Corporate Functions
It is usual for corporations to separate administration and service functions off from operational units. Such functions are normally performed centrally, and nowadays more and more frequently they are outsourced. Many corporations take advantage of beneficial tax regimes of Luxembourg, or in high-tax countries which offer quasi-offshore regimes, to locate such corporate functions where they can obtain tax advantages in addition.(corporate tax rate, individual tax splitting director fee's, interests deduction,...).
The rapid development of e-commerce and e-business, hand-in-hand with advanced telecommunications techniques, adds a new layer of possibility for corporations to place their support functions and services where they can be most efficiently (including tax-efficiently) performed. This section of the site explores the opportunities available to corporations to apply the new technologies to a range of corporate services.
Treasury Management
This was one of the first corporate support functions (as distinct from management) to be centralised. Some corporations even founded what amounted to internal banking units. Leaving aside some of the strategic corporate finance responsibilities of treasury managers, the transaction-heavy cash management and foreign exchange functions are ideally suited to electronic handling, together with the management of their downstream risk-measuring systems and derivative porfolios. Incoming information from subsidiaries is or easily can be electronic, while the external trading or account-handling transactions are already performed on the Internet or on systems which are readily linked to it. A crucial factor is the intrinsic profitability of treasury management, whether performed in-house or outsourced; if the corporate structure is such that eventual taxation in a high-tax home country can be mitigated to at least some extent, then there is every reason to want to locate treasury management profits in Luxembourg.
Procurement
It would be more accurate to say, the whole supply-chain, both because the successive stages of the chain all contain opportunities to crystallise profit, and because they are all increasingly taking place electronically or with electronic guidance and control. Lean supply-chain management, relies heavily on a constant supply of information about stock levels and usage, future production schedules, and supplier readiness; all of this information is inevitably electronic. It can therefore easily be combined with the fast-emerging packages for e-procurement to allow a wholly portable supply-chain management function. Once again, there is the opportunity to attribute profits to the supply function, and a resulting need to locate it in a tax-efficient place like Luxembourg.
The emergence of exchanges in a number of industry sectors, often owned by a group of major players, takes this process to a logical conclusion. If the value inherent in efficient procurement can be located in a minority-owned offshore Internet exchange, which itself can eventually be listed, then the capital realised from flotation or from trade sales of shares will largely have lowered taxation, especially for companies with benign CGT regimes in their home countries. This process seems to be a modern fiscal Philosopher's Stone: the transmuting of income into capital without taxation.
Telecommunications
Corporations are employing an ever-wider range of communications techniques, many of which amount to the supply of communications services to subsidiaries, or form part of internal 'products' which can be priced to include profit elements. Some of these 'products' can be outsourced, and some can be 'insourced', as when a corporation buys in bandwidth and creates its own intranet or extranet. The 'product' in all these cases is evidently highly portable, and can be positioned internally almost at will in a tax-efficient way. This is an e-commerce transaction, or maybe an e-business transaction: it is cross-border; VAT is involved; it has to be recorded, billed, etc; it has to be 'arm's length'.
Travel and Transport
Every geographically spread-out enterprise or corporation has a substantial internal travel bill, and if trading forms a significant part of corporate activity then there is probably freight transportation as well. Aspects of freight transport have been handled electronically for a long time already through the use of EDI (Electronic Document Interchange) for Bills of Lading and other shipping documents, but it is only recently with the advent of the Internet that whole freight transport networks are being managed and controlled electronically, with each package or shipment able to be tracked throughout the whole of its journey, and with electronic links to other corporate systems (stock control, billing and accounting). Management of personal travel has been slower to migrate to the Internet, perhaps mostly because of the need for physical tickets, but dematerialisation of travel documents is around the corner, breaking the last spatial link between the traveller and the travel management system. In future, corporations will be free to locate the travel and transportation management functions wherever they choose; the profit possibilities inherent in these functions may not be on the scale of telecommunications or treasury management, but they are not inconsiderable, and in suitable cases Luxembourg location may well be worthwhile.
Proprietary Trading
Not all corporations trade on markets on a substantial scale; but many do - oil and gas and other commodities-based companies, metals companies, banks and financial institutions (currency markets, stock markets, equity and financial derivatives), insurance companies and fund managers (stock markets) and (a new one) telecommunications companies on bandwidth markets. For historical reasons, trading on markets usually takes place in the most expensive possible place, right in the centre of downtown financial districts. This was inevitable, given the need for people to get together physically to trade and their need for good communications. Trading is a major profit centre for most of the organizations that do it on any scale and the opportunity to locate it in low-tax regions will probably be too good to pass up. There will be major cost savings as well: compare the costs of running a 12-person dealing room in the high-taxed juridictions with the equivalent costs in Luxembourg. It may not even be necessary to have a dealing room, if traders can work from their own homes. There are some managerial issues to be addressed, but 'teleworkers' are a growing phenomenon even in high-tax jurisdictions.
