As Dot-Coms Go Bust in the U.S., Bermuda Hosts a Little Boomlet

[mean-green at hushmail.com]

As Dot-Coms Go Bust in the U.S.,
Bermuda Hosts a Little Boomlet
By MICHAEL ALLEN 
Staff Reporter of THE WALL STREET JOURNAL


HAMILTON, Bermuda -- Operating out of a hurricane-proof command center in 
a former U.S. military base, Paven Bratch is a tax examiner's nightmare.

Although his Internet company, music and video merchant Playcentric.com 
(www.playcentric.com1), has just 10 employees, didn't go live until September 
and has yet to turn a profit, it has the structure of a major multinational. 
Its computer servers are located here, its operating unit is in Barbados,
 and it has a distribution deal with a big record-store chain in Toronto. 
The 36-year-old Mr. Bratch figures this setup will save him so much on corporate 
income taxes and other expenses that he'll be able to undercut Amazon.com 
Inc.'s prices by more than 45% and still make a bundle.

"One thing that always amazes me is, why would anyone who's planning on 
generating a profit locate themselves in a full-tax jurisdiction?" he says.

'First Generation'

Plenty of dot-coms are asking themselves the same question these days. Undaunted 
by their industry's growing ranks of flameouts and hoping to emerge as one 
of the profitable few, dozens of them are popping up in tax havens around 
the world.

In Bermuda, they range from tiny publisher ISI Publications Ltd., which 
sells hard-to-find business books under the domain name Booksonbiz.com (www.booksonbiz.com2),
 to E*Trade Group Inc., the big online stockbroker, which is locating its 
international trading operations here. Further south, on the Caribbean island 
of Antigua, an American trader has set up Indextrade.com (www.indextrade.com3) 
to allow small investors to bet on swings in market indexes, while in Cyprus,
 a former British jazz singer is doing a brisk business by listing vessels 
such as a Soviet-era submarine on Ships-for-sale.com (www.ships-for-sale.com4).

"These merchants are the first generation who can really domicile anywhere,
" says Andrea Wilson, chief executive of Bermuda-based First Atlantic Commerce 
Ltd. (www.firstatlanticcommerce.com5), which provides credit-card payment 
systems for e-businesses. "They can be a virtual corporation if they choose."

The trend started with Internet gambling companies, which fled to the Caribbean 
to avoid the long arm of U.S. law. But now, thanks to an explosion of new 
telecommunications links to places such as Bermuda and Britain's Channel 
Islands -- and an ambitious push by promoters in such countries as Panama 
to set up facilities capable of hosting hundreds or thousands of Web sites 
each -- more-legitimate Internet companies are starting to make the leap 
offshore.

A Wealth of Ambiguity

There are serious questions about whether some of the structures would pass 
muster with the Internal Revenue Service and its foreign counterparts. But 
many accountants figure there's enough ambiguity in the industrial world's 
offshore tax codes that e-commerce companies could, at least theoretically,
 rack up tax-free profits for years before the authorities sort things out.

The issues are often murkier than for a standard offshore tax shelter, because 
they involve technological innovations that the U.S. Treasury couldn't have 
anticipated when it began laying the ground rules for offshore taxation 
in the 1960s. For instance, nobody's entirely sure how to tax the earnings 
of a programmer who sells his software by allowing buyers to download it 
from a Web site hosted on a computer server in a zero-tax jurisdiction.

Some tax attorneys take the position that the sale takes place where the 
server is located, and that the business owes no corporate or sales tax 
in the buyer's home country. "It would be no different than you or I getting 
on a plane, flying to the Bahamas, and buying a T-shirt in the hotel," says 
Lazaro Mur, a Miami tax attorney.

New telecommunications options have brought Bermuda and much of the Caribbean 
even closer than a plane ride away. Cable & Wireless PLC's phone monopoly 
among former British colonies in the region is breaking up, and C&W's new 
competitors are starting to lace the seabed with modern fiber-optic lines,
 breaking down old technological barriers to working offshore.

At the same time, so-called server farms -- warehouses built to accommodate 
row upon row of computer servers -- are sprouting up to accommodate high-
tech newcomers. At Fort Clayton, a former U.S. military base in Panama, 
local entrepreneurs plan to open a 50,000-square-foot "high-tech hotel" 
later this month they say will be capable of hosting as many as 1.2 million 
Web sites.

HavenCo, a self-proclaimed "data haven," announced plans last year to host 
Web sites from an antiaircraft platform abandoned by the British after World 
War II. The North Sea platform has a colorful history: In 1966, a retired 
British army major seized control of it and has operated it for years as 
the sovereign "Principality of Sealand."

Ryan Lackey, HavenCo's chief technical officer, says the company, which 
spent the summer upgrading electrical power and air conditioning on Sealand,
 has more than 30 servers up and running, connected to the mainland by satellite 
and wireless service, and hopes to expand to as many as 5,000.

