tax should be levied.

      Also remember that there are essentially two types of taxation in the business world to be considered - (1) a sales tax (or value-added tax) and (2) a corporation tax. The former is ultimately paid by the buyer, the latter by the seller.

      The sales (or value-added) tax has no tax deduction offset ability (if the buyer is a personal rather than a corporate consumer). Whereas corporation tax does have the deduction offset ability. This "intersection" of tax categories can be monitored and thus regulated in the traditional cross-border business models - however the "cyberspace model" creates a complex set of issues leading directly to a whole range of
      contentious discussion and territorial dispute between nations, typically conducted through such organisations as the World Trade Organisation or by the G7 nations.

      So clearly the tax-neutral domiciles have a massive advantage at the outset - tax is complicated not by determination of the applicable tax rate but by the determination of the deductions to be offset (and who decides which deductions are appropriate and at what value level). Cross-border taxation (double taxation treaties as such) merely intensify the complications. Because offshore domiciles have no sales or corporation tax on international activities (rate) then clearly they have no need to recognise tax
      deductions.

      Consequently, the international tax strategy of multi-national companies engaged in global e-commerce can be substantially reduced if they incorporate their e-commerce (subsidiary) company offshore - BUT, especially in the case of U.S. corporations, the Controlled Foreign Corporations (CFC) rules apply and cannegate that apparent advantage.

      So the level playing field desire of OECD etc between onshore and offshore jurisdictions is based on a need for universal acceptance of CFC rules - whereby, regardless of the location of the subsidiary company (i.e. the e-commerce company), the ultimate beneficial owner of the subsidiary and its location will be the corporate tax trigger. This will therefore result in tax deductions of the offshore operating
      costs being allowed to offset the tax bill "back home" of the ultimate beneficial owner.

      Therefore, in the case of a Bermuda-based e-commerce company, perhaps we need to focus not so much on the "no corporate tax" magnet but begin to address the cost-benefit analysis issues (including tax deduction strategy, double taxation treaties and so forth) of conducting e-commerce business in and from Bermuda, with one eye firmly focused on the possibility of a universal CFC structure and its implications.

      In other words, rather than, as in the case of captive insurance development, where the tightening of the tax net caused Bermuda to react by developing "Bermuda Magnets", we should perhaps take the initiative at the onset of our e-commerce industry and construct our e-commerce framework based on CFC rules and cost benefit-deduction strategy analysis, while concurrently developing the Bermuda Magnets.

      Target7

      6.0    Socio-economic impact on Bermuda
It is critical that Bermuda controls the development of E-commerce. The key is not to create new ideas in e-commerce – the key is to create new ideas THAT work. Not just for the economic effect but the social infrastructure effect as well - consider the following issues :-

6.01    Economic Goal

 The goal of our E-commerce initiative is to boost the Bermuda economy by :-
  (a)    direct contribution to the "Treasury" through Government fees or some                other form of levy and/or indirect taxation on economic activity OR,

(b)    creating new jobs and let the trickle-down theory take effect OR,

(c)    both
 

 The first increases the direct revenue base but with a limited increase in jobs (public and private sectors). The second increases the indirect revenue base and will increase jobs – both public and private sectors. However, the last is the goal.
 

6.02    Opportunity Cost

The risks of "opportunity cost" impact could be staggering given the pioneerism of the new electronic frontier – compound that with the offshore ingredient and the potential for all types of "e-pirates" believing naively that an offshore domicile is less than well-regulated. Remember, for every hugely successful Internet venture, there are maybe 10 hugely UNsuccessful Internet ventures. Moreover, the astonishing market valuations (price) of U.S.-based Internet stocks, most of which are actually loss-making ventures (earnings)result in bizarre P/E ratios which will not be replicated in a Bermuda stock market environment due to very limited market liquidity (and overseas investors will only affect that slightly, if at all).
 

 6.03     Four Standards of Production

If we apply the standard "four factors of production" theory to E-commerce in Bermuda, we find that 3 of them are IN-elastic (capital, labour and land - even allowing for the Baselands property which, while it is available for commercial use means that - assuming the current resident labour supply is not large enough to meet the e-commerce demands - an influx of overseas workers would need to be housed,
presumably off Baselands property). Thus the need for exacting controls on our E-commerce development becomes critical – deciding what is good for Bermuda demands intense scrutiny due to the in-elasticity of the above – intense scrutiny demands qualified people, taking time and considerable due diligence, to adjudicate on the good versus the bad proposals.

In other words, to allow a free-market economy to evolve may have a good impact on Bermuda’s economy but a disastrous impact on Bermuda’s already fragile social infrastructure. We are not advocating a total Government controlled industry but on the other hand, a completely hands-off policy could be damaging.
 

