Online Payment Processors

Online payment processors are companies who offer businesses a way to accept and process credit and debit cards without dealing with each of the different card issuers directly.

Each of the companies reviewed offer a secure and encrypted (via SSL) environment. The most common way this is used is via a web interface where the business checkout process temporarily jumps to the processing website, to take the credit card details; the processor then passes control back to the business website, either to a confirmation page, or to a declined page. Alternatively a more complex, but seamless, method is for the business website to take and store credit card details, then pass these invisibly to the payment processor for validation. This type of processing would obviously require the business website to be extremely secure.

Your research may cover many of the payment processors available to UK businesses, submitting each to the same tests and scrutiny. As well as covering the main differences in accounts available, the results of my research have been split into categories that will be important to businesses requiring these services:

Account Availability
Fees
Set Up Fees
Ongoing Fees
Transaction Fees
Accessing Funds
Chargebacks
Trust and Support


Account Availability
For small to medium sized businesses, the market has become crowded with third party payment processors and it has become difficult to decide which is the most cost effective choice. But cost is not the only parameter that should be taken into consideration - security, customer service and the reputation of the third party payment processors should also figure highly.

For larger volume businesses, possibly the cheapest method would be to use your own merchant account. If you already have a merchant account with your bank, then you can upgrade this to accept payments via the Internet. The following company is one of the more recognised third party payment processors who will process the credit card transactions for you

Credit Card Terminologies - Authorize Card

Authorize Card authorizes a credit card purchase from the cardholder's bank. Before using Authorize Card, your company must do the following:

Establish a merchant account with your company's bank. See the CyberSource Support Center for more information.
Provide the identifying numbers for your bank account. For example, FDMS requires both merchant identification numbers (MID) and terminal identification numbers (TID), while Paymentech requires the division number.
To authorize a credit card transaction, Authorize Card performs the following tasks:

Calculates the total amount for an order by totaling the cost of each offer in the order.
Requests credit card authorization from the issuing bank for the total amount.
Places a temporary hold against the customer's credit card for the total amount of the order. Most authorizations expire within five to seven days, but the bank that issued the card determines the length of the authorization.

Debit Cards

Our product include an online account with Debit Card.

1. An online account allows you to receive and send Wire Transfer to any account that have the ability to accept Wire Transfer.

2. You manage you funds as well as the Debit Card. This allows you to control how much you spend.

3. No matter where you spend, only you knows. The online account allows you to view your statement anywhere, anytime as long as you have access to internet.

4. For more info on how to set-up your account, skype me at crystalglobalservices

The Difference Between Merchant Accounts, Payment Gateways and Third Party Processors

Many questions arouse after having read about e-Commerce merchant accounts and credit card processing. When trying to clarify the technology behind online credit card processing and the terminology we try to provide the most up-to-date information and a comprehensive knowledge base. Many future and current e-Commerce merchants find it difficult to understand some instances of online credit card processing and it's up to us, e-Commerce merchant service providers, to make things seem and, more importantly, feel easy. One of the most hard to understand things when dealing with online CNP (card not present) transactions is the mixing up of the terms used and their corresponding definitions. We will try to explain the difference between the three most commonly mixed up terms used in online/e-Commerce credit card processing: a) e-Commerce merchant accounts, b) payment gateways, and c) third party processors.

Let's start with the basics on a) e-Commerce Merchant Accounts:

An e-Commerce merchant account allows any (or almost) online business (also known as an e-Business or e-Commerce business) to accept credit cards/debit cards, gift cards and other forms of payment cards online based on the CNP (card not present) transaction principals, including MOTO (mail order/telephone order) transactions. e-Commerce merchant accounts can also be referred to as: online credit card payment accounts, online credit card processing accounts, credit card transaction accounts, and others. An e-Commerce merchant can get an e-Commerce merchant account from a merchant bank or a merchant service provider in his/her local area (city, state, country) or in another country (offshore/international e-Commerce merchant account). An e-Commerce merchant account is basically a service for which e-Commerce merchants apply, and thereafter use online credit card processing services; just like you would expect an e-mail account to work for you providing SMTP and POP3 (i.e. e-mail transmission) services.

E-Commerce merchant accounts are acquired from either merchant banks or MSP (merchant service providers), as already stated above. The process of acquiring, or applying for, an e-Commerce merchant account is different and depends on the provider itself (terms, guidelines and conditions), the type of e-Commerce merchant account and the e-Commerce merchant. For example, some types of e-Commerce merchant accounts can be setup in just a few minutes, while others will take days to approve a merchant. Fees and rates will also differ much.

Some of the types of e-Commerce merchant accounts are:

Direct e-Commerce merchant account - a type of account usually applied for directly at a merchant bank.

Local e-Commerce merchant account - an e-Commerce merchant account in one's home country.

Offshore e-Commerce merchant account - an account outside the country of the applying e-Commerce merchant. Also known, in some cases, as an international merchant account.

