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The corporate headquarters of large groups tend to accumulate a variety of support services, which are often priced into the base costs of the group's products and services, and then attract margin in the final price to a customer. The profit realized by the group in this way is of course taxed at whatever local rate is applicable.
The evolution of telecommunications, most or all headquarters' functions can be carried out almost anywhere, and there is extreme competition to attract them between IOFCs (International Offshore Financial Centres) and high-tax jurisdictions as well, all wanting the prestige and the economic benefits stemming from the presence of a group of highly-paid executives and the business transactions they generate. In different ways, it is thus often possible for a group to make the profits inherent in its support activities in a more or less tax-free environment. Whether this translates through to the bottom line depends on many complex factors, but competent financial management will usually be able to get a good result.
The high-tax jurisdictions have tried to attract headquarters' offices and functions using the 'coordination centre' concept. Originally pioneered in Belgium, it is now in common use in many countries, although in the EU it has fallen foul of 'level playing field' rules, and some countries, including Belgium, have had to adapt or abandon their coordination centre regimes. Essentially, the host country will allow a resident corporate coordination centre to carry out its functions outside the normal tax laws, so that for instance a re-invoicing function for cross-border intra-group trading would be allowed to escape withholding tax or transfer-pricing rules. Taxation of coordination centres is 'by agreement' between the corporation and the host country, and is usually minimal. This is one of the ways in which high-tax jurisdictions, which are nominally against low-tax areas, play the game themselves.
A group may decide to locate some of its support functions in a traditional IOFC. There may be cost and operational advantages to doing so, apart from any tax savings; but the underlying reasons are always tax ones, and eventually amount to the fact that the profits implicit in the functions can be made in a low-tax centre. The list of corporate functions which can be carried out from an IOFC includes procurement, marketing and distribution, treasury management, debt factoring, travel and transport management, telecommunications, computing, recruitment and training, pensions management, payroll.
The rapid evolution of e-commerce and e-business techniques has only increased the attractions of an offshore location for many of these functions.
Foreign exchange management is a good example of how centralized IOFC management can benefit a group: any large group with many subsidiaries in different countries has substantial costs connected with foreign exchange. Multi-currency treasury management on the basis of a set of independent national treasury operations is nearly the worst possible method, and concentration of all transactions into a flexible central treasury in a jurisdiction without exchange controls or predatory and highly-protected local banks is an obvious solution. Providing that the centralized currency management function is based in an low-tax jurisdiction with good local financial infrastructure, treasury management can proceed to optimize cash flows without concerns about withholding taxes, capital gains, or any of the other unpleasant taxes or regulations often imposed by high-tax governments. Finally, the profits from such an operation, which can be quite substantial in a large group, are made in a low-tax jurisdiction.
The choice of an appropriate IOFC for the conduct of centralized group management or support functions is obviously dependent on the location of the existing head office or support functions, the type of business concerned, the existing group fiscal structure, and a host of other factors. It is not possible therefore to select a list of particular IOFCs that should be considered.
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Disclaimer: Whilst reasonable care has been taken in provision of information above, it does not constitute legal or other professional advice. INTERSHORES does not accept any responsibility, legal or otherwise, for any error omission and accepts no responsibility for any financial or other loss or damage that may result from its use. In particular, readers are advised to take appropriate professional advice before committing themselves to any involvement in jurisdictions, vehicles or practice. |
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