Offshore payment processing companies. What? How? And Why?

One of the first things we check while choosing the online processor is its registration. Today the most part of the payment gateways is registered in offshore companies. But why do they do it? How does it work? It’s time to know everything.

In order to be able to accept payment by credit cards, e-commerce companies need to set up a merchant account with a payment processor. When the website’s customer wants to make a payment and needs to enter sensitive date (credit card numbers and other personal data,) he/she is transferred to the payment processor. Offshore e-businesses should be aware that there might be tax risks in allowing payment to take place in a third party jurisdiction. Conveniently enough, many offshore jurisdictions offer payment-processing solutions to offshore companies. Offshore payment processors in certain jurisdictions, which are generally banks or joint-ventures including banks, offer very sophisticated features such as multi-currency pricing, same day settlement, reliable online banking and security features such as 1024-bit encryption.

How does it work?

In order to process online payments by credit cards, an e-commerce trader has to set up a merchant account with a bank or other credit-card issuer. A merchant account is a bank account established with a payment processor for the settlement of credit card transactions. The merchant account provider processes authorization for sales charged to the website’s customers’ credit cards. Practically, the merchant account provider authorizes the credit card transfer from the website’s customers and deposits the funds for their purchases right into the company’s checking account.

Thus, the payment process generally involves four stages: 

- The website makes the sale and passes along the sale and credit card information to the merchant account provider. 

- The merchant account provider sends an authorization request to the credit card processing service, which verifies the credit card information - checks the credit limit and seeks to ensure the card has not expired and is not stolen, etc. Typically, at this point, the company would receive an authorization number.

- The information is then transmitted by the credit card processing service to the customer''s bank, which debits the customer''s credit card for the sale. The funds are then deposited into the company’s merchant account. 

- Finally, the monies, less the merchant account provider''s fees, etc., are transferred to the company’s business checking account. 

Generally the whole process takes 2 to 3 days, but it can take longer depending upon the risk associated with the type of e-business'' products or services, which credit card the customer uses, which merchant account provider is selected, etc.

Why should a business choose to process payments offshore?

As indicated in the summary entitled “Permanent establishment and offshore taxation,” e-businesses that wish to have permanent establishment in a particular jurisdiction for taxation purposes need to carry on core functions of the company in this particular jurisdiction. In the case of an e-commerce company that sells products through the Internet, permanent establishment at a location requires that the typical functions related to a sale be performed at this particular location. This might include (i) the conclusion of contracts with the customers, (ii) the processing of payments and (iii) the delivery of the products. Thus, for any e-business to be regarded as truly offshore for taxation purposes, it is necessary that payment processing and banking solution take place offshore. This further strengthens the identity of the business offshore. Of course, this does not require the presence of personnel offshore to process payments manually. Payment processing might be performed automatically via a merchant account and still be regarded as core to the activity of the company and therefore constitute permanent establishment. 

What types of payment processors are available offshore?

Many offshore payment processors and banks offer sophisticated offshore payment solutions. As previously indicated, it is important that the actual sale take place on the offshore server in order to avoid any possibility that the transaction might be deemed to occur in the buyer''s tax jurisdiction. The predominant payment methods are credit/debit cards, whether plastic or virtual (e.g.: electronic wallets, cybercash.) The offshore processing software carries on the following tasks: 

-Establish contract terms and make a contract; 
-Perform the transaction in a secure environment such as SSL or SET; 
-Handle the credit card payment transaction including authorization procedures; 
-Integrate the sales/payment process into order management; 
-Communicate with customer database. 
 
What are the best jurisdictions for offshore payment processing?

Online payment processing could be provided from virtually anywhere in the world, and thus does not need to be provided from offshore. However, as previously indicated, it is safer from a tax standpoint that payment be processed from the offshore jurisdiction chosen by the e-business. Not surprisingly, offshore payment processing and certification have developed faster in those countries that have substantial existing business infrastructure, as well as appropriate legislation and good connectivity, such as Ireland, Hong Kong and Bermuda for instance.