High-risk e-Commerce merchant account - a merchant account for online businesses with a high percentage of chargebacks and returns; for example, adult, IP telephone cards, internet gambling, etc.

Third-party e-Commerce merchant account - see below for a basic explanation on 3rd party merchant accounts.

Pharmacy e-Commerce merchant account - a specialized merchant account designed specifically for online pharmacies and drug e-Stores.

b) Payment Gateways:

A payment gateway can be called the relay between the e-Commerce merchant account affiliated website (online shop) and the merchant bank, which is also connected to a large network of credit card issuing banks. One of the other main functions of credit card processing payment gateways, besides communication, is encryption. A payment gateway uses SSL 128-bit encoding technology to encrypt and decrypt all the data being sent through it. Safety and security in online credit card processing is a very vital point. Without encryption all the credit card holders' data could be stolen and used illegally.

Understanding how a payment gateway works is important as to know, for example, why and where an error occurs that may lead to unsanctioned use, malfunction, etc. Thus, we bring you a brief step-by-step working cycle of a typical (no auxiliary/external verification/encoding/protection systems engaged) payment gateway:

A cardholder/customer orders a product or service at an e-Commerce merchant's website by clicking the 'Order' or 'Send to Shopping Cart' buttons.

The cardholder is taken to an automatically generated (by an integrated shopping cart script) order form, where he/she is asked to provide the credit card details and the shipping details.

After clicking the 'Submit Form' button at the bottom of the form(s) all the data is encrypted (SSL 128-bit) by the cardholder’s web-browser, a key is generated and passed on, along with the details, to the e-Commerce merchant’s payment gateway.

The payment gateway (if function available and switched on) decrypts some of the information (only for statistical usage, no credit card details are held), re-encrypts it and forwards it to the e-Commerce merchant's acquiring bank.

The acquiring bank forwards the data to the credit card issuing bank for verification and authorization.

The issuing bank sends a so-called response code back to merchant bank, and the latter sends it to the payment gateway. This response code is used to denote any error that might have had occurred during the verification or transaction process.

If everything is in order the credit card is billed and, usually, at the end of the day the funds are transferred to the merchant bank, where they are safely deposited until the payout day.

The e-Commerce merchant's website also generates feedback based on the response code received by the payment gateway. Some of the codes may be interpreted as: "You card has been billed.", "Error. Insufficient funds.", and so on.

The whole process takes only a few seconds. The important part that payment gateways play in online credit card processing is evident and must never be underestimated. Make sure that you get a secure, stable payment gateway with much flexibility and third-party options.

Finally, c) Third party processors:

Third party processors are what e-Commerce merchants get when getting third party merchant accounts. For more information on 3rd party merchant account visit our "Merchant accounts" section in our Articles knowledgebase. Basically, third party processors are connected via an additional secure payment gateway to a direct credit card payment processor. A third party processor contributes to the work of the direct processor, sharing its’ expenses, i.e. paying much less. Many third party processors make up a network of e-Commerce merchants sharing one secure direct merchant account. Third party processors are great for beginner e-Commerce.

To sum everything up, and to differentiate the mixed up terms e-Commerce merchant accounts, payment gateways and third party processors:

An e-Commerce merchant account is a whole service, a solution allowing e-Commerce merchants to accept credit card payments over the Internet; a payment gateway is one fragment of a whole system (chain of elements) involved in online credit card processing, functioning as a secure 'relay'; a third party processor is a type of e-Commerce service which makes up a network of direct merchant account affiliated e-Commerce merchants

How debit cards work

Debit cards are linked directly to your bank account. You can use them to buy goods or withdraw cash and the amount is taken from your account right away.

You can also use debit cards to get 'cashback' from certain shops (you buy goods and also ask for money back from the cashier). The total amount is deducted from your account right away.

When using a cash machine or paying for goods with a debit card you'll need to enter your PIN (personal identity number). When buying goods you usually enter it into an electronic hand held device, but in some cases you may have to sign.

Most bank accounts offer debit cards. Most debit cards double up as 'cheque guarantee cards', guaranteeing that your cheque will be honoured by your bank up to a stated amount.
What happens if there's not enough money in your account?
This will depend on the type of debit card you have:

if you have a ‘Solo’ or ‘Electron’ debit card the balance in your account is checked before each transaction – if there’s not enough money you won’t be able pay or withdraw cash with the debit card without prior agreement
if you have ‘Switch’, ‘Visa’ or ‘Delta’ card your account balance won’t necessarily be checked and the payment may still go through
If you go overdrawn the charges you’ll pay will depend on whether or not you have an authorised overdraft arrangement with your bank. If you do, you’ll pay the agreed amount of interest at the end of each month. This is usually much lower than interest charged on credit cards.

If you don’t have an overdraft agreement, or you exceed the agreed limit, your bank may allow the payment to go through but you’ll usually pay much higher fees than if you had an agreed overdraft.

