Why offshore hosting in the Bahamas? Michael Atkin, VP of Maxil Communications, says the benefits offered by offshore hosting are compelling.

As you might expect, tax benefits are on top of the list. Atkin is careful to point out that tax avoidance is not the same as tax evasion.

"The Bahamas has no tax…no income tax, sales tax, property tax, corporate taxes…in fact there's no tax department," Atkin reiterates. By locating oneself "properly" in an offshore jurisdiction, companies and individuals save some portion of the taxes typically doled out thereby providing a competitive advantage or outright savings. Essentially, "doing business offshore shelters your income from the underlying tax department that the business resides out of."

Permanent Establishment

Before you make a beeline to the Bahamas, however, you must understand the concept of permanent establishment.

"It's not just putting your servers offshore—just because your revenue is captured offshore doesn't mean the IRS is not interested…your taxes are based on what your worldwide income is," he explained.

"To run a legitimate offshore entity, for example, requires you to do your merchant accounts through the offshore entity, buy your hosting services offshore, acquiring your content there, doing your banking and having your bank accounts registered. Doing these things collectively means you've met the burden of proof and have established permanent establishment." Typically, Atkin notes, a company will create a holding company and set up an operating company in the Bahamas (or elsewhere) under the holding company's ownership.

Atkin says creating a company can cost as little as $600 but to do a proper structure including holding company and the offshore entity might cost upwards of $60,000.

Companies dishing out that type of cash are often seeking other benefits as well. Legal benefits, says Atkin is another huge selling point for offshore hosting services.

Law and Order

"Companies do business out of the US because it isolates them from the US legal system. By being in a foreign jurisdiction you make applying the rules and regulations of a given country more difficult."

Atkin illustrates the point with several examples. If a minor gets access to certain adult sites or makes his way to a gaming site with a credit card, it's not uncommon for the parent to sue the owner of the Web site. And the US legal system more or less encourages this behavior according to Atkin. Since 98 percent of lawyers in the US work on contingency, the parent doesn't have to put up cash upfront for legal fees and lawyers are only too happy to walk off with a percentage of the settlement if they win the lawsuit. However, if the site is offshore and the entity is registered legally offshore, the parent would have to sue that entity which means years and years of litigation, upfront costs, and hiring a lawyer from the same country as the company being sued—with no guarantee of victory. This discourages litigation in offshore jurisdictions.

Atkin points out that there are close to ten million frivolous lawsuits a year in the US. Interestingly, says Atkin, Wal-Mart is served notice everyday of the week. Some new form of litigation is filed against the company 47 times a day, with between 9 to 11 lawsuits coming to completion in one form or another every day. So a big benefit of doing business offshore in countries such as the Bahamas is protecting you from all but the most serious of lawsuits. Also for any company transacting business on the Internet involving providing advice—legal, medical, or financial—malpractice insurance is an expense to contend with. Offshore, these premiums go down substantially, adding to a company's savings.

California Rules

Additionally, many businesses are worried about the advent of California Consumer Protection Laws, which gained prominence with the America Online Inc. decision in June 2001. AOL was sued because Virginia, where the company is based, was designated as the jurisdiction for all disputes. The Court found that " AOL customers' rights would be substantially diminished if they are required to litigate their dispute in Virginia, thereby violating an important public policy underlying California's consumer protection law."

What Atkin and many others find scary, is that AOL was forced to hear suit under California law, in a totally different jurisdiction. Thus, not surprisingly, legal protection has become a major consideration when examining the offshore option.

And if that doesn't still doesn't convince businesses of the offshore value proposition, add to the list, regulatory benefits.

US Attorney General John Ashcroft's intentions are clear, says Atkin and it terrifies people in the adult entertainment industry. "Ashcroft is dictating what a company can or can't do on a Web site, what to do before and after they buy on the site and what type of content they can have on their pages."

"These rules don't exist in the Bahamas," continues Atkin. "The government isn't worried about what content you consume in the privacy of your own home, in the US the government is involved. As you know, more than half the revenues earned on the Internet today is by gaming and adult sites."

Well-Encrypted

Many companies in the adult market are looking at this closely and offshore hosting becomes more compelling as this escalates, said Atkin. He notes that since the events of September 11, it is becoming impossible to operate an encrypted e-mail service onshore in the United States.