He says the company has fielded "several thousand" sales inquiries. "The 
big thing people really want is e-mail servers, because in the past people 
have been getting their e-mail servers subpoenaed," he says. He adds that 
HavenCo would only comply with subpoenas issued by the Court of Sealand. 
"But there's no Court of Sealand, so it's very unlikely."

Tax savings are the big selling point for many of the installations. "Offshore 
+ Ecommerce=Tax Free Heaven," screams a banner ad for Bahamas.net, which 
offers server facilities in the Bahamas for as low as $2,200 a month.

Bermuda, which has a rich history of helping foreigners shave taxes, also 
is doing its best to encourage the migration offshore. Its two biggest banks,
 Bank of Bermuda Ltd. and Bank of N.T. Butterfield & Son Ltd., have launched 
major e-commerce initiatives, establishing systems to allow online merchants 
to bill customers in several major currencies. A common refrain among business 
leaders on this tiny fishhook-shaped island is that Bill Gates would be 
a much-richer man today if he had originally established Microsoft here.

The pitch helped reel in Robert Edwards, an editorial cartoonist who lives 
in Canterbury, England. Not long ago he went looking for help in setting 
up a Web site to sell works by him and about 30 other artists from around 
the world. Tipped off to Bermuda by a visiting delegation of businesspeople,
 he registered his company online through Appleby, Spurling & Kempe, a local 
law firm here, and was quickly directed to Web designers, a hosting site 
and a credit-card intermediary, First Atlantic.

Late last year, at a total cost of less than $200,000, his Drawnandquartered.com 
(www.drawnandquartered.com6) went live, offering 4,000 artworks, which can 
be downloaded online with a credit card, for $200 and up. His company doesn't 
pay any income or sales taxes, and he only has to pay personal-income tax 
on the salary he draws. "I'm a perfect example of how it can be done," he 
says.

Playcentric's Mr. Bratch, a former Procter & Gamble Co. manager, says he 
relied on advice from an international tax attorney in structuring the online 
retailer, which will market its compact disks, videos and DVDs partly through 
packaged-goods makers who want to reward loyal customers. Mr. Bratch, a 
Canadian citizen, put his operating unit in Barbados, which, unlike Bermuda,
 has a tax treaty with Canada, in order to take advantage of the Caribbean 
nation's corporate income-tax rate of just 2%.

He says he located his computer operations in Bermuda because of its extensive 
banking and telecommunications infrastructure. Its attractions include a 
state-of-the-art server facility built in an old U.S. naval base by 360networks 
Inc.'s TeleBermuda International unit, which laid an undersea fiber-optic 
cable to the U.S. in 1997.

Tax considerations also helped lure Todd Middagh, chief executive of Originals 
Online Ltd., to Bermuda. His brainchild: a site that will allow importers,
 exporters and shipping companies to swap legally binding trade documents 
online, instead of wasting days with couriers. "It's a digital product, 
global in nature, 24-hours-a-day world-wide," says Mr. Middagh, who has 
already attracted the interest of several major grain companies, including 
Archer Daniels Midland Co.

"We're going to be in almost every jurisdiction over time," he says. Meanwhile,
 Mr. Middagh, a native of Canada, will be presiding over the company from 
his house here, which overlooks the Atlantic Ocean.

Scott Rubman, a Long Island, N.Y., real-estate attorney whose family has 
long been in the fur trade, is putting together Furs.com (www.furs.com7),
 a Bermuda-based site that plans to match mink farmers in, say, Norway, 
with fur-coat manufacturers in North America and China. As an American, 
Mr. Rubman may face a bigger hurdle in shielding any offshore profits from 
taxation. Unlike many other countries, the U.S. taxes its citizens on their 
income world-wide.

"If you move offshore strictly to evade taxes, that's something the U.S. 
will always look at," says Mr. Rubman, who is getting plenty of advice from 
U.S. tax experts. "When you have a legitimate business purpose to transact 
business offshore, I'd think the U.S. would be supportive of that."

And if the U.S. isn't supportive? Cryptographer Vince Cate thinks he has 
that covered. In 1998, the onetime Carnegie-Mellon University Ph.D candidate 
walked into the U.S. Embassy in Barbados and renounced his American citizenship,
 declaring that he was henceforth a citizen of Mozambique, thanks to a document 
he purchased for $5,000 over the Internet.

Then, he went back to the Caribbean island of Anguilla, where he had developed 
a reputation as a computer-encryption visionary. Among his many ventures,
 he has taken over the operations of an online marketer of driver's-license 
information that had run afoul of a new privacy law in Texas. Mr. Cate plans 
to build the business without paying a cent of taxes.

"Because I'm not a U.S. citizen, I'm not in the United States, and Anguilla 
has no taxes, I don't believe I have any problem," he says.

Write to Michael Allen at mike.allen at wsj.com8