Using a debt card over the phone or internet
Debit cards can be used to make payments by phone or over the internet. In this case you'll need to provide certain details that are printed on your card.

Find out more and view an example debit card on the FSA website.

How to tell if an e-mail message is fraudulent

Here are a few phrases to look for if you think an e-mail message is a phishing scam.

"Verify your account."
Businesses should not ask you to send passwords, login names, Social Security numbers, or other personal information through e-mail.

If you receive an e-mail from Microsoft asking you to update your credit card information, do not respond: this is a phishing scam. To learn more, read Fraudulent e-mail that requests credit card information sent to Microsoft customers.


"If you don't respond within 48 hours, your account will be closed."
These messages convey a sense of urgency so that you'll respond immediately without thinking. Phishing e-mail message might even claim that your response is required because your account might have been compromised.


"Dear Valued Customer."
Phishing e-mail messages are usually sent out in bulk and often do not contain your first or last name.


"Click the link below to gain access to your account."
HTML-formatted messages can contain links or forms that you can fill out just as you'd fill out a form on a Web site.

The links that you are urged to click may contain all or part of a real company's name and are usually "masked," meaning that the link you see does not take you to that address but somewhere different, usually a phony Web site.

Notice in the following example that resting (but not clicking) the mouse pointer on the link reveals the real Web address, as shown in the box with the yellow background. The string of cryptic numbers looks nothing like the company's Web address, which is a suspicious sign.

Damage caused by phishing

The damage caused by phishing ranges from denial of access to e-mail to substantial financial loss. This style of identity theft is becoming more popular, because of the readiness with which unsuspecting people often divulge personal information to phishers, including credit card numbers, social security numbers, and mothers' maiden names. There are also fears that identity thieves can add such information to the knowledge they gain simply by accessing public records. Once this information is acquired, the phishers may use a person's details to create fake accounts in a victim's name. They can then ruin the victims' credit, or even deny the victims access to their own accounts.

It is estimated that between May 2004 and May 2005, approximately 1.2 million computer users in the United States suffered losses caused by phishing, totaling approximately US$929 million. United States businesses lose an estimated US$2 billion per year as their clients become victims. In 2007 phishing attacks escalated. 3.6 million adults lost US $ 3.2 billion in the 12 months ending in August 2007. In the United Kingdom losses from web banking fraud—mostly from phishing—almost doubled to £23.2m in 2005, from £12.2m in 2004, while 1 in 20 computer users claimed to have lost out to phishing in 2005.

The stance adopted by the UK banking body APACS is that "customers must also take sensible precautions ... so that they are not vulnerable to the criminal." Similarly, when the first spate of phishing attacks hit the Irish Republic's banking sector in September 2006, the Bank of Ireland initially refused to cover losses suffered by its customers (and it still insists that its policy is not to do so, although losses to the tune of €11,300 were made good.

Phishing techniques

Link manipulation

Most methods of phishing use some form of technical deception designed to make a link in an e-mail (and the spoofed website it leads to) appear to belong to the spoofed organization. Misspelled URLs or the use of subdomains are common tricks used by phishers. In the following example URL, http://www.yourbank.example.com/, it appears as though the URL will take you to the example section of the yourbank website; actually this URL points to the "yourbank" (i.e. phishing) section of the example website. Another common trick is to make the anchor text for a link appear to be valid, when the link actually goes to the phishers' site. The following example link, Genuine, appears to take you to an article entitled "Genuine"; clicking on it will in fact take you to the article entitled "Deception".

An old method of spoofing used links containing the '@' symbol, originally intended as a way to include a username and password (contrary to the standard).[23] For example, the link http://www.google.com@members.tripod.com/ might deceive a casual observer into believing that it will open a page on www.google.com, whereas it actually directs the browser to a page on members.tripod.com, using a username of www.google.com: the page opens normally, regardless of the username supplied. Such URLs were disabled in Internet Explorer,while Mozilla Firefox and Opera present a warning message and give the option of continuing to the site or cancelling.

A further problem with URLs has been found in the handling of Internationalized domain names (IDN) in web browsers, that might allow visually identical web addresses to lead to different, possibly malicious, websites. Despite the publicity surrounding the flaw, known as IDN spoofing or a homograph attack,no known phishing attacks have yet taken advantage of it.[citation needed] Phishers have taken advantage of a similar risk, using open URL redirectors on the websites of trusted organizations to disguise malicious URLs with a trusted domain.

Source - wikipedia

Phishing

In computing, phishing is the criminally fraudulent process of attempting to acquire sensitive information such as usernames, passwords and credit card details, by masquerading as a trustworthy entity in an electronic communication. Communications purporting to be from PayPal, eBay, Youtube or online banks are commonly used to lure the unsuspecting. Phishing is typically carried out by e-mail or instant messaging,[1] and it often directs users to enter details at a website. Phishing is an example of social engineering techniques used to fool users.[2] Attempts to deal with the growing number of reported phishing incidents include legislation, user training, public awareness, and technical security measures.