"That's a legitimate business. The Internet is an inherently insecure place. Companies need this service…they can't take a chance on raw e-mails being accessed by competitors or hackers for that matter. We didn’t outlaw planes, we just have to work together to make travel safer."

Atkin notes that many European businesses seek to service the US marketplace, yet are leery about being under the legal and tax system there. Offshore hosting in the Bahamas has become a viable option to these companies because the connectivity and hosting capabilities offered are good compared to the performance, latency and cost of servicing the US market from a European base.

Is it All Good?

But before plunging into the offshore market, businesses must be aware of some potential disadvantages. Atkin divides these concerns in three buckets: Pricing, technical and jurisdiction.

While he freely admits that offshore hosting prices are higher, Atkin says Maxil Communications' prices are as competitive as similar services onshore.

"For top-end high quality service such as that of AboveNet's (part of Metromedia Fiber Networks), our prices are as good or better. Maxil may be about 15 per cent more expensive than the mid-to-lower end market prices onshore."

On the technical front, customer's level of expectations about network performance, back up services and power generators and connectivity must be met or no consideration will be given, notes Atkin.

"A year ago, the Bahamas had terrible connectivity. Maxil Communications has invested $27 million to build out undersea fiber going from 4 islands in the Bahamas to carrier hotels and tier1 connectivity to the US. Our data center is similar or better than mainstream IDCs in the US."

As for jurisdictional concerns, Atkin asks, "When you think of Panama what comes to mind?" He answers: "Manuel Noriega (who was deposed by a US invasion and taken to stand trial in the USA, accused of criminal activities), political instability and political corruption."

"People want a stable environment to conduct business, they need to be assured that business will continue to operate productively day in day out. The Bahamas offers one of the oldest parliamentary systems in operation in the Western Hemisphere dating back to the 1780's and the currency is tied to the US."

"As well, businesses demand availability of services and access to tax advisors, lawyers and the financial community during regular business hours. There are 600 banks in the Bahamas. And you also want to look at language issues. Bahamas is English. What about access to your servers? If you were in Antigua, for example, there are only four flights a week from Canada to Antigua…this limits your access if you need to fly down and make some adjustments to your servers. There are about 100 flights a day into Canada and US from the Bahamas. These are all big selling points."

Big Future for Micropayment

It's no surprise to find that the prime candidates for offshore hosting are the gaming and adult Web site owners. Given Atkin's reasoning, it also makes sense that more interest is coming from European businesses that want access to the lucrative US market as well as individuals and companies providing advice. But Atkin sees a wider net in the future. He is convinced that once micropayment engines become commonplace and is accepted by the consumer, more and more Web sites will find their way to offshore locations.

"People realize that there is intrinsic value in the Internet. But the model has largely been dismissed…that doesn't mean there is no value attached, it's just that there is no effective way to go to a website and charge five cents a day for use of a service. I'd gladly pay a small fee to view the Toronto Star online but you can't make a charge on a credit card for much less than $10 to make any money on it."

Continues Atkin, "The costs of the transactions across the board tend to eat it up." He drives the point further, "Two years ago when the dot.com companies were going strong, they'd throw money at anything regardless of value, now many things have disappeared when it is not cost-effective to do. Many things are now getting a charge model put around because you can't afford to give it away for free, online companies are not getting millions of advertising dollars they thought they'd get to run the service so they have to charge for it."

Atkin sees the main driver for development of micropayment engines will be digital music rights. He foresees a "Napster like product" that would enable customers to buy digital music by the track, for example 50 cents, or $6 for 12 tracks enabling the music fan to download on MP3 or burn on a CD. But to make this work, micropayment engines would be required. Then once this is accomplished, it follows that a charge of five cents or so could be undertaken by the Toronto Star (and other Web sites) whereby a viewer each time they visit the site will have their Web browser register with a payment engine and receive a bill at the end of the month. Noone would go through the hassle of filling out VISA or MasterCard or AMEX forms, the model must be consumer friendly, he emphasizes.

"When this starts moving, adult sites will no longer be at the forefront…many other services will see the benefit of this solution and the need for offshore hosting will really take off."

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