6.04     Job Opportunities

It is a noble objective to create indigenous job opportunities through the development of E-commerce. However, given the target levels presently being bandied around, we ask the question "Where will these people come from..?"

The answer can only be found from either (a) present industry sectors, hence a transfer of population ; (b) a new influx of overseas workers ; (c) the unemployed ranks or ; (d) the student population.

It is therefore of supreme importance that Bermuda immediately develops e-commerce initiatives in the student community of Bermuda - it is without doubt that the future of e-commerce will depend heavily on the ability of young Bermudians to carry the country forwards into the new Millenium.

If the e-commerce workforce comes from existing sectors of the Bermuda economy, a high level of re-training will be needed. Which then begs the question "Who will pay for that re-training - public sector or private sector…??" These costs may run into several million dollars per month, if the target projections are realistic (some say e-commerce could become the third pillar of our economy and also be greater than our insurance industry which has a working population of 1,642 (Archer Study 1996 -
latest figures available). Moreover, what happens in those sectors losing those people (e.g. hospitality, retail and our existing international business sector) - how will those gaps be filled…??
 

6.05     Balance

It is our belief therefore that the balance between economic impact and social effect will be the most fundamental issue to be addressed. Ideally, Bermuda needs to attract E-commerce development which will have a positive effect on the "treasury" but a near-neutral effect on the social infrastructure (jobs, housing, transportation, social services etc).


 

 Target8
7.0    Business development opportunities
A successful e-commerce business in Bermuda will have particular characteristics uniquely correlated to the vagaries of the offshore business world.
 

7.01     Tax benefits

If the ultimate beneficial owner of the Bermuda-based e-commerce company (subsidiary) is a U.S. company, it seems unlikely that an offshore domicile will afford many, if any, tax benefits of the offshore domicile unless it is owned by a large number of individual members (in their own names) of a trade or professional group or association or similar homogenous group.

While the above comments may not be "cut and dried" in that specific tax codes applicable to e-commerce, may in fact offer some benefits not known to the authors, we would nonetheless contend that a Bermuda marketing effort based on "tax neutrality" aimed at US business, will prove to be costly in terms of the time and effort (and financing) needed to justify the offshore formation with perhaps limited chance of success. Educating overseas entrepreneurs (typically bold on business issues but wary on tax matters) on the tax benefits of the offshore world can, at times, be tough and time-consuming, not to mention frustrating. "Learning curve" costs can be horrendously high in terms of time spent, reports and proposals written, seeking (and perhaps paying for) third party expert opinions, overseas trips (cost and time), thinning already limited resources and so forth.

However, if the ultimate beneficial owner of the Bermuda-based e-commerce subsidiary is NOT a U.S. company, there may well be tax benefits of the offshore domicile. The tax treatment of overseas companies owned by country nationals of other than U.S. countries varies from country to country but in most cases is not as onerous as the U.S. tax framework.
 

7.02     Regulatory benefits

As regulations cut deeper into the e-commerce business world, country by country, there will be ample opportunity to attract Bermuda formations, with or without tax benefits being part of the offshore package.

Many corporations around the world will form offshore corporations to handle their export business where the customer is clearly identified as not residing in the country of origin of the product and/or the ultimate beneficial owner of the offshore subsidiary resides in a tax incentive country in regard to exports from that country. In fact, many countries may actually encourage offshore formations with attendant tax or other benefits, to foster exports. This is similar to the Foreign Sales Corporation ("FSC") structure of the U.S., introduced by President Reagan in 1984 to boost exports of certain U.S. products. This framework has not so long ago been expanded to include software sales, previously excluded.
 

7.03     Non-tax, non-regulatory benefits

The list of "Bermuda Magnets" above creates the opportunity for a number of permutations of other reasons to form offshore.

Unlikely that any one in isolation will be the driver, but combinations of some with or without tax and/or regulatory impact will yield many opportunities for Bermuda's e-commerce development.

Bermuda must therefore develop a high-quality professional research facility, which will be able to continually monitor the world trade markets to identify specific niche opportunities and gaps in the business framework of companies around the world. A press clipping service for example will not be enough - such a facility will however include an in-depth analysis of newspapers, trade journals, online services, conference reports and other quality published material - documents need to be found (quickly, efficiently and correctly)then analysed then commented on in an understandable business language. Opportunities will open up.

 
7.04     Business portals, search engines

It is not the intention of this First Paper to identify specific business opportunities as such but much has been said about Bermuda acting as a domicile for the location of websites which allow the consumer to visit, take the information at no charge and then, hopefully keep returning for more. The basic assumption is that the site is well designed, rich in content and is funded by sponsorship and/or advertising.