A phishing technique was described in detail in 1987, and the first recorded use of the term "phishing" was made in 1996. The term is a variant of fishing,[3] probably influenced by phreaking,[4][5] and alludes to baits used to "catch" financial information and passwords.

Recent phishing attempts

Phishers are targeting the customers of banks and online payment services. E-mails, supposedly from the Internal Revenue Service, have been used to glean sensitive data from U.S. taxpayers.[15] While the first such examples were sent indiscriminately in the expectation that some would be received by customers of a given bank or service, recent research has shown that phishers may in principle be able to determine which banks potential victims use, and target bogus e-mails accordingly.[16] Targeted versions of phishing have been termed spear phishing.[17] Several recent phishing attacks have been directed specifically at senior executives and other high profile targets within businesses, and the term whaling has been coined for these kinds of attacks.[18]

Social networking sites are a target of phishing, since the personal details in such sites can be used in identity theft;[19] in late 2006 a computer worm took over pages on MySpace and altered links to direct surfers to websites designed to steal login details.[20] Experiments show a success rate of over 70% for phishing attacks on social networks.[21]

Almost half of phishing thefts in 2006 were committed by groups operating through the Russian Business Network based in St. Petersburg.

...to be continued

It's mine and you can't have it!

By Matt Blackman

A well-known television show was conducting a story on the insurance industry in America and staged an intentional accident to demonstrate their point. A bus and a car were placed strategically to film the slow-motion crash. With television cameras rolling the bus was deliberately driven into the car. With cameras still rolling, surprised camera crews watched as bystanders who had witnessed the crash began piling on the bus. As word of the accident spread, the bus filled with more eager riders. Their sole purpose was to take part in the insurance windfall that would surely come their way. Most were not aware of the cameras that clearly documented the incident.

The unbridled increase of litigation in North America combined with growing complexity of tax codes has slowly but surely shifted the efforts of those with property. As a result less time is available for the pursuit of greater profits while more time and expense is required to keep what assets have been earned. With more than 100 million active lawsuits presently winding their way through the courts in the U.S. and more than 14 million new ones being launched every year, it is no wonder that those with property are getting apprehensive. Add the facts that half of all marriages end in divorce and 80% of all businesses fail within five years and one quickly realises the incredible challenge facing those with assets to protect.

In one recent survey conducted in the U.S., participants rated a lawsuit as the second best way to strike it rich behind winning a lottery and ahead of receiving an inheritance. It is a sad commentary on a system that once upon a time relied on risk- taking, initiative, ingenuity and plain hard work to get rich, slowly. Patience, it seems, has fallen out of favour. Let someone else take the risk, do the work and make the money - then sue them!

However, lest we slip into fainthearted despair, help is available. There are a growing number of options available to protect one's estate from the unrelenting onslaught of parasitic wannabe nouveau riche.

If you count yourself among those aspiring to own or haven't yet given any thought to protecting what you own, a new book entitled It's Mine and You Can't Have It by attorneys Robert V. Eberle and Frank Corcell should be at the top of your reading hit list. Written in plain English, it clearly presents a roadmap to follow and covers a variety of topics that will be of interest to the above groups.

The book begins with a "how to" on saving for retirement that explains how much money one needs to retire based on their earnings. It is a sobering reminder to the majority who are not putting away enough to retire in the style to which they have become accustomed. To begin with, retirement income should be 70% of working income. For example, if one earns $40,000 a year he or she will need a minimum $28,000 in yearly income to continue a similar lifestyle after leaving the work force. The average Social Security retirement benefit of $750 per month or just $9,000 a year isn't the answer unless the pre-retirement annual income was $12,850. This is prerequisite information for those in the early stages of a career but will prove shocking for the majority of Americans who are not adequately prepared for retirement. According to a Boston Globe survey, only 5 percent of American families with one spouse aged 70 years or greater are able to continue living the style to which they have become accustomed after they retire using Mr. Eberle's seventy-percent rule.

For this five percent, the challenge is keeping what they've got safe from the hoards that would scheme to take it from them. The book defines asset protection as "nothing more that the discipline of arranging the ownership of your assets or your property in such a way that your retain maximum control without any, or only minimal, direct ownership or your property." Why? Because whatever you own can be taken from you to satisfy a claim or judgement against you but if you own nothing, there is nothing to take.

As Mr. Eberle explains, giving up ownership is a frightening prospect for most of us. There are ways to satisfy this concern, however. "The key to asset protection is to arrange ownership in entities which permit you to control those assets without owning them directly." How that is accomplished while retaining peace of mind is the purpose the book.

Inside risk or that which emanates from the asset itself, and outside risk or that which results from simply owning the asset each require different types of protection. The first type can often be covered with insurance. Outside risk or the risk of lawsuit offers the greater challenge and requires a more complex strategy.

Trusts, a major tool in the battle against frivolous lawsuits, are explained in an easy to understand format. The differences between non-grantor and grantor, revocable and irrevocable, inter vivos (living) and testamentary (after death) trusts are all discussed in detail.

