There have been more changes in the adult industry’s legal and billing landscape during the past year than in the previous 10 years combined. The virtual implosion of iBill compelled adult webmasters to be diligent with their business partners, and the renewed interest in 18 USC 2257 by both the U.S. Department of Justice and Congress has forced webmasters to examine their content compliance and seek professional legal advice to determine if their sites and business practices conform to the new rules.
Anti-porn activists are pressuring lawmakers to restrict access to legitimate pornography, arguably with the unspoken goal of completely eliminating adult entertainment. Banks are refusing to open or maintain accounts for adult businesses that are otherwise good customers. Visa U.S. makes obtaining a merchant account problematic and takes a chunk of the webmasters’ revenues. These pressures are causing producers and webmasters to consider relocating their businesses overseas, where pornography is not a dirty word and the government doesn’t treat adult businesses like redheaded step-children.
For some adult webmasters, the benefits of moving overseas outweigh the high costs: legally lighter tax burdens, friendlier Visa EU, and the relaxed regulations on adult entertainment.
However, for most U.S.- and Canada-based adult businesses, offshore relocation denotes peril, confusion, and unintended legal or tax consequences. If you create an offshore corporation using an online service, transfer ownership of your domain names to the new company, and move your servers outside the U.S., you have not moved your business offshore. A façade offshore company easily can be set up by an inexperienced business owner—without ever leaving the country. The reality remains that you and your business are still based in the U.S., and you have simply created a foreign entity to complicate your tax returns. A U.S. operation does not become a foreign company just because the servers are now in Amsterdam and there is a bank account in the Caribbean. The business remains located in the U.S. and is still under local and DOJ jurisdiction. All financial activity must still be reported to the IRS, possibly as foreign income, requiring an experienced tax preparer to complete your returns. Failure to disclose your offshore financial activities or failure to comply with U.S. laws, if discovered, will cause exponentially more financial pain and suffering (plus possible criminal charges).
Moving offshore requires competent legal guidance and tax advice to avoid the many pitfalls. If you cannot afford to hire both a lawyer and a certified public accountant with international tax experience, don’t bother relocating. Selection of your new location needs to include research on local laws, tax treaties, and benefit programs for new companies. A real offshore business will have a real office in another country, with employees and utility bills and desks and laptops and coffeemakers. The new business will have to file tax returns in a different country, file business reports with the proper authorities, and submit payroll taxes, and the assistance of professionals is worth the price to move overseas.
If you still want to explore moving your Web-based business offshore, here are a few steps you will need to take. First, make a thorough evaluation of your proposed business model (if you don’t have a business model, then draft one). Determine what is important to you in a new location. What type and how skilled of a labor force do you need? What locations have sufficient Internet infrastructure for your applications? If you or one of your officers will be moving to the new location, what hospitality and medical services are important to you? What business services are available?
Before making the decision to open a new location, you must evaluate the new location’s legal and tax structures, such as what annual reports must be filed and in what language(s); how revenues are taxed; and the tax savings by relocating current officers versus hiring locally. Many jurisdictions give tax breaks for new companies, some even give relocated employees reduced income tax rates. A CPA and attorney can provide you with the requirements and comparisons of your various options.
Next, calculate the effect on your bottom line. What is the potential for expanded revenue streams? Does the cost of setup exceed projected savings? Finally, go there. Get out your passport and credit card and visit your (potentially) new headquarters. If your new company is going to be based in Botswana, then you need to see it in person before you invest in it. Spend at least a week there checking out available office spaces, housing prices, transportation, and availability of everything your company needs to function. That balmy Caribbean island may seem perfect until you realize that buying computer hardware and office supplies will require airfare.
If you decide, after reviewing all of the intricacies of the idea, that setting up a new company in a different country makes good sense, then you need to file creation documents for your new company. Expect to provide, at a minimum, a very good photocopy of your passport, driver’s license, and probably even a utility bill. Your passport shows citizenship; the utility bill shows where you reside. There is an excellent degree of anonymity in some countries to prevent the general public from discovering the identities of the constructive owners, but the government that is granting you the corporate charter needs to know who you are. Getting everything in order and then getting documents back inevitably takes longer than you expect, by the way.
Eventually, you will need to open a bank account and billing solutions. We are moving from a financial market with a lot of banks that have a few branches to a few banks that have a lot of branches, and the number of banks that are willing to open an account for a new offshore pornography company is dwindling, so seek advice. Billing solution options outside the U.S. are numerous but must be selected carefully. Money laundering and drug trafficking have made banks more interested in the identities of their clients – a policy often referred to as “know your client” – so expect to divulge your personal history and provide a letter of reference from your current bank, your passport, and other documentation before you are allowed to make a deposit.
Do not consider these guidelines as an all-inclusive list or “how to” that can substitute legal and accounting advice. Offshore operations are complicated, expensive, and time-consuming processes that require extensive evaluation, planning, and maintenance. A solid plan can expand your company into new markets, legally reduce your tax burden, and provide some assurance of stability amidst an environment that is becoming increasingly unfriendly to porn. For some companies, offshoring is a sound part of long-term planning. For others, it is a stupid, transparent, and ineffective tactic to evade compliance with U.S. laws. Consult a good lawyer and CPA before, during, and after you move offshore—it is better to do it right the first time than to try and untangle a disastrous mess.
Chad Belville is a Tempe, Ariz.-based attorney who practices exclusively in the area of adult business. He is licensed in Iowa, Arizona, and the 9th Circuit Court of Appeals. He served as an elected county attorney in Iowa for four years and remains a member in good standing of the National District Attorneys Association.