We see no particular reason why this type of e-commerce business should gain any economic benefit from locating in Bermuda. There may be tax advantage (if a non-U.S. ownership exists), however the cost of hosting, telecommunications, continual content building (labour) and site updates (labour) could well prove prohibitive in attracting such business to Bermuda.

We do however believe that Bermuda-based entrepreneurs, otherwise familiar with the indigenous costs of operation in Bermuda and familiar with the needs of the offshore financial service industries in particular, could easily identify specific offshore-specific business portals to be constructed, operated and developed in and from a Bermuda base.
 

7.05     Remote processing

A critical issue for Bermuda is to closely monitor the possible influx of overseas professionals to the island (see Immigration comments above). Apart from the costs of bringing people here, paying them, housing them and so forth, all of which translates into high operating costs, the strain on our socio-economic infrastructure must be considered.

It is therefore the opinion of the authors that a case can be built on tax, regulatory and/or other magnet reasons, for a Bermuda company to be formed for global e-commerce with a handful of local staff but which then remotely processes its transactions in lower-cost domiciles - this reduces costs of operations and takes the strain off the Bermuda infrastructure.

It is unlikely that the airline companies for example, would see the benefit of setting up in Bermuda for back-office ticket processing then remotely processing the business - they would set up in that domicile in the first instance. However, if Bermuda can develop its electronic intellectual skills and innovative nature in certain industries (probably insurance, investment, trusts, stock trading and banking) then it will be
possible to show why a Bermuda domicile with remote transaction processing is ideal for the multi-national company. In this case the uniqueness of Bermuda is not necessarily tax or regulation but a quality labour pool, especially if a venture capital pool sits alongside.

Clearly Bermuda's existing knowledge base, built over many years (and the envy of competing offshore domiciles) in those five industries noted above provide Bermuda with a reputation, contacts, experience and expertise platform right at the onset of our e-commerce development.

Consequently, with vision, these opportunities can be "ramped-up" quickly and without a steep learning curve. Build on what we know today, not what we need to learn tomorrow.

Target9

Conclusions
In today's CyberWorld, Bermuda is NOT UNIQUELY placed to become the world’s primary e-commerce domicile because it does not have that single "killer application" (if we may borrow the expression from our technical colleagues).

Its clean reputation is strong and can be proudly shown to the business and regulatory community around the world. However the new world of online business needs a new approach.

A legislative framework is critical, but not enough, in and of itself. A sensible regulatory environment is critical, but not enough, in and of itself. A belief that a "tax neutral" policy is sufficient to attract new business to Bermuda is possibly naive at best and potentially destructive at worst.

The delicate balance between tax, legal, regulation, "Bermuda Magnets" and sound business principles is the sought-after mix. Anything short of this will result in false hopes built on the famous beaches of Bermuda – the shifting sands principle.
 
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Target10
Biographical information
Bill Storie (Bermuda)

Bill is a Chartered Accountant (Scotland). He has been in Bermuda since 1975, working primarily in the international insurance sector of Bermuda - captive management, reinsurance investigations and business development. In 1989 he formed WRS Ltd.

Bill has acted as a business advisor to many companies and individuals around the world from his Bermuda base. He has published a wide range of articles and papers in several magazines and online locations on insurance management, investment management, insurance technology, e-commerce and offshore financial services. In 1995 he established "BerBiz", an online e-mail newsletter of events and updates on the business community of Bermuda, which is currently electronically distributed to over 35 countries.
 

Claire Green (London)

Claire is a qualified information professional. Prior to joining the company she was the Senior Researcher at Lloyd's of London and prior thereto, Senior Researcher at American International Group (AIG) in London and New York.

She has researched and presented many industry-related reports, White Papers, Business Development Studies and Market Trend Analysis Reports. She has also conducted considerable research into the laws, regulations and current trends in electronic commerce in various countries around the world, from a business perspective.
 

William R. Storie & Co Ltd
WRS Ltd is a management consulting firm based in Bermuda and London. It is owned by Bill Storie and Claire Green. Its Board of Directors also includes Charles Vaughan-Johnson, former President and CEO of The Bank of Bermuda Ltd.

The company specialises in customised management advisory services within the insurance and reinsurance, information and research and technology/telecommunications sectors. Clients are based in Europe, North America, South America and Bermuda.

Market trend analysis, market intelligence, business trending forecast reports, corporate profiles and interpretation thereof for specific business development purposes plus Internet-related advisory services (business focused) are all part of the overall service range of the company.
 
 

  William R. Storie & Co Ltd
31 Queen Street, Hamilton, Bermuda
Tel - (441) - 295 – 3987   ;   Fax - (441) - 296 – 8087
E-mail - wrsl@ibl.bm ; Web - www.wrsl.com