Offshore trusts and recent changes in legislation regarding offshore entities are covered along with some common dos and don'ts to prevent running afoul with the Internal Revenue Service. Offshore trusts should be irrevocable, discretionary, have a foreign trustee who limits the onshore trustee's control and should limit certain classes of persons from benefiting from the trust. This would include potential creditors or litigants of the grantor.

Various corporations, partnerships and other entities will be of interest to those who have wrestled with options on how best to conduct business while enjoying maximum asset protection. Mr. Eberle also discusses the advantages of different states to be used for incorporation when asset protection and tax minimisation are a prerequisite.

The Rip Off Corporation

by Rolf Müller

The rip off corporation is one of the most common scams on the internet. Don't get short-changed on your Corporation. Most so-called offshore service providers sell 'hot cake,' corporations, that lack proper apostilles, proper stamps, have unpaid taxes, unpaid subscription taxes, and are merely 'shell documents,' not legal corporations. i.e. They sell you the document, but it is not legal in Panama. If you wish to do offshore banking, brokerage or eCommerce it will require that you have a fully legal Corporation that meets Panamanian law.

Panamanian fees & taxes must be paid from day one, not at the end of the year. (The fees are minuscule, consisting of only a few hundred dollars.) Many so-called Offshore Service Providers do not pay the taxes, even in subsequent years, although they will charge you for it. They don't care, they figure you'll never come to Panama, never investigate and therefor never know. This is part of what soured me to promoting offshore firms. Some firms go even beyond that level of dishonesty and run what are called Ponzi schemes, using other investors money to pay you high interest on your investments. (Like a chain letter.) Once they've collected enough money they disappear.

In eCommerce, (internet commerce,) the one area I am recommending, you control your own assets, you control your own website, you control your own bank account.

We are not interested in helping people evade taxes, our goal is to provide the legal means of doing legitimate offshore eCommerce, whether in international trade, import & export, online eCommerce, product sales, software sales, and/or any of the many forms of international online eCommerce that will benefit from the utilization of an offshore jurisdiction.

The most important tool, and the first tool one needs for offshore eCommerce is the IBC.

Seven tips for responsible use of debit cards

1. If your card is lost or stolen, report the loss immediately to your financial institution.

2. If you suspect your card is being fraudulently used, report it immediately to your financial institution.

3. Hold on to your receipts from your debit card transactions. A thief may get your name and debit card number from a receipt and order goods by mail or over the telephone. Your card does not have to be missing in order for it to be misused.

4. If you have a PIN number, memorize it. Do not keep your PIN number with your card. Also, don't choose a PIN number that a smart thief could figure out, such as your phone number or birthday.

5. Never give your PIN number to anyone. Keep your PIN private.

6. Always know how much money you have available in your account. Don't forget that your debit card may allow you to access money that you have set aside to cover a check which has not cleared your bank yet.
7. Keep your receipts in one place -- for easy retrieval and better oversight of your bank account.

Offshore account

Much was written about the benefits of having an offshore account. Little is said about an account that risk managed your money against inflation, such as living in a high inflation country where your money actually diminish in value or countries where the government are not stable or insecure. You are able to manage your wealth this way using a offshore account.

Benefits of Offshore Banking Accounts

Author: Clint Jhonson

Most people find themselves in a situation in which they realize that they cannot keep their savings under the mattress and that they should resort to a bank in order to deposit their money. In this case, it seems that the most convenient are the offshore banking accounts, due to the fact that they allow you to be in a low-tax regime.

The offshore bank is a bank situated outside the country of residence of the depositor, usually having low tax jurisdiction. It is certain that offshore bank accounts represent the most tax efficient way to handle huge amounts of money and many investors use offshore banking accounts in order to avoid taxes and to have some privacy regarding their accounts. Still, offshore banking can be quite expensive and if you are interested in such accounts we advise you to talk to a specialist before opening offshore bank accounts. Investors have at their disposal two modalities of using offshore facilities: either they open offshore bank accounts or they start an offshore company which will handle their assets.

The advantages of offshore banking accounts are numerous. The most important one is the fact that they are tax-efficient; your offshore bank account will not be liable to income tax and at the same time it is not subject to local litigation; thus you can protect your assets against all sort of creditors. Another plus is the fact that offshore accounts have less restrictive legal regulation, they allow an easy access to deposits and they protect you against local or financial instability.

The downside of offshore banking accounts is the fact that they come at a fee and those of you who want to open such accounts need significant knowledge in order to deal with this process in an efficient and legal manner. Nevertheless, there’s no need to worry since there are many offshore consultancies that are willing to help you. Still, you need to understand that in the case of offshore bank accounts your investments will be protected from legal assault but you will not receive any legal protection if you happen to be the victim of a scam. This is why it is essential to talk to an offshore bank specialist before opening any offshore accounts.

