Multijurisdictional Hopping: Every Investor's Dream

Robert Lee, Tax-news.com, London

30 August 2000

Investors are usually careful with their money. Rich investors are probably even more careful. Both would surely jump at the chance of banking from a Pacific island, storing their online data in Scandinavia and paying taxes in Barbados - the dream combination of financial secrecy, data privacy and low government pickings on their wealth.

American James Bennett could provide the answer. He claims to offer what he terms "sovereignty services". At a charge (and probably not a nominal one!), Bennett will rearrange one's business and personal affairs to take advantage of the best mix of global jurisdictions and keep the authorities at bay. Bennett certainly seems like a man well in the know: 'Anguilla has nice privacy laws and low taxes, but they've had some scams over there," he says. 'Meanwhile, Scandinavian countries aren't financial tax havens, but they do have very strong data privacy laws and good courts. It depends on what you're after.'

Over the years Bennett has had his finger in all kinds of pies. He expects his latest venture, which will initially focus on arranging the affairs of wealthy individuals from its Virginia headquarters, to be up and running by the end of 2000. He hopes that Internet Transactions Transnational will later branch out into business services. The whole focus of the company is to utilise the Internet to its maximum. He commented: 'The nice thing about the Internet is that it allows you to link - cheaply - a number of jurisdictions with different characteristics.'

James Bennett has cottoned on to the activity of so-called regulatory arbitrage, which involves exploiting different rules in different jurisdictions, and here comes the most important bit - for a profit. The Internet is an arbitrageur's tool, a way of getting round regulations. And given the set-up of his own company, Bennett should know all about this. Internet Transactions Transnational, whilst based in northern Virginia, is incorporated in the Bahamas and operates primarily out of Ireland. 'The sovereignty question is one of the most interesting frontiers in cyberspace,' says Bennett.

But border-hopping to take advantage of different rules and regulations may, over time, lead to a showdown between the dot-com entrepreneurs and the authorities at local, domestic and international levels; but by the same token, can the govenments of more than 200 jurisdictions engage in a clamp down without sacrificing businesses which benefit them too?

Bennett says that while governments may anguish over the loss of supervisory control over the movement of online businesses, they should look to the fact that there are other variables besides regulatory arbitrage that are involved. These are things like credibility and trust, Bennett says: 'Would you want to put your servers and financial assets in Iraq, for example, even if the tax rate was zero? We avoid encouraging people to transact business in places where you can't have confidence in the judicial system. One of the things we look for is the strength of the rule of law.'

Most experts agree on one point: in a world with increasingly open electronic borders, the possibilities are more or less limitless. In the words of one e-commerce lawyer: 'It's pretty hard to arrest an electron.'

Bennett believes that aggressive action by governments against regulatory arbitrage is not a wise move on their part. Of the OECD initiative to crack down on tax havens, he says that serving penalties on countries deemed to have harmful tax practices could work against the G7 powers; that they will eventually need the cooperation of smaller nations in fighting global threats such as terrorism. The price of this cooperation, he thinks, may well be a willingness to look the other way regarding a few margarita-drinking tax cheats

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