Bermuda Changes Taxes, Laws To Promote E-Commerce

After an exhaustive investigation into the tax practices of the majority of the world’s offshore jurisdictions, the Organization for Economic Cooperation and Development (OECD) concluded earlier this week that Bermuda and five other countries are not “harmful tax jurisdictions.”

The finding comes as the OECD concludes its annual conference in Paris, which focused this year on how the Internet revolution is transforming business practices around the world.

The other countries that were scrutinized and omitted from the OECD “hit list” of global tax havens were the Cayman Islands, Cyprus, Malta, Mauritius and San Marino. Each country, including Bermuda, has pledged to ensure that any remaining harmful tax practices will cease by 2005 and that no new harmful tax regime will be imposed.

Global Economy

The OECD is a organization of 29 member countries, including Australia, Canada, France, Germany, the United States, the United Kingdom, and Switzerland, which provides a global setting for the development of government policies on economic and social issues.

The OECD noted in its conference papers that a large number of developing and transition economies, particularly those affected by financial crises, are launching an unprecedented program of policy reform to take advantage of the Internet economy.

Taxing Authorities

U.S. Treasury Secretary Lawrence Summers had high praise for the commitment of the six jurisdictions, popular for their tax haven status, to end the practices that gave them that reputation. The commitments were an “important milestone” in the international effort to curb use of offshore subsidiaries, bank accounts and other arrangements to avoid taxes, Summers said.

At the same time that U.S. taxing authorities are praising the demise of offshore tax havens, many industry leaders and state governments are criticizing the U.S. federal government’s support of a tax ban on Internet sales, which they say creates a tax haven for pure play dot-com companies.

In a recent speech given to the Computer and Communications Industry Association, U.S. Treasury Deputy Secretary Stuart Eizenstat declared the agency’s support of a permanent Internet sales tax ban, despite the contribution such taxes would make to U.S. coffers.

“We need to be sure that we do not discriminate against sales on the Internet and thereby impede the growth of e-commerce. We need to ensure that governments finance themselves in a way that does not impede the growth of the Internet,” Eizenstat said.

Tax Competition

In a letter to the OECD, Bermuda Finance Minister the Hon. Eugene Cox stressed that the island shared “the concerns of the OECD about the global effects of harmful tax competition and would like to associate itself with that work.”

The OECD found that Bermuda’s commitment to an exchange of information is “an extension of the island’s long-standing reputation as a well-regulated jurisdiction, only interested in business of substance and quality,” said Mr. Raymond Medeiros, Chairman of the Bermuda International Business Association.

Bermuda does not generate government revenue through income tax. The island’s taxation system is consumption-based and in many instances that is of benefit to companies seeking an offshore base of operation for their e-commerce enterprises.

The recent OECD determination means that Bermuda will not be included in any international sanctions or punitive actions that the OECD might be contemplating to take against identified tax havens or companies operating within them.

E-Commerce in Bermuda

Over the last few years, Bermuda has demonstrated its interest in developing the island into a leading global center for e-commerce. For example, the country launched a series of initiatives designed to create the greatest possible degree of self-regulation by the industry, combined with effective oversight and compliance mechanisms.

In the summer of 1999, the Government of Bermuda passed one of the world’s first pieces of e-commerce legislation — The Electronic Transactions Act.

The purpose of the law is to facilitate the use of electronic transactions; remove uncertainties in conducting transactions electronically as to the requirements for documents and signatures to be in writing; promote public confidence in the validity of electronic transactions; and encourage the development of the legal and business infrastructure necessary to implement electronic transactions securely.

The Act also provides for a complementary code of conduct, known as the “Standard for Electronic Transactions,” which is set to take effect on July 3rd, and will apply to both intermediaries and e-commerce service providers. The purpose of the standard is to ensure that “those undertaking e-commerce businesses connected with Bermuda should so conduct themselves as to preserve the good name of Bermuda.”

Customer Identity

In keeping with the “Safe Harbour Guidelines” established by the European Union, the standard also makes it the responsibility of all e-commerce service providers and intermediaries to know their customers and render service consistent with Bermuda’s established reputation.

The standard also requires e-commerce service providers and intermediaries to establish business practices that are transparent, and avoiding misleading statements or omissions.

To fulfill this “transparency requirement,” all e-commerce service providers registered in Bermuda must identify their trading name, e-mail and mailing address in an accessible location on their Web sites and post a statement informing the public that they are obliged to comply with all portions of the Standard For Electronic Transactions.