Offshore legal banking accounts represent an important of the international financial system and financial experts claim that half of the world’s capital is in offshore centers. By creating offshore bank accounts, you will be able to reduce your tax liability by transferring your savings and investments into an offshore bank account. Furthermore, you will benefit from high confidentiality, security, convenience and global access. It looks like offshore banking accounts are being used by many individuals and organization from all over the world.

Why should you consider opening an offshore bank account? Because not only will it minimize your tax liability, but it will also help you protect your assets, plan your estate, enjoy confidentiality and have better returns. Some offshore institutions offer almost absolute anonymity and confidentiality and personal data is subject to modern data protection legislation.

Nowadays, many small countries offer offshore banking accounts services without needing to make a substantial investment. The local laws can limit or even eliminate taxes which are placed on traditional banking accounts and this is why many companies and individuals prefer to open offshore bank accounts which allow them to remain anonymous. Moreover, due to electronic banking, offshore banking accounts holders can easily make the desired transactions without having to travel abroad.

To offshore or not to offshore....

Matt Blackman , Consultant and Author
Coquitlam, British Columbia

Each year, an increasing number of investors from around the world are flocking to tax havens to establish a business presence in the form of an offshore trust, International Business Corporation or IBC, open an offshore bank account or even start their own bank. In a 1991 Euromoney magazine article, author Anthony Ginsberg estimated that "as much as half the world's stock of money either resides in, or is passing through, tax havens making them an essential catalyst for world trade". Many are lured offshore legitimately but some go offshore for the wrong reasons and do so at great risk. Below are some examples.

Case 1
Mark has worked for the same company for 20 years. He has reached the top of the ladder in his department but the pay is good and he can't afford to quit. He's getting tired of paying taxes and would like to earn extra money. Last year he and his wife Mary started a home based business doing janitorial work for small to medium size companies in the city where they live. Most of the money they receive is either cash or cheque. Mark was surfing the Internet a few months ago and found an ad for offshore services offering to set up a company, including a bank debit card and cheque cashing service for "under $500". The offshore advisor suggested that they could set up an offshore corporation (Clean-It Ltd.) which would own the janitorial service. They could then deposit cheques made payable to Clean-It Inc. and withdraw the money at home using a debit card, which leaves no paper trail at home.

He assured them that the account would be confidential so they wouldn't have to worry about prying income tax inspectors. To add another level of security, the promoter suggested they set up an offshore trust which would own the shares of the janitorial service and be the ultimate home of the income. That way, Mark and Mary don't own anything because the funds would be controlled by an offshore trustee who is sworn to secrecy so no one will be the wiser. The promoter assured them that this way all the money Clean-It Inc. earned would be tax free.

Case 2
Frank owns a company that leases cranes, forklifts and other heavy equipment to construction companies in a number of countries. With the help of an offshore advisor recommended by a friend, Frank 'sold' the leasing company to Equipment Leasing Ltd. (E.L.L.) an offshore company that now buys the equipment and leases it to other companies around the world. Frank retains a small interest in the company and the rest is owned by an offshore trust and an International Business Company (IBC). Furthermore, E.L.L. can sell the equipment after it has been leased a number of times and retain the capital to buy more equipment tax free.

Case 3
Peter is a writer who writes screenplays for well known film companies and is well paid for his labours. His offshore consultant has helped him set up an offshore company that now collects his sizable fees. Peter is paid a smaller fee that he is taxed on at home. His offshore company purchased a villa in the French Riviera that Peter has exclusive use of while in Europe on business.


Case 4
William is an author who writes booklets which he sells on the Internet. His market has grown and he now sells to clients in a number of countries. He realizes that to market world wide, he needs an international presence. The cost and quality of printing dictate that his books be printed in a relatively high tax country which also has very strict avoidance rules so he must be careful not to trigger unnecessary tax liability. He decides to sell the rights to his books to an offshore company in a low tax country that has a number of tax treaties with those countries with which he does business. With careful planning and some able guidance, his books are printed for his company in a high tax country which then pays royalties to the offshore company with only a minimum withholding tax on the royalties. He has even found a way to have some of the income paid to his company at home (a high tax country) tax free!

The question is, in the above four examples, who has gone offshore legitimately and may legally benefit and who has done so illegally and risks a charge of tax evasion?

It's easy to see that Mark and Mary in example one have opened themselves up to a whole heap of trouble. Assuming they live in North America, both Canada and the U.S. have laws with stiff penalties for tax evasion and that is what they are doing. They are sending taxable earnings to their offshore company without declaring it and then bringing it back via a debit card and spending it tax free. If they don't tell anyone and are very careful about what they buy, they may get away with it for a while.

The cheques they receive from their clients are usually under $1,000 and the clients may not know that the funds are going to an offshore company. If the cheques are over $1,000, the risk of being caught goes up because the banks must keep records of all such payments going out of the country for the tax officials.

If Mark and Mary or one of their clients are audited, the risk of detection is high, especially if clients are claiming the janitorial expenses for income tax purposes. Often tax departments will check expenses deducted from one taxpayers' income against income claimed by the recipient. Since Mark and Mary aren't declaring any of the income, it wouldn't take a Sherlock Holmes to catch them at their game.

If they buy real estate, cars, furniture or vacations using their debit card, they also greatly increase the risk of being caught. One of the major weapons used by the US Internal Revenue Service or Revenue Canada is unsupported life style changes. They look at the taxpayers' income and expenditures. Again, it doesn't take a genius to see through a plot if expenditures exceed declared income.

Furthermore, the rules governing trusts in the US and Canada have been substantially tightened in the last two years. A new rule in the US in 1996 requires Mark and Mary to appoint an American trustee to 'oversee' the offshore trust to insure that any tax owing is being paid. Failure to do this will result in stiff penalties and fines. If the trust is earning income not declared as received by it, they risk a 100% tax on the income plus penalties.

Examples two, three and four are a little more complicated.

If Frank legitimately leases heavy equipment to companies around the world and has corporations offshore for reasons other than tax avoidance at home, there are a number of potential benefits.

The tax haven(s) he chooses will determine his tax bill at home. He could set up in a tax haven where his company pays no tax on earnings such as the Cayman Islands, or the Turks and Caicos Islands, but he might be better advised to also use an intermediary company in a country with tax treaties with the countries where he leases his equipment. Rather than lose 25-30% to withholding taxes in the high tax countries where he does business, this amount could be substantially reduced. It will cost him more to set up an intermediary company, but the strategy will reward him with the best of both worlds; complete privacy and liability protection as well as potential tax savings.

There is another consideration.

If Frank's company is set up in a pure tax haven to which he travels and sends money, his chances of an audit are greatly increased, even if he has done nothing wrong. Revenue officials carefully scrutinize any movement to and from well known, high profile tax havens. If they see that an individual has made a number of trips and sent money to such countries, a red flag goes up. If, on the other hand, Frank has a intermediary company in, for example, the Netherlands, which has a number of favourable tax treaties owned by another company in, for example, the Netherlands Antilles, he reduces this risk. Business trips and money sent to (and from) tax treaty countries don't usually elicit the same interest from tax officials.

Peter, the screenwriter, can also benefit from setting up a company in a tax haven as long as he has legitimate reasons for doing so other than for tax avoidance. If he sells his work to a number of different companies in different countries, it could be argued that an international company in a tax haven gives him greater access to business worldwide with fewer restrictions, even if he continues to reside in a high tax country. He could sell the rights to his work to an offshore company for a fee and receive income that is declared at home. He could take the income as a royalty or dividend which are given favourable tax treatment, depending on the countries involved. He, too, may find it beneficial to use an intermediary company in a tax treaty country as well as a tax haven to reduce taxes and give him protection from future creditors at home.

In the above two examples, Frank and Peter must be careful to meet all requirements necessary to reduce taxes payable at home. For maximum tax savings, the companies could be structured so not to qualify as Controlled Foreign Corporations (CFCs). Both the US and Canada have strict laws governing CFCs.

For example, a company qualifies as a CFC in the US if a US person owns 10% or more of the company or 50% or more of the total stock is owned by US shareholders. Even if the company is a CFC, tax on income may be reduced if the income is classified as 'active' as opposed to 'passive'.

William represents a growing number of home based entrepreneurs who's success is tied to the growth of the Internet. They live in high tax countries and have clients around the globe. How many have given any consideration to the tax implication of their new found business income?

If William scores a hit with one publication and sells a million of them for US$9.95, his costs of marketing and distribution on the Internet could be less than ten percent, for a net income of $9,000,000. Considering that the Internet is projected to have in excess of two billion users in three short years, this possibility is not all that far fetched. In Canada his corporate tax bill if earned in one fiscal year could be as high as 45 percent; or 38 percent in the US.

What if William were to sell the rights of his publications to a company in Barbados which would have the books printed and distributed by a company in the US to customers around the world?

Barbados taxes individual and corporate income at 40% so it can't be classified as a 'no tax' tax haven. However, international income is taxed at a rate of 1% to 2.5% in Barbados. A number of favorable tax treaties offer benefits for a Barbados International Business Company (IBC), Offshore Bank Corporation (OBC) or Society with Restricted Liability (SRL) doing business with high tax countries. The withholding tax on royalties paid to a Barbados company by a US corporation is 5% or 10% by a Canadian company.

If William owned a Canadian company that in turn owned the Barbadian company and the latter was classified as a foreign affiliate for Canadian tax purposes generating "active income", the former could receive income from the latter from "exempt surplus" tax free in Canada. (See Canadian Tax Planning Opportunities - Offshore Outlook 12/96).

Many high tax countries (Canada, US, Australia, etc.) have adopted strict anti-avoidance legislation designed to curb the use of tax havens or Offshore Financial Centres (OFCs) for tax avoidance. It is important to note that tax havens were, in effect, created by high tax countries such as the UK and the US in an effort to reduce aid to certain 'have not' Caribbean and other under privileged nations around the world by creating incentives for multinational corporations to invest. These incentives were not intended to encourage individuals to move assets to these nations in an attempt to avoid paying tax, but that has been the net result. However, companies legitimately established that foster world trade and investment in certain "developing" countries derive substantial benefits from such incentives when they know the rules. It is important to remember, according to offshore legal expert Ken Finkelstein, that as long as a person remains resident the US or Canada, they are subject to the tax laws of that country. As such, merely setting up a company in a tax haven will not alleviate nor reduce tax liability for the individual in most cases. The IBC or other type of corporate structure (if classified as a Controlled Foreign Corporation) and the individual will be treated as one person for tax purposes.

OFCs have become an integral part of the tax planning for corporations doing business world wide. High as well as medium net worth individuals are increasingly utilizing offshore corporations to take advantage of investment opportunities unavailable to them at home. The Securities and Exchange Commissions in the US and Canada require all investment companies to provide an exhaustive (and expensive) prospectus before any investment can be offered to it's citizens. Unfortunately, most of the top offshore funds find the process too onerous and expensive to file in many high tax countries and therefore are unable to offer their investment to those citizens. An offshore company, on the other hand, can easily invest in any fund or investment available world-wide.

These passive investments must be disclosed in most high tax countries and capital gains taxes paid, but if the investment is generating over 100% annual return, the net return is still sizable. The Quota Fund, a derivative fund domiciled in the Netherlands Antilles returned 78.8% in 1996 with a five year return of 852%, according to The Micropal Offshore Investment Funds edited by Robert (Woody) Milroy. Wouldn't it be good to know when it comes time to retire, that you have a tidy nest egg awaiting you in your new home on a sunny, tropical Caribbean Island. If you end up becoming a permanent a resident there, the tax savings could pay you a handsome dividend if you don't mind relinquishing your residency at home. (US citizens are taxed on world-wide income, regardless of residency and now derive 'more limited' tax benefits from relinquishing citizenship.)

The decision to utilize OFCs is one that must be given careful consideration but if tax avoidance is the primary motivation, a number of obstacles must be expected by both the individual and corporation. If, on the other hand, your goal is to access new markets, take advantage of business and investment opportunities unavailable at home or to protect assets from future frivolous litigation, an investment in an OFC could reap untold future rewards.

USES OF OFFSHORE COMPANIES

An offshore company is a very flexible corporate entity. As such it can be integrated into a wide variety of business arrangements. Reduced tax and increased confidentiality are just two of the main benefits which can be achieved by a proper application of the offshore company. However, it would be erroneous to believe that an offshore company incorporated in a no-tax jurisdiction "flies above" all the complicated tax regulations in force in the high-tax jurisdictions. Contrary to a popular belief, having an offshore company in itself does not relieve its owner from all personal tax liabilities in his home country. A clever use of an offshore company, however, can reduce, defer or completely eliminate some tax that would otherwise be payable by his business. The ability to accumulate revenues in a tax-free and hassle-free environment of an offshore jurisdiction are especially helpful to start-up businesses, allowing them to grow faster be more competitive.

Nevertheless, the practical implementation of an offshore strategy will almost always have to confront some of the anti-avoidance laws that may be in force in the country where the beneficial owner resides or where he does his business. For this reason we recommend that anyone, who considers an offshore incorporation, starts by taking some advice from an accountant or tax advisor located in the clients` country of domicile and in the country where the proposed business operations are due to take place. In case with offshore companies, the laws in the offshore jurisdiction will often have to be considered in conjunction with the laws and regulations of other countries, in particular the countries where the offshore company will have its sales, contracts and assets.

How to Establish an Offshore Business

By Richard Price


Establishing an offshore presence for your business can be a very overwhelming prospect to say the least. Indeed there are many aspects that need to be considered and taken into consideration.

To start, an offshore jurisdiction for your IBC incorporation (International Business Company) needs to be selected; one that allows your business to legally conduct business. The local laws and regulations of the offshore jurisdiction need to be carefully researched. For example many offshore jurisdictions will not allow online Casinos to operate without a gaming license, where as some do not have this requirement.

Next the privacy and confidentiality of the jurisdiction needs to be taken into account. Does the jurisdiction allow bearer shares and nominee directors? Does the jurisdiction have any treaties with other countries to share information?

Once your company has been established, an offshore bank account must be set-up. The bank must be fully insured, have had a background check, and offer a high level of service with Internet, telephone and fax banking.

A jurisdiction also needs to be selected to host your website. The offshore hosting company must have the bandwidth you require and insure that your private information and database will remain completely confidential.

Reliable offshore merchant processing must also be put in place, allowing you to accept payments from your customers by credit card and settle to the privacy of your offshore IBC company bank account.

These are just a few of the many aspects you will need to consider in regards to your quest for a stable offshore banking solution